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What Should Silver and Gold Investors do?
Today there was an article on CNBC telling us that the Bull market in silver is finished. Last week we heard that the Bull market was finished in Gold. What is an investor to do with all the noise around us? When silver was approaching $50 in June 2011 the media was happy to tell its viewers and readers to buy. It is very difficult to focus on the end game when the media continues to get it wrong.
The public keeps falling for the same trick year after year. Peter Schiff, Congressman Ron Paul and Marc Faber all said that the real estate bubble would burst while the media laughed at them. Today we have the media telling us that it is ok to bring our hard earned currency back into the stock market. Does all seem well to you? My gut feeling is telling me that something is terribly wrong with the system and that the risk of a serious crisis is still a possibility.
I would like to share with you my approach to precious metals investing. My approach may seem ultra conservative, but it has worked for almost a decade. Physical metal in my possession or 100% allocated in my name in a private vault is the only way to go for my family. I do not worry about the ups and downs of the silver and gold market. When it is time for a purchase, I do not try to time the market. When the cash is available I place an order. People ask me, ¨Randy why are you not worried about silver and gold crashing?¨ My reply is easy, do you really think that the governments around the world are going to show restraint when it comes to devaluing their currencies?
Here are a few reasons to not trust currencies.
- China has signed 16 currency trade agreements bypassing the US Dollar.
- Ben Bernanke and the Fed have announced that they want to continue to devalue the US Dollar.
- Trade wars, nations trying to keep their products cheap by devaluing their currencies, recently Brazil said the government will use this tactic.
- Governments around the world are devaluing currencies to pay off national debt, instead of raising taxes. Raising taxes is political suicide.
The other question people ask is, “when will you sell?¨. The answer to this question is a very personal one, but my approach is pretty simple. I have a set goal for the value of my metals. When the price reaches that value, I will then sell my silver and gold and buy real estate or possibly equities. For me the precious metals are a tool to build wealth. When I sell, I am just moving to a different asset class. When I can buy a $100k house for 600 ounces of silver it will be time for me to sell. Similar to everyday life, if we don´t focus on set goals, we will accomplish very little. Even if it takes another five years for silver and gold to reach my price goals I am okay with it.
Will there be times in the climb forward, when silver and gold take large price drops? Of course there will be, but these are the times when the market just gave you the opportunity to buy more precious metals at a discount. I am just an average guy who wants to be able to sleep good at night. I don´t want to be worrying whether or not my call or put options are in the money. So if you want peace of mind, please do not listen to the media, focus on your goals and you will be ok.
China Could Soon Overtake India As The Biggest Gold Market In The World
HONG KONG (AP) — China is poised to overtake India to become the world’s biggest gold market this year as rising incomes fuel demand for the precious metal and a weak rupee diminishes Indian purchases, an industry group said Thursday.
The amount of gold bought in China rose 20 percent in 2011 over the year before to 770 metric tons, the World Gold Council said in its annual report. That put China behind only first-place India, where 933 metric tons were bought.
Worldwide, the amount of gold purchased rose 0.4 percent to 4,0671 metric tons worth $205.5 billion.
The council said it’s “likely that China will emerge” as the world’s largest gold market for the first time in 2012.
Rising incomes in China, which is the world’s No. 2 economy, have resulted in a surge in demand for gold jewelry and other luxury goods. China became the world’s largest market for gold jewelry in the second half of 2011 as demand rose in every quarter, the report said.
Gold bars, coins and other gold-backed products are also popular because of a lack of other investment options in China.
The long-term rise in the price of gold has also made it a popular hedge against inflation — gold hit a record nominal high of $1,891.90 an ounce in August, though prices have fallen since then. Gold futures for April delivery ended trading in New York on Wednesday at $1,728.10 an ounce.
Central banks, many in developing economies, also boosted gold sales as they sought to diversify their growing piles of foreign currency reserves. They bought 439.7 metric tons of gold last year, up from 77 metric tons the year before and the highest amount since 1964, the report said.
The poor performance of China’s stock and property markets — the other two main choices for Chinese with money to invest — is boosting the popularity of gold as an investment, said Albert Cheng, a managing director at the London-based World Gold Council.
The Shanghai Composite Index is down 20 percent over the past year while house prices are starting to fall after authorities put in place curbs to cool an overheated market.
Strong Chinese demand for gold also helped sales leap 33.5 percent last year in Hong Kong, a popular destination for wealthy mainland shoppers because of lower taxes in the semiautonomous Chinese territory.
Demand for gold jewelry in India, meanwhile, fell in the second half of 2011 because of the weakening rupee, which made gold more expensive.
Indians also grappled with high inflation last year that ate away their purchasing power, so they bought smaller amounts of gold, Cheng said.
Source: http://www.businessinsider.com/world-gold-council-china-india-2012-2
Why isn’t the Gold price going through $2,000 now?
The gold price went over $1,900 and looked as though it was going to mount $2,000, but since then has fallen back to $1,600 and is in the process of consolidating around the lower $1,600 area. It was expected that it would have moved a lot higher faster, but that hasn’t happened, yet.
In the face of Italy’s downgrade to A2 by the ratings Agency, Moody’s summary that, “There has been a profound loss of confidence in certain European sovereign debt markets, and Moody’s considers that this extremely weak market sentiment will likely persist. It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence.” The downgrading was expected, as are further downgrades for the different Eurozone members, shouldn’t the gold price be on its way through $2,000 to much higher levels?
The ‘downturn’
The news over the last few weeks has sent global financial markets down very heavily as a slow recovery morphed into a downturn and at best a flat economic future in the developed world. These falls have been accompanied by tremendous worries that there could be a major banking crisis that will cripple the Eurozone economy as a whole, not just the debt-distressed nations. In France growth is now at zero, in Greece it is somewhere south of a 5% dip in growth well into recession. Greater austerity simply adds to the fall in government revenues defeating their purpose of reducing their deficit. All of this implies an ongoing shrinkage of the Eurozone economy. This hurts investor capacities in all financial markets and wealth throughout the Eurozone. Cash becomes ‘king’ as investors flees markets to a holding position waiting for much cheaper prices before re-entering markets at lower levels.
The path to deflation is then made. Deflation in its early stages causes tremendous de-leveraging. That is the selling of positions to pay off loans taken to increase positions. It may come about because of investor prudence, banks calling in loans, stop-loss triggers and margin calls [where the level of debt against positions becomes too high and forces sales]. This often and particularly in the case of precious metals has nothing to do with the fundamentals of the market. It is simply the position of investors. This happened in the precious metal markets as well. This is why gold and silver prices fell.
De-leveraging
As was the case in 2008 and often through history, the process of de-leveraging is a short-lived one, even when it is savage. Once and investor has sold the positions he feels he needs to that downward pressure on prices disappears. Leveraged positions are the most vulnerable of investor held positions and can make up the froth or ‘surf’ in the markets, which cause the volatility levels to increase when dramas strike. In 2008 these positions were huge because there had been two and a half decades of burgeoning markets that encouraged greater risk taking. Since then, while leveraging has taken place it has been less and rapidly removed when dramas hit.
In 2008 we saw a similar drop in prices from $1,200 to $1,000 [20%], which equates to the fall from $1,910 to $1,590 [16.9%]. In 2008 the precious metal prices then slowly rose as buyers started to come in from all over the world. It took over a year for prices to recover back to $1,200.
Change in market structure
Today the shape of the precious metal markets is quite different, particularly that of gold. In 2008 central banks were sellers, today they are buyers. In 2008 the Chinese gold markets were small. Since then they have grown to such an extent that they are soon to overtake India. These are two dynamic features that give demand a totally different shape to 2008. More than that, the impact of the developed world long-term has diminished quite considerably. It now represents less than 21% of jewelry, bar and coin demand. The emerging world as a whole represents over 70% of such demand now.
The bulk of the world’s physical gold that comes to the market is dealt at the London twice daily Fixings. The balance that is traded outside the Fixings is the most short-term price influential amounts, producing the swings that resemble the waves on the seashore. It is these traders and speculators that often persuade long-term buyers to stand back and wait for the prices to swing to the point that persuades them to enter the market. The drop from $1,900 had this effect on investors. Now that the fall has happened we see a surge in demand from the emerging world to pick up the slack in the market. We have no doubt that central banks are buying the dips as well.
So once the selling from the developed world has stopped [emerging market demand waits for this before buying, allowing the fall to extend further] in come the buyers happy that they are entering the market at a good time. Because of this change in market shape we fully expect the market to take far less time to find its balance and allow demand to dominate.
2012 recession and the battle against it
The I.M.F. has just warned that the developed world will enter a recession in 2012. Will that be a negative for the gold market? We do not believe that it will. The world has seen the recovery peter out, has seen the sovereign debt crisis arrive and now sees the I.M.F. recommend that the Eurozone banks be recapitalized. What does this mean for precious metals?
Cast you minds back to the recapitalization of U.S. banks under the TARP measures whereby the Fed bought the ‘toxic’ debt investments of the banks against fresh money. When we say fresh we mean just that, newly created money in the trillions. This did lower the perceived value of the dollar inside and outside the U.S. The effect on gold was palpable as it rose back through $1,200 and onto new highs.
Already we are hearing rumors of an E.U. government minister’s plan to walk the same or similar road. With the recent past in mind, we are certain that that will lower the perceived value of the euro and see euro investors seek places to cling onto the value the euro still has. This time round we fully expect markets to discount these actions in the same way. The downturn will therefore be fought with new money creation in the same way the U.S. did it from 2008 on.
Second time round
There is a significant difference between 2008 and now. In 2008 the credit crunch was new to investors and shocked the markets into overreactions. In 2011 we are not shock but expectant of what lies ahead. In 2008 the developed world economy had considerably more resilience than it does now, so the situation is more serious and less likely to be believed as the panacea for the developed world’s economic crisis. Because the gold and silver prices rose so strongly after that time and in the face of those ‘solutions’ the same will be expected now. In 2008 confidence in the financial system as well as in the monetary system appeared unassailable, not this time. While the developed world, outside of the gold ETF’s in the U.S., has not been the main driver of rising gold prices, this time we would not be surprised to see their resilient confidence in their world snap and a frantic search for safe-havens follow.
Yes, if we see a repeat of the 2008 breakdowns in the near future they will slaughter remaining confidence in the monetary system and the ability of its governments to set matters straight. What then for gold and silver?
By Julian Phillips
Source: www.ibtimes.com