Concerned at the fall in the gold price

Concerned at the fall in the gold price?

Since September 2012 to date the gold price has gone from 1384 euro all the way down to the sub 1200 euro area now (22cd Feb). Today an ounce of gold costs 1195.44 euro and we’ve seen gold tumble down in roughly 20 euro increments every few months. At the same time the Dow Jones index has rallied since the 15 November 2012 from a low of 12496 to 13946 today – that’s a rise of almost 1500 points or more than 10%.

Accompanying the stock market rise in the last 6 months we seen a rise in bullish sentiment among financial commentators and analysts so along with metals, treasuries have suffered as investors look for ‘risk on’ higher yield investments. This is all predicated on the idea that the US economy is racing out of recession and there are blue skies ahead. However when the herd all rushes to one side of the room a degree of scepticism should be employed. There are some serious problems with the idea of a resurgent US economy unfortunately. One of those factors (which everyone is trying to explain away) is that US GDP actually shrank in Q4 2012 by -0.1% the first time we’ve had negative reading since Q1 2009.

Areas such as housing which have shown resurgent strength are also the areas where the Federal Reserve has been most directly involved – who believes US housing would be showing any pricing strength without the Fed’s QE3 monthly 40 billion dollar purchases of mortgage backed securities? This is a problem, because what happens when the Fed tries to ease back on these purchases? A real free market would continue to drive down real estate prices until they represented outstanding value for investors and this would allow prices to reach a stable equilibrium – but the Feds actions are encouraging the banks to begin writing more mortgages and more business than would be the case in a true free market potentially creating even more problems down the line. Unless of course the Fed is committed to QE forever but that will lead to a crisis in either the currency markets (dollar collapse) or the bond markets (international investors lose confidence in Treasuries). There is no way out of this trap.

If you ignore factors such as negative GDP numbers last quarter or artificially propped up housing market you might well conclude the present stock market rally is built on rock solid foundations but it is worth considering that perhaps the Fed’s money printing has something to do with the run up? Also ask yourself if 14000 dollars (Dow Jones now) today buys you more than 10000 dollars (Dow Jones 2000) in 2000 (the end of the greatest bull market in stocks in history). The answer (no!) tells you that, at best stocks have been trading sideways for 13 years – that looks more like a great bear market a la the 1970’s than the any sort of bull market from history! Based on the current economic fundamentals it seems clear that the half year run up in stocks that we’ve seen since November, is, at the very least, standing on some shaky foundations. That has coincided with a period of weakening metals prices. However the fundamental factors driving gold and silver to outperform stocks and property for the last decade remain very firmly in place. With sentiment so firmly against the metals this is a great time to pick up bargains. Metals may well go lower from here but as soon as sentiment in the stock market is shocked into realising the US economy is still mired in excessive debt with a wobbling currency the markets are likely to reverse in a big way. What will happen to the price of gold and silver then? Draw your own conclusions and base your investment decisions on fundamentals, not on sentiment!

Should you buy Gold Coins or Gold Bars?

Should you buy Gold Coins or Gold Bars?

Buyers are often unsure whether to buy gold coins or gold bars when it comes to investing in gold. Firstly people need to be aware that they are investing in gold not the coin or bar, coins or bars are simply different forms of the same product. That is not to say they are exactly the same value, there are advantages and disadvantages to both, but for the average investor who is unaware of these it is worth pointing them out.

If we start with coins, the main advantage of coins is the ability of a dealer to distinguish its authenticity.  Gold has a unique density as a metal, it is one of the most dense metals on the periodic table. This is highly significant because, a well-known coin has its dimensions set by the mint it originates from. A quick internet search will reveal these dimensions to you. Using this information you simply need to measure your coin’s dimensions and if they match you then need to check the weight. If both are correct you have a legitimate coin. You can perform these checks in seconds using a  ‘Fisch’ device. This is an advantage over bars or bullion as I’ll explain later.

Coins can also have a numismatic element to them. The advantage of this is you may come across a coin that is worth more than its bullion content. However this is rare as coin collectors don’t often let collectible coins slip through the net undetected. The disadvantage of numismatics are paying too much over the bullion content and getting an emotional attachment to the coin. If your purpose is investing in gold, try not to get distracted by buying numismatics, leave that to the collectors.

Most of the best known coins in the gold market are backed by government rather than private refiners, i.e. sovereign, maple etc. Again this can lead to a slight premium in price but it more than pays for itself when it comes to selling. Also certain coins such as the gold sovereign have an affinity with the Irish and British markets, the same can be said of the gold maple in Canada. Again this is an advantage when it comes to re-sale.

The main advantage of gold bars is a low premium but it is important to get the product from a reputable source and the bar should be fabricated by a well-known refiner. The dimensions of bars are non-standardised, meaning you can get several different types cast, machined, assay stamped, assay unstamped. Therefore, counterfeiters are not bound by a mint’s pre-set dimensions. This simply means that they can create their own dimensions on a copy and then have the correct weight.

Other advantages of bars are the lack of emotional attachment that can come with coins particularly numismatics. Gold bar premiums do decrease with the larger bars but this is offset when it comes time to sell, it becomes harder to sell the product above 100g size.

In conclusion, of course there is an element of personal preference in the type of product the investor chooses, and indeed different investors will have different requirements. However, my advice would be to go for coins that are low premium, well known and easily tradable. In Ireland it is hard to look beyond the gold sovereign, it scores very highly in all three categories.

10 Reasons to buy Gold now.

10 Reasons to buy Gold Now

10 Reasons to buy Gold Now

  1. The bubble in government debt is showing signs of bursting – look at the performance of US treasuries since the start of 2013 – yields are rising which is an ominous development for overstretched and over indebted nations in the west
  2. Gold has outperformed almost all other assets over the last decade (apart from silver!!) and the factors which powered that outperformance (money printing, low interest rates, unsustainable debt etc) all look stronger now than they were back in 2000
  3. The Dow Gold ratio typically tops out at 1 to 1 at the end of a gold bull market. Look at the example of the deflationary 1930’s and the end of the gold bull market in 1980 – both times gold and Dow Jones index were valued equally in dollar terms. Today that ratio is 8.38 –(Dow 13992.40 and Gold 1667.80 dollars) suggesting this gold bull market has a long way to go.
  4. The rise in stocks and the improvement in the US housing market in the last few months may signal heightened inflation is on its way as the velocity of money increases in an environment where money has been printed in an unrelenting effort to ward off another great depression.  High inflation is always connected with outperformance for gold and silver.
  5. Investors are presently all consumed by their interest in equities and housing as they over-emphasise the importance of short term events and de-emphasise longer term trends. This has directed attention away from gold and kept gold prices range bound. But the idea of a stock bull market at the present time is slightly preposterous – stocks were in the greatest bubble in history a little over a decade ago and stocks today hover around their long term average valuations or slightly above – but before a real long term bull market in stocks can begin again PE rations need to be far below long term averages. They will also need some strong fundamentals to drive outperformance – those fundamentals will return but they are not in place now. The present revival in stocks is not driven by good export numbers, strength in manufacturing, restricted and small government , low taxes or good savings rates. It is driven by money printing, better figures on housing and consumer spending – all things that got the economy into a mess in the first place!
  6. History tells us that the US economy has a recession every 4-6 years – look  at 2002 and 2008 and we are due another right about now or certainly over the next 18 months. When that hits more money printing will be required – more and more paper is printed every time this debt based system runs into trouble to bail it out – considering how extreme the money printing has been over the last four years imagine how much currency will be printed when we hit the pending recessionary event this time out? You can imagine the consequences for the gold price…
  7. Gold is still under-owned by the public. Now the public is aware of gold as an asset and a wealth protection option but there is no mania or widespread desire by the public to hold some of their wealth in gold. Before this cycle ends there will be a mania to match any previous market top and the ‘shoeshine boys’ will be advising on the best gold investing options! Today the public remains sceptical and many believe gold has topped out after a good run. They’ll soon see how wrong they are.
  8. Paper based currencies usually collapse. Every fiat system we have seen in history has eventually collapsed. This is just a confirmation that bureaucrats and governments are not good managers of money. Gold does not need to be managed and it is that virtue which has made it the only real and enduring form of money. Since the start of the debt crisis in 2007 and 2008 to now the level of debt and money printing has only increased in this fiat currency system. The acceleration of money printing has been a constant feature of the end of every fiat currency and this time promises to be no different. Anyone left holding bundles of paper at the end of this cycle will have a lot of toilet paper but not much actual wealth. Protect yourself by holding gold.
  9. The British started producing the modern gold sovereign back in 1817 – you can pick up a coin from 1825 and it will have the same purchasing power as a British sovereign minted in 2013. By contrast take a dollar from 1913 (the year before the Federal Reserve was established) and a dollar printed in 2013 – can the dollar today buy you as much as a dollar in 1913? No, in fact the modern dollar is worth only less than 2% of what a dollar was worth in 1913 and that can be attributed to the glorious management of the US Federal Reserve as guardian of the US dollar. The message is clear.
  10. Eliminate counterparty risk – with gold, you own it without depending on any other party unlike financial transactions where there is always some counterparty risk (e.g. you hold government bonds you rely on that government being able to pay its lenders back their money plus interest). With the subprime meltdown and the exponential increase in debt levels throughout nation states in the west over the last several years counterparty risk has increased despite the perception that money printing has reduced this risk. But money printing can only increase the risk long term because it increases the pressure on the currency itself and if a currency collapses what counterparty risk will any sane individual be willing to accept when it comes to financial instruments like bonds, loans etc? Coming off the Bretton Woods standard in 1971 is what started the explosion in debt levels and the mind boggling increase in the size and complexity of the financial sector and going back to a gold standard in some form seems the only practical ‘reset’ option we have at this point.
Silver price prospects in 2013

Silver price prospects in 2013..

 Silver rose 6.4% against the euro in 2012 rising from 21.38 on the 1st January 2012 to 22.75 by the 31st December 2012. In the decade up to the end of 2011 the average price performance for silver against the euro was 19.3% increase per annum so 2012 ranks as a very modestly positive year for silver prices. In dollar terms the silver price averaged gains of 22.3% in the decade up to the start of 2012 and from January to December last year the silver price in dollars was up by 8.3% from 27.70 to 30.00 dollars. So last year was very unremarkable in terms of precious metals.

Metals investors might have expected more positive price action in the last 12 months particularly in light of the fact that silver prices actually fell in 2011 in almost all major currencies losing -7.5% against the euro and -10.2% against the dollar. Since the start of this century every down year in silver prices has been followed a generally robust upward price movement in subsequent years. One thing worth pointing out though is that 2012 was a US presidential election year and both silver and gold prices have always struggled in any election year since the start of this bull market in 2001. In fact, if you look at 2008 as an example of this, silver lost -19.5% against the euro  and -23% against the dollar when Obama won his first four year term.  In that context 2012 really wasn’t so bad and both the President and the Federal Reserve would have been doing their best to ensure a smooth ride for the US economy over the course of that year to help Obama’s re-election prospects.

As we enter 2013, the stock market is booming with the Dow Jones at 13,940.70 hovering close to record territory (in nominal terms) and the S&P at 1,498.11. Both indices have had blistering starts to the year and the commentary in the financial world is all about a ‘real recovery’ in the economy reflected in stronger housing data and good jobs reports etc. This all sounds very convincing except for one thing – history. The bull market in stocks which ended in 2000 was the greatest and most powerful bull market in history. Other asset classes were deserted as investors flocked in a mania into stocks irrespective of earnings, PE ratios etc. History tells us that all great bubbles are followed by huge busts and washouts in the overvalued asset classes and a rise in value in other asset classes. Today the stock market is not in a bubble but it’s hardly a bargain either – think of the foundations for the great bull market stretching from 1980 to 2000 in stocks – by the end of the 1970’s and early 1980’s magazines such as Newsweek and Businessweek were headlining with news stories about the ‘death of equities’  such was investor apathy to stocks at the time.  We are nowhere near that type of scenario today.

Another big reason to be sceptical about any big move upwards in the stock market is the general economic environment is so much worse now than it was in 1980. Then you had a high level of savings (absent today) to fund spending by consumers, you had a cost cutting pro-business, low tax president coming into office (Ronald Reagan and his UK counterpart Thatcher), relatively low levels of government debt to allow interest rates to rise and a great deal of scepticism or even disdain towards the stock market. Also, interestingly, at that time you had a mania in gold and silver – the reverse of the mania in stocks 20 years later. Investor psychology was setting the platform for a historic bull market in stocks in 1980 and a historic bear market in stocks in 2000.

In light of the strong start to the year for stocks precious metals have been firmly in the shade for January 2013. There are two probable ways this can play out price wise from here.  One scenario is that surprise bad news on the earnings front or economic data disappoints the stock market bulls and shocks the herd leading to a strong downward move in the market with downward momentum dominating the latter part of the year – in that situation I would expect metals to benefit hugely as investors become ever more sceptical about the prospects for economic recovery and the Fed’s money presses are cranked up another gear to stave off a deflationary depression.

The second scenario is that demand picks up across the economy and the bulls are confirmed in their early year optimism as the US economy gains some momentum. The problem with this is that if demand is maintained then the velocity of money will pick up rapidly and that means big inflation. Big inflation dominated the 1970’s but the stock market ultimately went nowhere in real terms and started the 1980’s at a 1 to 1 price relationship with gold – that’s 850 for the Dow Jones and 850 for an ounce of gold.  But big inflation is great news for precious metals – if paper is in freefall gold and silver will always thrive.

I think at the moment there is lot more negative than positive surprises in store for western economies over the course of 2013 but as we’ve outlined, almost regardless of which way the economic picture shapes up this year gold and silver are likely to do very well. I think it is a safe bet that whatever percentage gain stocks notch up over the next 11 months to the end of December, in percentage terms gold and silver will deliver a stronger result than equities. We are expecting silver to hit 30 euros an oz this year and to be able to hold above this level – this is a gain of approximately 29% from today’s price of 23.28 (1st Feb 2012) and we would expect gold to at least deliver its average gain of 15% per annum this year to get to 1405 from a current price of 1222.08 euro.