Investors seek out safe havens

The last several months have seen the gold price shoot from 1020 euro up to an all time high of 1375 euro this weekend. Given that last year’s all time high in euros was 1070 and the first six months of 2011 were spent in a trading range of 1000 to 1070 euro this is an extremely strong performance over the summer months. The pattern for metals is periods of strength followed by weakness and vice versa and gold seems to searching for an opportunity to correct at the present time but  the constant stream of bad news is preventing any correction from gathering strength.  Every time the price has moved down in the last 3 weeks the dips have been met by strong buying of  physical product which has driven the bears into hiding…

Silver had a strong start to the year and at the end of April it spiked up to almost 50 dollars an oz. But an increase in Comex margin requirements forced short term momentum traders to liquidate their positions and the price fell very sharply from just under 50 dollars to the low 30’s by early May. This popped the speculative element to the silver market very sharply and left long term investors to support the price and drive it forward.

Interestingly, while gold has moved forward strongly since then over the summer period, investors seem to have ignored silver as a monetary metal and focused on its industrial applications, and with economies across the world showing signs of slowdown or ‘double dipping’ into recession, this has meant a very stagnant silver price driving out the gold silver ratio once again to nearly 45 (spot gold 1344 vs spot silver 30.05) having dipped below 40 earlier this year. The 17 to 1 historical average still seems some way off at this point but this would certainly encourage us as to the likely out-performance of silver over the next several months.

While metals and US treasuries continue to perform strongly, currencies such as the euro and dollar and housing in Ireland are still slumping. Housing remains in the midst of a powerful deflationary trend and, with Irish banks in such poor shape this downward trajectory is set to continue for the next several years. Some great bargains are certain to emerge in this sector over the next 3 to 5 years but until the banks balance sheets are repaired there will be no possibility of arresting the slide in prices. Metals investors should be in strong positions here as they continue to make gains against the euro while the housing weakens even in euro terms. Those who have taken big positions in the metals markets will be able to go into property as cash buyers when they judge the time to be right.

The Swiss franc has been seen as a third ‘safe haven’ alongside gold and treasuries in a turbulent market. But in the last week the Swiss have announced moves to weaken their currency so as to protect their own export markets. While the S&P downgrade for US debt has tarnished treasuries somewhat, most investors and savers have simply ignored this downgrade and piled into treasuries as equity markets have come under pressure. This is a bad move. While many commentators are pointing to metals as a ‘bubble’ very few are highlighting the ‘bubble’ type behaviour evident in US treasuries at the present time. The US national debt continues to rise and the increase in the debt ceiling over the summer was a negative for treasuries, not the positive that most analysts seem to think. The reason for this should be obvious – why does the UScontinually need to raise its debt ceiling if it is in control of its debt and in a good position to repay the money it owes its bondholders? Think of it like this – if a family has maxed out its credit card bills and then to avoid defaulting on its payments it simply increases its credit limits on those cards does this represent any type of solution? And where will this lead? Default becomes inevitable whether for the individual or a nation, although the latter does have a printing press so the default can be outright or by stealth.

In summary this is a market where bad economic news, high debt levels and poor leadership are sending investors in search of safe havens. Three of the main havens have been the Swiss franc, gold and treasuries. But two of the three have significant issues at this time with treasuries likely to be the worst option. The Swiss franc actually has many attractive aspects as a haven but these are likely to outweighed by a government determined to weaken its currency as paper money gets caught in a race to the bottom. This is a scenario reminiscent of the currency wars in the 1930’s. In this developing situation, if treasuries were to weaken suddenly or more downgrades of US debt were to occur, the upside for gold is likely to be significant, or perhaps explosive. The same argument applies with even more force for silver as it remains highly affordable for all budgets at the present time.