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In US dollar terms gold fell 28% in 2013 and in Euro terms gold topped out in September 2012 at just over €1380 before falling back to the €900 area by December 2013. Silver did even worse and while it has been as high as €34 euro in 2011 by the end of 2013 it was breaking below the €15 level. All of this has happened while the Federal Reserve was fully engaged in QE3 and pumping billions a month in government debt and mortgage backed securities.
In contrast to the poor performance of gold and silver in 2013 the stock markets had a great year and the US property market showed real signs of life. Both of these markets relied almost entirely on the Federal Reserve’s money printing to make headway however, as Bernanke felt that driving momentum in property and stocks was key to US economic recovery. Ironically precious metals got hammered as the Fed’s QE program drove investors to follow momentum in equities and real estate. Furthermore, analysts pointed out that a taper was coming at the end of 2013 and this compounded poor sentiment in the metals markets.
But since the start of 2014 when the Fed has actually started the tapering process equity markets have stalled and metals prices have moved up quite strongly. The economic data over the December January timeframe has been generally below expectations and this has been explained away as a result of poor weather conditions. However we believe that the US economy is set once again to underperform dramatically over 2014 as the Fed tries to reduce QE and that the current weakness is not just a temporary blip. Since we believe that money printing was the prime driver in equity prices last year we also predict that equity markets will go nowhere this year as the Fed tries to bring its balance sheet under some control through the taper process.
If the stock market stalls out this year then we also expect to see some weakness in property prices in the US as a consequence of the attempted taper. General weakness in the US economy will be more difficult to explain away as spring approaches (doubtless many manufactured explanations will be made however!) and this lack of momentum on the general economy, stocks and property is likely to swing the pendulum of momentum back in favour of the metals. Unless a ‘black swan’ emerges gold and silver are likely to make consistent progress back to higher levels and erase much of the losses from last year. However if a ‘black swan’ event was to occur (e.g meltdown in derivatives markets…) gold and silver could both move rapidly past their previous highs in this cycle
Great Reasons To Buy Gold
1. Ireland’s economy.
Soaring unemployment, unsustainable debt and a government unwilling to take the action needed to help Ireland recover.
2. Anglo Irish Bank.
Need we say more – whether its €32 billion or €64 billion needed to bail out this toxic bank we’re being dragged into a black hole by this mess.
3. Diversification.
Everybody should have some Gold in their possession as a way to diversify their investment porfolio away from poor performance sectors like stocks and housing.
4. Quantitative Easing.
In other words – printing money! All the world’s central banks are tyring to outdo each other on this, trying to get their economies going again. Any cash you hold, whether in Euro’s or dollars is virtually certain to go down in value over the next decade, just as they have in the last decade.
5. Gold’s track record as an asset class.
In 1970, one gold ounce was worth $35 dollars. By 2000 one gold ounce was worth $270 dollars. In 2010 gold is worth over $1200 an ounce. Thats long term outperformance by any measure.
6. China.
The Chinese are the driving force of the world economy right now. They are swiftly gaining on the US to become the world’s largest economy. This is inevitable, when Britain was the centre of the world, it was also the world’s workshop, and the same was true of the US. China is the world’s workshop today. And the Chinese love gold as an asset class. They will be big buyers of gold in the coming years.
7. The Dollar.
The dollar and gold are vying for the same role in the global financial system. That is, the dollar currently claims the role as the basic measure of value in the global financial system. But since 1971, when the dollar gave up its fixed gold value and left the Bretton Woods system behind, the dollar has lost 97% of its value versus gold. What sort of value measure does that make paper currency? The free market is passing judgement year by year.
8. World Gold Supply.
South Africa used to be the biggest gold producer in the world. It has now been surpassed by China as production falls. But China consumes all the gold it produces and is a net importer of gold. This at the same time that global gold demand is rising relentlessly.
9. Gold is still cheap.
At the start of the 1980’s gold reached over $800 an ounce.When you adjust prices for inflation gold would have to reach over $2000 an ounce today just to equal that high in real terms.
10. Barack Obama.
Obama looks good and sounds good. But when it comes to economics he is not so good. The dollar needs a president who understands that if you print too much you destroy underlying value and currency confidence. America needs a president who understands that low taxes always lead to higher growth and higher tax revenues. Obama wants to raise taxes for the wealthy. Sounds good, but a terrible idea if ecomomic history teaches us anything. And to allow business to thrive Ireland and America need to allow bankrupt and insolvent businesses to go out of business.
Instead economic zombies are being created which will suck the economic life out of western economies for years to come and draw resources away from new start ups and entrepreneurs who can build real wealth. In the face of these economic policies it’s inevitable that gold will be the benficiary for years to come.
