It would be hard to pull a spotlight away from the debt issues in the US. Deals, credit ratings and financial shuffling are dominating the headlines. Will the big names in ratings wreck our reputation? It seems likely at this point, and that is helping drive another push in precious metals. Gold and silver are looking like attractive places for investors to wait out the storm even as they make fresh highs.
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
Gold and silver have both been moving towards new high prices. Talk of financial weakness across the globe boosted the markets. Debt issues have supported them. Inflation concerns are driving them onwards. So where are things headed now?
There isn’t really an example of this kind of thing in market history. Sure, the recession has been so deep and long so far that it has frequently drawn comparisons to the Great Depression but there are a couple of key points that keep investors guessing. For starters, the monetary policies are a lot different now than they were in the early part of the twentieth century, so the moves from the Federal Reserve will have a different impact.
The other consideration is the true global marketplace. Imports and exports flowed at other points in history, but now everything seems so deeply linked. US exports are strongly dependant on the demands of China and other developing nations. Canada’s fiscal wellbeing is tied tightly to their neighbors to the south. The European Union leaves strong centers like Germany towing the line for weaker nations like Greece, Ireland, and Portugal. Damage to one financial sphere bleeds into the others and ups the risk for financial contagion.
The markets seem like a shell game of finding the best of the worst, and right now no one is sure who is winning things. One thing is clear, there is a strong push into precious metals even at higher prices. Many dealers are reporting strong sales ahead of the pivotal festival season in India. Normally, that market is seen as a big tell for gold. If buyers in India shy away from metals during this time, it is viewed as a possible signal of an overpriced market.
Prior to the collapse of the housing market and the economic smackdown of 2008, a lot of the growth analysis for investing in commodities was pointed squarely at India and China. That has not changed much. Both nations are deeply entangled in the demand side of the equation and now they have substantial inflation issues to reckon with. It definitely shifts the driver for their internal demand, but not the course they are traveling on.
The swelling ranks of the well-to-do middle classes were the circa 2006 rationale for increased demand from China and India. Every profitable industry with new workers with disposable incomes was cited as a potential catalyst for increased gold and silver (and even platinum) jewelry purchases. Now the arguments shift to the struggle for people to hedge against rising prices. Higher crop values also give some rural farmers the financial means to buy metals to try to store wealth. The latest demand report from the World Gold Council suggests that the growth in developing nations has been strong.
Despite high prices, even heavy hitters like banks have taken a shine to precious metals. South Korea’s Bank of Korea is the latest in a line of central banks to become net buyers of bullion. In the past two months, the bank has added 25 metric tons to their reserve as they diversify their holdings. This move is the first foray into gold purchases in about 13 years. This kind of move at these high prices makes a strong statement.Summary
Debt problems and a resulting tarnish on the credit rating are a foregone conclusion. It isn’t out of the question that gold and silver prices might dip as investors digest each compromise and look for a positive spin on the situation. The thing to be aware of is the taint each currency now carries, the potential threat of delayed recovery and more stress on the global marketplace. Investors are going to need some pretty substantial evidence to support a sustained rally in equities or other markets. All the old rules seem to have been thrown out the window with the housing crisis. That has brought the even older demand for precious metals back from quaint retirement, and I see no reason to shelve either of them just yet. Disclaimer:
The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.