30% year on year price growth for gold as economic instability continues

Greece has still not come up with a solution to their growing debt crisis and therefore, gold has been increasing in price on the uncertainty in the global financial market. Many are worried about what will happen in Greece and the Euro Zone because global banks are very interlinked.

Author: Lawrence Williams
Posted: Monday , 07 Nov 2011
Mineweb

LONDON -

No-one who has been reading Mineweb in the past months should be in the least surprised that there is, as yet, no definitive answer to the pressing problem of the Greek debt crisis with its still-potentially devastating effects on the global banking system - effects which could make the Lehman Brothers collapse look small beer. The markets seem to breathe sighs of relief at every half-baked semi-deal which seems to be arranged only to find that all these are doing is putting off the ultimate problem of whether Greece ultimately defaults, or leaves the Euro - one or the other, or both, still seeming virtually inevitable. Even if Greece's debts are written down by 50% (itself a default by any other name), with the banks carrying the burden of this, it still looks as though this will only delay the inevitable by a few months and the whole Greek crisis will rear its head again then.

But of course the crisis doesn't end with Greece whatever the outcome. The focus has been on Greece, but Ireland and Portugal remain in an almost similar position and they will be thinking that if Greece has its debts written down by 50% then why shouldn't they. But even these could prove to be the tip of the iceberg - the real problem is the debt situation of some of the major EU economies with Italy the principal focus at the moment, but Spain remains vulnerable and some believe France could also be in economic difficulties. Indeed there are few European countries that are not currently seriously overstretched financially.

To an extent Germany should perhaps bear the brunt of the blame for the dire situation in which some of the other Eurozone economies find themselves - and thus, the argument goes, should meet the bulk of the bailout costs. The weaker countries ensured the Euro exchange rate did not rise excessively, as a German deutschemark almost certainly would have done if there had been no common currency, keeping German exports much more competitive in global markets at the expense of the less efficient Mediterranean economies. Here the steady Euro had precisely the opposite effect with the common currency making it impossible for them to allow their own currencies to drift downward and keep their products competitive on world markets.

So Germany reaped the gains of the Euro but now its citizens are seemingly unwilling to pump money into the economies on whose backs the German economy has done so well!

So what does this preamble mean for gold? Probably a lot more than it seems to have done so far. But part of this is down to the investment community which seems ready to seize on the slightest whiff of a solution to the crisis, however thin, and boost markets and thus deny the age-old safe haven status for gold, and perhaps silver. And then the whole process starts over again as each successive crisis solution is seen to be so much hot air and until the world finally gets to grips with the economic quagmire.

But can this situation last? Eventually the Eurozone will sort out its problems, but this may not be for some years yet before any kind of real stability returns - and the European Community itself (The Common Market) may well be a rather different animal by then.

And the U.S. is also not immune. Global banking is so interlinked that a collapse of a major European bank - not an impossibility - could bring down some weaker U.S counterparts, while the internal debt situation of some U.S. states mirrors that of some of the weaker Eurozone economies. We have all been living beyond our means for too long and now the situation has got totally out of hand.

The longer the instability continues, the greater will likely be the impact on gold and silver and we will surely see the monetary precious metals continue to move upwards - perhaps mitigated by Central Bank and Government interference who see a rise in gold and silver as destabilising. Thus gold and silver may well not rise to the extent some of the gold bulls are predicting - but on balance rise they likely will. One hazards to take a guess as to where the gold price will be a year hence but on recent years' performance one might predicate that a gold price of around $2300 and a silver price of say $58 by November 2012 might not be unreasonable as a forecast. However gold and silver are far from predictable as readers will be well aware and with investors seeming to seize on any perhaps non-negative economic indicators to move away from precious metals into the stock market in general the portents would seem to be a little mixed.

While many perhaps non-specialist commentators on the gold market, particularly those currently putting forward bearish viewpoints, tend to base much of their demand analyses on the situation in the Western economies, the Eastern ones are often ignored in their reasoning, yet it is these which have been the principal gold price drivers in recent months and years. Gold then remains in turn the principal driver of the silver price. This Eastern demand is unlikely to go away. Even if growth slips in China, India and other Asian economies these are still growing, and at a rate far in excess of their Western counterparts, and on this basis alone precious metals demand seems likely to continue to advance in a geographical sector now accounting for perhaps well over half of global gold consumption.

What is also seemingly overlooked by the non-specialist gold pundits, of which there are many - or perhaps just by economic writers who are told by their editors to cover gold or silver, but without having any grounding or history in precious metals analysis- is that the gold price is actually up over 25% so far this year despite its fall from its peak, and silver up around 13% despite an even greater price crash earlier in the year. Yet to read many of the self-styled pundits you could draw the conclusion that gold and silver are on their last legs and have been, and remain, a rotten investment! Over the same period though the supposed safe and secure stock markets have all declined, some heavily. The S&P 500 for example is actually down nearly 1% since the beginning of the year, the FTSE 100 down over 6%, the S&P TSX Composite down around 2% the Nikkei down 16%, the Hang Seng down 16% and so it goes on. Thus precious metals have shown a hugely better return compared with the major stock markets. Yet still precious metals investment is seemingly decried by most financial advisers everywhere. And it's not as if 2011 has seen an unusual pattern in relative performance with gold, in particular, massively outperforming the general Western stock markets over the past ten years or so. There thus seems little harm in suggesting that the outperformance by precious metals is likely to continue until the global economic crisis is solved - and that could still be years away.

What should be even more worrying for investors not putting at least a proportion of their savings into precious metals is that the growth in their price is largely at the expense of a decline in purchasing power of the globe's major currencies. So in fact all one may be achieving by making such an investment is as a protection against inflation and/or deflation - not as a wealth grower except relatively with respect to those who have put their trust in general stock market growth or keeping it in fixed interest accounts. But even this is far better than relying on largely moribund stock markets. At least you stand still while others fall back.

How about gold stocks and precious metals derivatives? In theory the former should have the potential for outperforming gold price growth. Indeed recent profit announcements by major gold miners, together with a paltry rise in the dividends some of them are paying could see a rerating upward. But recent performance, particularly if one takes capital spending into account, has not been a great example which to an extent accounts for their market underperformance, although also the general decline in global stock markets has a debilitating effect on precious metals stocks too.

Precious metals ETFs have also taken some of the blame for the relatively poor performance of gold and silver stocks with people finding it easier to use this route for investing directly in precious metals themselves than in holding bullion. However there is always the underlying apprehension that the metal which backs the ETFs is held for the most part by major banks in their depositaries and there is a lack of trust in the role of banks in this respect and over the allocations of all the gold they hold in their vaults, not to mention their overall stability in the current global economic scenario.

So for the moment gold, and by association silver, looks to have a positive outlook for some time to come. We are more of the opinion that any increase in price will be steady rather than spectacular and one can't rule out a 30% year on year rise continuing, with the occasional upwards and downwards spike, until the world is seen to have put its current economic meltdown behind it which, as noted above, could yet be some years away.

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