The ever-strengthening case for gold and silver investment

The case for both silver and gold as an investment get stronger and stronger as the economic news gets worse and worse. Even when gold and silver prices drop, they seem to bounce back higher than they were before.

Author: Lawrence Williams
Posted: Friday , 09 Sep 2011

Day by day, the case for holding gold and silver seems to get stronger as global economies remain mired in recession and the centre of precious metals demand moves ever eastwards.

Every day the case for investing in gold and silver would appear to get stronger and stronger as worse economic news follows bad. Gold and silver prices may get hit by stringent margin increases on some exchanges, yet still they bounce back. It seems that whatever ammunition the gold bears (whoever they may be - and suspicion falls on ‘official' channels and major banks holding short positions here among others) throw at it the ‘monetary' precious metals regroup and bounce back after a perhaps initial sharp retreat. It may well be that the bears are running out of ammunition! Gold and silver may lose the odd battle but they are certainly winning the war.

As has been pointed out in these pages time and again over the past several months, or even years, the centre of gravity for gold demand is moving ever further eastwards, which means that whatever western institutions (and I use this term in its widest sense) may try to do to curb its enthusiastic breakout they are ultimately doomed to failure. The Chinese, Indians and other eastern investors who are psychologically hard-wired into gold as the ultimate survival currency when times are bad - a factor which equally affects their government attitudes to the yellow metal - will call the tune and any splurge of western sales quickly provokes an even stronger purchase response from the East.

Silver will continue to be dragged up on gold's coattails, and given the far smaller market here we are likely to see more volatility - although it has been interesting to note silver's recent relative resilience to the occasional sharp gold price downward moves each time some obstacle is driven into its advancing path. It really cannot be too long before the magic $50 level for silver is surpassed and after a likely hiccup around this level, the floodgates could open. I am not a believer in the Gold:Silver ratio falling down to 16 or even less - at least not in the foreseeable future, but 30 does not seem unreasonable and that would put silver at comfortably over $60 at the current gold price level.

Another boost to silver is also an indirect consequence of gold's strength. Increasingly the small investor who wants some precious metal insurance against hard times ahead is being priced out of buying gold - and then silver becomes a real alternative. Do not be surprised to see silver demand continuing to increase strongly, particularly in the emerging nations as at least some growth here sees more and more people becoming part of the middle classes - and middle class aspirations in many of these nations will include holding some precious metals against a rainy day.

It is also becoming increasingly apparent - in part through the demand patterns noted above - that any truly speculative element in gold (and silver) purchasing is probably relatively minor in its impact and the demand for the key precious metals is coming from holders who will only sell as a last resort - not to make a quick buck. The radical difference in psyche between the Western speculator and the Eastern accumulator is paramount in the price advances we are seeing now. But now there is also an increasing element of western accumulation as a wealth protector too. With other safe havens like the Swiss Franc, and perhaps the Japanese Yen, even more prone to government intervention to balance domestic competitiveness in world markets, the role of gold as an insurance policy is getting stronger by the day. And this insurance is likely to remain in strong hands until the world is seen as coming out of recession - which looks to be years ahead still.

Add to the above the almost daily news items that various central banks are increasing their gold holdings - many by buying their own country's outputs (Bolivia is the latest of these) - and it would seem that the amount of gold becoming available to prospective purchasers may be diminishing by the day. Indeed there is wide belief that other Central Banks from gold producing nations - China being by far the largest of these - are also purchasing all their domestic outputs, but placing this in accounts which are not reported as part of their official holdings until such time as it becomes politically expedient to do so.

Meanwhile higher prices have not yet been able to stimulate any significant increase in mined output due to declining grades and end of mine lives counterbalancing any new output that may be coming on stream, which is further restricting supplies. With growing demand, which looks unlikely to diminish in the near future, the squeeze on precious metals prices looks almost certain to drive the gold price onwards and upwards.

Gold miners, on the other hand, do not appear to have been reaping the benefits of the advancing gold price - at least as far as their stock prices are concerned. But, with gold's price rise so far this year of over 30% in dollar terms, many miners will be showing massive Q3 profit increases when they come to report which may well really begin to stimulate precious metals mining investment interest at a time when the general stock market is appearing increasingly shaky.

All in all it seems to this observer that gold and silver are nowhere near their peaks yet. $2000 gold and plus $50 silver have to remain as definite possibilities even this year and there is likely much higher to come ahead as the global economy seems nowhere yet near coming out of its severe downturn. While continuing lack of global growth may not bode well for the short to medium term price patterns for industrial commodities it could well see gold and silver rise to ever increasing heights.

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