April 26, 2024

Gold and Silver Consolidate Recent Gains As Threat Of Sovereign Defaults Grows

April 1, 2011 by Leave a Comment

Gold and silver prices, as measured by the London PM Fix Price, were largely unchanged on the week.  Gold slipped by $18 per ounce while silver declined modestly by $.05

Gold has rallied almost $100 per ounce since late January but has failed to decisively break out to new all time highs.  Silver, the standout performer in the precious metals sector has rallied furiously since late January, gaining $10 per ounce for an increase of 36%.

SILVER - COURTESY KITCOSILVER.COM

Despite the current attempt by Congress to implement very modest budget reductions,  fewer and fewer people seem to have faith in the long term value of the dollar.  The value of gold has not gone up for 10 years straight by accident – it is the result massive increases in debt and the looming threat of paper currency depreciation as governments resort to the printing presses to avoid defaulting.  (See Why There Is No Upside Limit for Gold and Silver).  Recent comments by two prominent individuals reinforce the view that the potential fallout from the debt crisis will be severe.

Bill Gross of Pimco, the world’s largest bond investor, writes in his April 2011 Investment Outlook,  “Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates”.

John Lipsky of the International Monetary Fund warned that the level of debt by developed nations is unsustainable, having reached levels last witnessed after the end of World War II.  According to Mr. Lipsky, “The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks.  The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion”.

The reality of a democracy is that we elect those who promise to provide us with the most benefits and entitlements.  Under these constraints, the temptation by elected officials to use printed money to meet promises that cannot be kept is irresistible.  Yes, the promises will be kept but they will be paid for in dollars that have little purchasing value.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,418.00 -18.00 (-1.25%)
Silver $37.63 -0.05 (-0.13%)
Platinum $1,773.00 +21.00 (+1.20%)
Palladium $772.00 +18.00 (+2.39%)

Platinum and palladium both gained on the week, continuing a rebound from recent sell off lows reached during the height of the panic related to the Japanese earthquake.  Since mid March, platinum has gained $73 per ounce while palladium has gained $60 per ounce.  In late February palladium was at the $860 level while platinum traded in the $1850 range.

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Gold and Silver Prices Push To New Highs, Gold Silver Ratio Drops To 28 Year Low

March 25, 2011 by Leave a Comment

Gold and silver prices, as measured by the London PM Fix Price, moved to new highs on the week.

Gold, as measured by the closing London PM Fix Price, gained $16 per ounce on the week and hit an all time high of $1,447 on Thursday.  After soaring 30% last year, investors still have plenty of reasons to allocate part of their portfolio to precious metals.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,436.00 +16.00 (+1.13%)
Silver $37.68 +2.53 (+7.20%)
Platinum $1,752.00 +32.00 (+1.86%)
Palladium $754.00 +27.00 (+3.71%)

Silver was once again the standout performer among the precious metals, gaining $2.53 per ounce on the week.  The price of silver has now risen by over 10% in the past two weeks and is up from a yearly low of $27 in late January.  Silver has far outpaced the gains in gold, which has resulted in a decline in the gold/silver ratio to 38, which is the lowest since late 1983.  A return to the long term historical gold/silver ratio would result in silver prices approaching $100 per ounce.

SILVER - COURTESY STOCKCHARTS.COM

The surge in silver prices caused the CME to increase margin requirements on silver futures, which contributed to a pullback in prices on Thursday.  The move by the CME was seen by some as a manipulation tactic to bring down the price of silver, but increased margin requirements are common when prices are rapidly increasing.  Small and underfunded speculators may have to liquidate, but in the long term silver will merely move from weak hands to strong hands.  Increased margin requirements on highly leveraged positions can produce a short term sell off, but it does nothing to change long term fundamentals.

Platinum and palladium, which both lost over 3% last week, gained on the week as fears of reduced industrial demand were eased by estimates of the huge reconstruction cost in Japan.  The rebuilding of Japan is likely to result in higher prices for all types of commodities and an increased rate of global inflation.

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Gold and Silver Prices Gain on Week

March 18, 2011 by 1 Comment

As measured by the London PM Fix price, gold and silver prices gained on the week after declining approximately 1% each in the previous week.  Gold gained $8.50 per ounce on the week to $1,420.00.  Silver was the stand out gainer on the week with a 3% or $1.05 per ounce gain.   As the situation in Japan and Libya stabilized somewhat, the recent panic selling in financial markets subsided as bargain hunters moved in, although in late trading, stocks gave up much of their gains.  Gold and silver also pulled back slightly in New York trading with gold at $1417.80 and silver at $35.10.

As market analysts worried about the potential for slower economic growth due to the disaster in Japan, classic industrial metals saw further price erosion after significant losses in the prior week.  Platinum fell by $57 on  the week and palladium dropped by $27.  Over the past two weeks, platinum has declined by $108 or over 6% while palladium was off $84 for over a 10% loss.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,420.00 +8.50 (+0.60%)
Silver $35.15 +1.05 (+3.08%)
Platinum $1,720.00 -57.00 (-3.21%)
Palladium $727.00 -27.00 (-3.58%

As discussed last week , the fundamental forces propelling gold higher remain intact.  The devastation in Japan will require massive amounts of additional borrowing by a government already reaching the limits of its borrowing ability.  Expect Japan to follow the policy of the Federal Reserve with massive amounts of quantitative easing.   The currencies of Japan, Europe and the United States all face a loss of real purchasing value as governments engage in money printing to meet spending and borrowing needs that have spiraled out of control.

The toxic combination of  low economic growth, weak personal incomes and public resistance to additional tax increases have left governments with no other choice than to engage in massive expansion of the public debt.  As constraints on governments’ borrowing ability have grown, the last resort option of money printing will continue to result in the debasement  of currencies.  Increases in the price of precious metals have no upside limit under this scenario.

Silver remains the primary investment choice of many as the metal reasserts itself in relationship to the price of gold.  If the very long term historical gold silver ratio reasserts itself as many expect, the price of silver could easily close in on the $100 per ounce level.

SLV - Courtesy yahoo finance

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Gold and Silver Prices Hold Gains, Rise in Late Trading

March 11, 2011 by Leave a Comment

Gold and silver prices declined slightly on the week, as measured by the closing London PM Fix prices.  Gold finished the week at $1,411.50 for a loss of $15.50 while silver declined fractionally by 33 cents to close at $34.10.  However, as markets assessed the impact of a slowing world economy, higher inflation, higher oil prices and the massive earthquake in Japan, prices for gold and silver saw significant price improvement in late Friday New York trading.  Gold moved up $9.20 to $1,421.30, while the silver price rose $.60 to $35.90.

In a week of tumultuous economic and political news, platinum and palladium saw significant declines on the week as investors worried about reduced industrial demand in the face of a slowing world economy.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,411.50 -15.50 (-1.09%)
Silver $34.10 -.33 (-0.96%)
Platinum $1,777.00 -51.00 (-2.79%)
Palladium $754.00 -57.00 (-7.03%

The minor price consolidation for gold and silver over the past week are impressive considering the strong gains of the previous month.  Strong bull moves are never straight and price corrections should be seen as an opportunity to increase positions.

None of the concerns that have propelled the precious metals higher have been resolved.  There is a strong probability that one or more of them will blow up putting major financial pressures on governments that are already staring into the abyss due to untenable levels of debt.  Which event will trigger another financial crisis is impossible to predict, but here’s a quick rundown of the obvious suspects:

1.) The final implications of the massive Japan earthquake will take weeks to assess but is certain to add huge financial stress to a country already overwhelmed by the highest debt to GDP ratio in the world.  The Japanese central bank has already indicated it is ready to loosen monetary conditions to calm financial markets, which may be a signal that they will follow the U.S. Fed’s lead and engage in a significant amount of quantitative easing or money printing.  The cost of credit default swaps on Japanese government debt widened significantly reflecting the need for increased borrowings by a government already overwhelmed by indebtedness.  As investors become increasingly alarmed at the prospects of default on government debt and currency debasement, the flight to gold will accelerate.

2.) The sovereign debt crisis in Europe continues to spiral towards a crisis as the European Central Bank attempts to solve a debt crisis with more debt.  Monetary authorities worldwide are out of standard policy options and will follow the lead of the U.S. Fed by printing money.   The implications of money printing on a global basis removes all constraints on the appreciation limits of the precious metals.

3.) The largest bond fund in the world dumps all longer dated U.S. Treasury securities. Bill Gross, manager of PIMCO, the largest bond fund in the world warns that when QE II stops in June, there will not be enough buyers for government debt, leading to a funding crisis for the U.S. Government.  If one of the planet’s smartest and biggest bond investors thinks it’s time to sell U.S. Treasuries, the risk of contagion becomes substantial.  Foreign governments currently purchase half a trillion dollars of U.S. debt every year and are becoming alarmed by Fed policies which make their debt investments look riskier by the day.  How long will it be before other major investors in U.S. debt decide to follow Bill Gross’s lead and initiate a massive sell off in U.S. treasuries?

4.) Oil prices have pulled back in recent days but the situation remains volatile.  A small group of protesters in Saudi Arabia were immediately dispersed with a hail of rubber bullets from security forces, an action that can only further inflame the passions of those who feel repressed by regimes in Saudi Arabia and other oil producing countries.  Chaos in Saudi Arabia would quickly put the world economy back into an economic meltdown that governments may be unable to contain.

SILVER - COURTESY STOCK CHARTS.COM

The last upward move in silver last four months from September through the end of 2010 with a price gain of over 70%.  After a brief correction early in the year, investor and industrial demand pushed silver to a new yearly high.  A rally equivalent to that of last year would drive silver up to the $50 level by June.

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Gold Price Hits All Time High, Silver at 31 Year High

March 5, 2011 by Leave a Comment

The Week in Precious Metals

Gold and silver continued their winning ways this week. Measured by the closing London PM Fix prices, gold gained $24.50 or 1.75%, while silver rose $1.89 or 5.81%. On an intraday basis, the gold price hit an all time high of $1,440.31 while silver traded to a new 31 year high at $35.55.

Gold’s advance for the week came after solid gains of $19 per ounce in the previous week.  Concerns about a weak dollar, skyrocketing oil prices and continuing turmoil in oil producing nations in the Middle East all contributed to reinforce the importance of gold for wealth diversification and as a hedge against a range of adverse economic conditions.

The ongoing surge in oil prices does not reflect an actual shortage in crude production.  Inventories remain robust and excess producing capacity seem adequate to replace all of Libya’s roughly 2 million barrels a year of production.  Rising oil prices reflect the fear that social unrest will spread to Saudi Arabia, the King of oil producers.

Saudi Arabia is surrounded by countries that are in massive social, religious and economic upheaval.   The contagion of violence and revolution has spread throughout the area included Algeria, Libya, Tunisia, Iran, Yemen and Bahrain.  If Saudi Arabia follows the path of its neighbors, the price of oil would quickly be on its way to $200 a barrel.  Small protests in the Saudi Kingdom this week may be a prelude to much larger upheaval in the months ahead.

Oil - Stockcharts.com

The money printing and inflation creation campaigns of the Federal Reserve seem to be giving the struggling U.S. economy some traction and there have been discussions by Fed members regarding the termination of quantitative easing after the current $600 billion round of money printing ends in June of this year.  However, much higher oil prices would quickly put the U.S. economy back into recession since consumer disposable incomes would be drastically reduced.

The Fed’s only easing option to fight another recession is to institute another round of money printing, which at some point leads to an inflationary spiral.  In Senate testimony this week, Fed Chief Bernanke admitted that “sustained rises in the prices of oil or other commodities would represent a threat both to economic  growth and to overall price stability.”  It is no surprise that gold is looking like a sensible option to more and more investors.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,427.00 +24.50 (+1.75%)
Silver $34.43 +1.89 (+5.81%)
Platinum $1,828.00 +37.00 (+2.07%)
Palladium $811.00 +26.00 (+3.31%

Platinum regained some of its luster with a gain of $37 after last week’s loss of $45, while palladium was up $26 following last week’s loss of $62.

After a gain of almost 2% last week, silver continued its sharp upward price movement and gained $1.89 or almost 6% on the week.  On a percentage basis, silver’s gain on the week was almost three times the gain seen by gold.  Since last summer, silver has vastly outperformed gold, a trend that may continue.

If the gold to silver ratio returns to its long term historical trend of 16, the price of silver would approach $100 per ounce at the current price of gold.

The price of the ProShares Ultra Silver (AGQ)  jumped $23 points on the week to close at $204.19 while the popular iShares Silver Trust (SLV) jumped $2 dollars or 6.2%, closely tracking the price of the metal.

AGQ - Yahoo Finance

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Gold and Silver Prices Higher as Platinum and Palladium Sell Off

February 26, 2011 by Leave a Comment

As turmoil reigned in the Middle East and worries mounted over the reduction of oil supplies, gold and silver proved their safe haven status as both moved higher in price.

After a very solid gain of $1.94 per ounce last week, silver continued its upward move with another gain of $.60.  The closing London Fix Price for silver was $32.54 for a gain of 1.88% on the week.   The normal price consolidation and pullback in silver that extended from the beginning of the year into the end of January was the setup for a solid breakout into new highs.  Silver has now advanced over 20% from the lows of January.

SILVER - COURTESY STOCKCHARTS.COM

Besides the safe haven/currency alternative lure of silver, the fundamentals in silver are forecasting further dramatic price gains.   There have been numerous reports documenting physical shortages of silver as well as huge investment demand in the U.S., India and China.

One solid indication of the huge demand for physical silver is evidenced by the backwardation in prices.  Typically, the forward price of a commodity will exceed the cash price due to the expenses of insurance, warehousing and inventory financing.  When a commodity has a normal upward pricing curve to reflect a higher futures cost, the situation is termed contango.  Backwardation, the unusual case where the cost of the physical commodity is higher than future prices, is a classic indicator of surging demand.  Another indicator of the great demand for physical silver is the four year low of Comex warehouse silver.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,402.50 +19.00 (+1.37%)
Silver $32.54 +0.60 (+1.88%)
Platinum $1,791.00 -45.00 (-2.45%)
Palladium $785.00 -62.00 (-7.32%

Gold also continued its upward move with a gain of $19 per ounce after an advance of $19.50 in the previous week.  To understand the wealth preservation appeal of gold, one needs only to look at the exponentially increasing level of  U.S. debt.  Ultimately, the staggering amount of sovereign debt can be serviced only through inflation and dollar debasement which is what the Federal Reserve is currently orchestrating through quantitative easing (money printing).

US NATIONAL DEBT - THE ROAD TO FINANCIAL OBLIVION

The U.S. dollar also appears to be losing its cache as the “safe haven” currency.  Despite the unprecedented turmoil in the Middle East and the rise in oil prices, the U.S. dollar has weakened over the past two weeks.  By comparison, during the financial crisis of 2008, the U.S. dollar appreciated 24% against other major currencies.

The surge in oil prices has led to concerns that the U.S. and world economies will see much lower growth as higher oil prices devastate consumer disposable income.  A weakened world economy would probably lead to lower demand for industrial metals such as platinum and palladium which both declined this week.  Platinum sold off by $45 and palladium was rocked by a $62 loss from the prior week.

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Gold Demand Soars as Supplies Increase Marginally

February 21, 2011 by Leave a Comment

Gold demand increased strongly across all sectors during 2010, as the supply of gold barely increased.

According to the World Gold Council, global demand for gold hit a 10 year high of 3,812.2 tonnes worth $150 billion.  The demand for gold hit an all time high in value as gold prices hit a record high of $1,421 per ounce on the London PM fix.  Typically, as the price of an item increases demand will decrease, but in the case of gold, it seems that  higher gold prices are creating more demand.  The risk of sovereign defaults, inflation, economic concerns and weak currencies have convinced many investors that gold is  integral to the preservation of wealth.

The demand for gold in 2010 was nothing less than extraordinary considering the 25% increase in gold prices.  The London PM Fix price of $1,121.50 at the beginning of 2010 increased steadily throughout the year and closed on December 30, 2010 at $1,405.50.

The World Gold Council noted that key factors affecting the price of gold during 2010 included the following:

  • Jewelry demand increased by 17% over 2009, with demand particularly high in both India and China.  Asia accounted for 51% of total investment and jewelry demand during 2010.
  • For the first time in 21 years, central banks became net purchasers of gold.
  • Investment demand for gold during 2010 was actually down by 2% in 2010 to 1,333 tonnes, but was the second highest demand year on record.

Gold Demand - World Gold Council

The value of gold demand skyrocketed by 38% in 2010 to $150 billion, despite the 40% increase in gold’s value since 2008.  The statistics for specific demand categories, according to the World Gold Council were as follows:

  • Total gold jewelry demand increased by 17% to 2059.6 tonnes despite increased gold prices.  The value of jewelry demand was $81 billion.
  • Investment demand for bar and coin and ETFs remained stable in 2010, down only 2% from the previous year.  In value terms, demand strongly increased by 23% to $52 billion.  Demand for physical bars increased by 56% to 713.2 tonnes.
  • ETFs accounted for 9% or 338.0 tonnes of gold during 2010 which was down by 45% from the peak of 617.1 tonnes in 2009.  At year end 2010 gold holdings by ETFs amounted to 2,175 tonnes worth $96 billion.
  • Gold demand by the technology and electronics industry rose 12.4% to 419.6 tonnes.
  • The market with the strongest growth in gold demand was India.  Gold demand by Indian consumers increased by 66% to 963.1 tonnes worth $38 billion.
  • The market with the strongest investment demand was China which saw a 70% increase in demand for coins and small bars to 179.9 tonnes worth $7 billion.

Total gold supply increased by only 2% as mines struggled to find new deposits and increase production from existing mines.  Out of total yearly gold supply, 40% comes from recycled gold.

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Gold and Silver Recap: Back to Work

January 9, 2011 by 2 Comments

Another Precious Week

So the holiday season, with decent job creation statistics, has seen some uncustomary cheer for the dollar, and on the face of it this seems to be the main driver for the weakness of gold and silver prices.  After all if you’re priced in dollars, and the dollar goes up then your price goes down.  The last week has been particularly bad for gold, with a 3.5% fall (the figures below cover the whole of the holiday period) which is the largest week on week fall for six months.

The long term trend still looks like it’s going to be up, as the Central Banks are starting to buy gold, apart from the Fed – although if Ron Paul gets his way then Uncle Sam may stop being a hold out as well.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,367.00 -1.50 (-0.11%)
Silver $28.39 -0.39 (-1.36%)
Platinum $1,735.00 +39.00 (+2.30%)
Palladium $754.00 +16.00 (+2.17%)

Gold-Silver Ratio: 48.15 (was 47.55)

So far the Central Banks that are buying gold are the scary ones; Russia, China and Venezuela.  But one of the more interesting things is that they are doing this in secret.  If it was an attempt to finish off the dollar then this would be in the open.  No, they are seeing gold as an integral, and underweight part of the reserves that are going to underpin their currencies in the future.  In other words an unofficial, secretive return to the gold standard.  This sort of thing is not a long run dampener on the gold price.

Silver also did badly, which was shown in a rather big slip in the gold silver ratio.  If the idea is that silver is priced around a third of its long term price when compared to gold, well it shouldn’t be going in this direction.  Now I don’t fully buy the idea that silver has got to come to around fifteen ounces to an ounce of gold, or at least any time soon.  But it hard to deny that it is out of balance.

What is even odder is that platinum and palladium have seen a large rise over the holiday period.  While gold can have a life of its own, and it’s true that palladium can have more to do with what the Russian ministry of mines is up to, silver and platinum are quite similar.  While platinum and palladium have seemed to be riding the same industrial metal climb as copper, silver seems to have decoupled with the feeling that perhaps we’ve overestimated the inflationary potential for the dollar with the classic inflation hedge of silver taking the hit.

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Looking for a Top in Gold

January 6, 2011 by 3 Comments

Investors and analysts alike are looking at the record prices of gold last year and trying to predict the future. Last year the price of gold rose by more than 27%, contributing to an increase of more than 400% over the past decade.

Another year of double digit gains in the gold price has many experts considering whether prices will continue their upward trajectory, or whether there are warning signs for a potential top. The predictions are as varied as their sources:

  1. According to Goldman Sachs, gold will top in 2012 at $1,750 an ounce.
  2. John Nadler at Kitco.com predicts that gold will cap by the end of 2011.
  3. The CEO of U.S. Gold, Rob McEwen believes that the market is “a third of the way” to a mania.
  4. Jim Rodgers estimates that the long bull market in gold will result in a huge bubble for the commodities market as a whole—and he thinks we’re halfway there already.
  5. Scott Redler at T3Live.com predicts that if the price gap is truly filled, gold will stay range bound between $1,320 and $1,400 for a time before mustering up a bigger rally.

Everyone is eying the market and trying to decide what it is going to do next so that they can react accordingly. Surprisingly though, most investors do not own their own gold and have never owned it.

According to The Street, you’re much more likely to see people selling gold than buying it. Still, the media excitement about gold prices, not to mention the prices themselves, is generating new investors. The SPDR Gold Shares added 155 tons this year, for example. Longtime investors are waiting for the day when everyone jumps on the bandwagon, resulting in the gold bubble they’re currently trying to predict.

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2010 Gold, Silver, Platinum, and Palladium Price Performance

December 31, 2010 by Leave a Comment

Precious metals delivered another year of strong performance, with double digit percentage gains for gold, silver, platinum, and palladium.

Palladium led the pack with an increase of 96.77% for the year. The metal is now at a nine year high, with gains attributed to the dwindling stockpiles in Russia amidst increased demand for use within catalytic converters in gasoline powered automobiles. As recently as December 2008, the price of palladium was $164 per ounce, compared to this year’s closing price of $791.

Silver had an impressive year with a gain of more than 80%, outperforming gold’s rise of 27.74%. With the price of silver moving up faster than gold, the gold-silver ratio continues to contract. This ratio indicates the number of ounces of silver necessary to purchase one ounce of gold. At the start of the year, the ratio was 64.98. At the close of the year, the ratio is 46.04.

The table below shows the last available London Fix prices from 2009, today’s London AM Fix price, the change, and percentage change.

2010 Precious Metals Price Performance


 Dec 31, 2009 Dec 31, 2010 Change Percent
Gold $1,104.00 $1,410.25 $306.25 27.74%
Silver 16.99 30.63 13.64 80.28%
Platinum 1,466.00 1,731.00 265.00 18.08%
Palladium 402.00 791.00 389.00 96.77%

Although palladium and silver outshone gold this year, gold continues its impressive streak of consecutive annual gains. The price of gold has recorded an annual gain each year since 2001. During the ten year period, the price of gold has risen more than fourfold from $272 per ounce to $1,410.

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