June 4, 2023

Gold and Silver Recap: Back to Work

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.

2010 Gold, Silver, Platinum, and Palladium Price Performance

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.

Gold and Silver Recap: Precious Metals Prices Mixed

Another Precious Week: Unsettled

Despite the general downward appearances, this was a very mixed week for precious metal prices.  Business Week, that fantastic contrarian indicator has announced that gold is in a  three month slump.  As Christmas is coming, there does not tend to be the large buying from India and (increasingly) China that there is over the autumn wedding season.  Unlike the three wise men, westerners don’t tend to give each other as much gold as the Indians do, although this may change if the expected retail gold breakthrough happens.  It has not happened (if it ever does) and so it’s still cheap Chinese electronics that are waiting for you under the tree, rather than discrete pieces of gold jewelery.  Sorry about that.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,368.50 -6.75 (-0.49%)
Silver $28.78 -0.01 (-0.03%)
Platinum $1,696.00 +23.00 (+1.37%)
Palladium $738.00 +1.00 (+0.14%)

Gold-Silver Ratio: 47.55 (was 47.77)

The Central Banks and investment funds also seem to be winding down for Christmas, and there is no discernible activity from these two sources. As they have been net buyers for the year, this is going to have a softening effect on prices.  The Central Banks of countries with sovereign wealth funds still think of themselves as being underweight in non-paper money, so they are likely to kick off buying in January, or if there is a dramatic dip.

On the currency side, it must be said that the fundamentals for precious metals are looking a lot more solid.  The European Central Bank is talking about printing a whole load of new Euros now that Spain looks very wobbly, and they realize that the stabilization cupboard is particularly bare.  The United States is also seriously unimpressive with benefits being extended for the poorest and tax cuts being extended for the richest.  This looks like a really nasty deficit in the making and so default by printing.

It must also be remembered that the Chinese are suffering some very real inflation, as even the People’s Daily has noticed. It is still a bit weird to realize that the Chinese press is quite free, by despotic communist standards, and that these pieces of news are getting reported.  There is also talk of the Chinese shifting some of their massive US government bond holdings into gold, which even at the margin will be massive.

If the big Asian buyers, particularly the private buyers, start to get as interested in silver, then 2012 could be a real bull market.

Gold and Silver Recap: Silver Price to $50?

Another Precious Week

Usually we start this column with some guff about gold.  And then after talking mostly about gold we may hit the other metals.  Let’s face it, gold is usually the most exciting metal there is.  If the world collapses about us, we will be using gold as the currency that helps us rebuild civilization.  And after all, what could be more exciting than that.

But the real action has been in the silver market.  Not all up, it must be said as silver took a real pounding on some days, but there’s some real excitement that J.P. Morgan may be about to bite it on silver.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,375.25 -28.25 (-2.01%)
Silver $28.79 +0.05 (+0.17%)
Platinum $1,673.00 -45.00 (-2.62%)
Palladium $737.00 -21.00 (-2.77%)

Gold-Silver Ratio: 47.77 (was 48.83)

First let’s look at some history.  Bunker Hunt and a few friends tried to corner the silver market by buying silver and buying silver futures.  They drove the silver price skywards, to a level that’s not been reached since.  Then the authorities did some dirty tricks with the silver futures contracts, the price of silver fell, and everyone brushed themselves off and got on with life.

Now J.P. Morgan has been accused of doing the same thing, but in reverse.  Instead of buying silver they are selling it short, that is they are selling it now to buy in six months time.  They have, it has been alleged, sold far more silver than they can possibly have.  This has meant that the rise in the silver price is going to kill them if we all buy physical silver.  You see, someone may want to see all this silver they’ve been sold, and then J.P. Morgan will have to buy it and up shoots the price.

The core idea here is that the gold silver ratio is ridiculously high.  Historically (going back to Biblical times) it has been 16:1, now it is around 48:1, although this week it fell quite fast.  A return to historical norms would mean that silver would get to $87 per ounce.

So there’s some correction that’s due.  Now, this doesn’t necessarily mean that silver has to go up.  There could be a new paradigm, or if not, the correction could be postponed for a very long time. If the correction does happen, then it could be that gold would go down to around $500 – where it was only a few years ago.

Gold could keep going down, but there’s enough uncertainty and inflation to suggest that it won’t get all the way to $500 per ounce.  The correction could be delayed by decades or muted, but the collection will come.  You could still lose money betting on it.

Silver Market Correcting or Crashing?

Despite predictions of the silver market’s strength, prices fell from an impressive 30 year high of $30.68 recently. As of the today, COMEX silver futures have fallen about 7% from their recent peak

Likewise, the silver ETF experienced a similar fall in higher volume. From its intraday high of $30.00, it has fallen below $28.00 on higher volume.

It seems like, for the moment at least, silver prices are falling. Will they rise again? And why?

Strong Holdings vs. Falling Prices

In reality, the news is conflicting. After all iShares Silver Trust is the world’s largest silver backed exchanged traded fund and it has just reported reaching an impressive record. On the 7th, it announced that holdings had reached a record 10,941.34 tons, up from 10,816.69 tons on the 6th.

The question is: has silver regained its strength? Is the market simply correcting? Or are we about to experience a major collapse in silver prices despite expert predictions of strength and growth? In any case, how should investors respond to its new movements?

Silver Shortage?

In the end, the best thing investors can do to protect themselves is to simply be careful. Its important to be mindful of the many pressures that the market is under, as well as the predictions of its potential long-term growth. Silver has been sold past the point of availability and as a result significant shortages of the physical metal are developing.

This is in part due to attempts at manipulation that have recently begun to turn on the manipulators. Companies that have traded silver futures in an effort to keep prices low are now being stressed by the rising investor interest in silver. As a result it seems clear that the short-term silver market is about to get truly exciting.

Another Precious Week: Back on Track – Record Breakers

Gold, Silver, Platinum, and Palladium Weekly Recap

So the price of gold has broken the $1,400 mark, whatever.  The biggest news is that we shrug off records such as these being broken.

The pundits are saying that this is a “flight to safety”, to which we say that’s so last week.  Literally last week.  If you’re memory was at the top end of the gold fish scale (and we’re talking about market pundits here) you’d remember that the flight to safety was last week when all the other metals were going down but gold was up.

Now gold is up less than the other metals, and we know what that means.  Inflation, baby.  Sure enough, oil is up as well.  In fact gold really didn’t show much form until Friday, and that was only because of Chinese figures.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,403.50 +48.50 (+3.58%)
Silver $28.74 +2.12 (+7.96%)
Platinum $1,718.00 +79.00 (+4.82%)
Palladium $758.00 +88.00 (+13.13%)

This inflation hedging should be slightly puzzling, after all the Quantitative Easing announcements were a few weeks ago and the bank rescues in Europe may have been mildly inflationary, but they are also a reminder that the whole thing could go down in a deflationary spiral that will hit precious metals.

That’s because we’re looking at the west.  As we’ve been arguing for some time the consumer demand in the east is where the action is.  And the Chinese are very worried about inflation.  China has released figures that have shocked the markets showing that the demand for gold is five times what it was last year.  This is about a third of the total consumer gold demand. The Chinese are scared stiff of inflation, which is going out of control, particularly with a weak currency due to the dollar link.

Precious metals are the answer, and China has historically been particularly fond of silver rather than gold.

Governments are also actively buying, particularly Russia which has overtaken Japan to become the eighth biggest Central Bank holding gold.  And they got the World Cup soccer competition.  Lucky Russia.

In the silver market the talk is about market manipulation and short positions, with some people speculating that the traders who took out the massive short positions need to cover their positions and actually buy silver.  Well perhaps.

Palladium and platinum have also proved to be very tight markets, with palladium getting to its highest price since April 2001.  Palladium in particular has a very narrow supply base, with much of the mines being in Russia.

Gold and Silver Recap: Prices Mixed, Eurozone Troubles

Another Precious Week

The big news is once again that the Euro zone is in trouble.  Ireland has rather bizarrely decided to take a bail out loan that it claimed that it never wanted, but that’s not the really, really big news.

No the really, really big news is that the rest of the Euro zone is in trouble.  Both Portugal and Spain are denying that they need bail outs, which to the international markets seems to mean “are in an early rather than a later stage of negotiation”.  Even Belgium is looking vulnerable.  And outside the Eurozone the British, who seem to have been remarkably smug, are also in trouble due to their mainly nationalized banks being up to their neck in bad Irish debt.  So chaos.

And then there’s Korea, where we could have war.  And so more chaos.

But not inflationary chaos, yet.  This has meant that gold and silver swapped places this week.  Gold went up (reflecting a greater danger that the world was going to end soon) while silver went down showing that inflation was probably not likely when everyone’s trying to work out how to wind up a small but rather expansive economy.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,355.00 +12.50 (+0.93%)
Silver $26.62 -0.45 (-1.66%)
Platinum $1,639.00 -11.00 (-0.67%)
Palladium $670.00 -25.00 (-3.60%)

This has not just shown in silver, palladium and platinum prices – it’s also shown in the price for crude oil.  The dollar’s strengthened and everyone’s worried about money going out of the system rather than going in.  Whether this will last is another question, after all although the Euro is a mad concept with a single currency over separate fiscal policies it had a reasonably strong central bank.  Sooner or later someone’s going to start the printing press up as they’ve already done in Washington, Tokyo and London.  And gold rose 3.8% against the Euro.

When looking at the market there hasn’t really been much government action.  The action, as it has been for much of this half of the year, has been among consumers.  For example the GLD ETF, a way of investing in gold if you really trust brokers rather than gold coins in your hand, has been soaking up a lot of the customer interest in gold.  As these ETFs, or exchange traded funds, are adding to the liquidity they could be setting the stage for a sharp reverse.

There’s also some action in Asia as the Indian wedding season is adding yet more pressure as the wedding season starts and Vietnam allows more gold to be imported. One interesting fact is that Chinese consumers have doubled the amount of savings they devote to gold this year to 2%.  There’s plenty of room for growth.

Gold and Silver Recap: Prices Mixed, $500 Silver Campaign

The excitement seems to generally be wearing off.  It could be the end of the bull market in precious metals.  I don’t think so, but if I call it now and it does happen I will look like a prophet as every one else (including me) thinks that gold is going up.  Words are cheap.  Silver certainly isn’t.

In fact the market has been a bit up and down.  Down for two days on Tuesday and Wednesday, back up on Thursday and then gradually back on Friday.  In fact the gold price for once seems to have been helped by the world not going to pot, as the Euro zone seemed to be edging towards a deal to put Ireland into run off.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,342.50 -46.00 (-3.31%)
Silver $27.07 +0.28 (+1.05%)
Platinum $1,650.00 -62.00 (-3.62%)
Palladium $695.00 -8.00 (-1.14%)

It seems to have affected silver as well.  It only went up 1% this week.  On silver’s past form this is a fall.  So have they stopped competitive devaluation?  You bet they haven’t.  It’s just that fewer people are noticing it.

One stealth seller of gold from the official sector – which has been very quiet – has been the IMF.  While the World Bank goes around telling everyone that the gold standard is something worth considering, the IMF has been ever so quietly selling gold.  This has accelerated when the gold price has been relatively high as the IMF is not making an ideological statement in the same way that Gordon Brown did in the UK when he sold off a chunk of the gold reserves.  This has been counteracted by equally quiet gold buying from some Central Banks, particularly Russia.

Another source of demand is the Asian consumer, and that was quite evident on the week’s trading as much of the dip was attributed to the Chinese resolve in fighting inflation.  If China is successful against inflation then demand for gold will lessen.  One fact on the demand, China is now approaching India as the biggest gold consumer in the world, how long before the Chinese Central Bank shares its peoples growing love of gold?

Silver is still going up, even when all the other precious metals have a bad week.  There’s been relatively little action on the price fixing case, although there is now a rather bizarre campaign to bankrupt JP Morgan (one of the alleged fixers) by having everyone buying an ounce of silver which JP Morgan would have to sell back.  Their target?  Silver at $500 an ounce.  Currently it’s $27.

Gold and Silver Recap: G20 Aftermath and Silver Price

Well it looks like the G20 worked.  Talk of ending competitive devaluation seems to have put a bit of zip into the dollar, and other currencies.  This has hurt gold, particularly towards the end of the week.

Oddly it didn’t touch silver, the purer inflation play.  So the view is that the end of the world is much less nigh than it was last week, but inflation is still on the way up.  Or perhaps the investors are confused as I am.  It’s usually the second answer when the market is spinning around in the short term.  In the long term the market may be the most rational engine for progress, but in the short term it is irrational and emotional.  Of course it is in the medium term that rational speculators make their money.

Precious Metals London Fix Prices
Gold $1,388.50 -7.00 (-0.50%)
Silver $26.79 +0.65 (+2.49%)
Platinum $1,712.00 -52.00 (-2.95%)
Palladium $703.00 +16.00 (+2.33%)

Talking about the long run, there’s even talk of gold being reintroduced to the international monetary system, from the President of the World Bank, Robert Zoellick.  “The [new monetary] system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”  Wow.  Sounds like the London Gold Pool of the 1950s and 1960s, although the United States tried throughout that time to stop private individuals buying gold.  He then says to the fiat money stalwarts “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”  Too true.  And silver.

But in the actual precious metals market the real movers were still private individuals rather than governments, with many metals traders warning that there is a big wall of consumer money coming in to the precious metals markets in the shape of planned commodity funds.  Could this be the start of the last leg when the main street investors buy into the death of fiat currency argument?

The silver market still went up, which on the face of it is a puzzle.  If the reason why gold went down was that the market believed that governments weren’t racing to finish off the purchasing power of their currencies, why is silver still going up?  Surely it should be going down.  More.

My theory is that this could be an unwind from the silver price fixing allegations as the action was at the start of the week.  There is also a potentially large overhang of short future positions, which essentially means that there are a lot of people who are selling silver without having bought it.  If they all have to close their positions at once, or buy the silver, then the price could shoot up.

Gold and Silver Recap: The Fed Gives a Helping Hand

So the Fed decides that quantitative easing was going to boost the economy, as if the way to prove that you’re really clever is to do the thing that wasn’t working before, just all over again.  This is naturally going to give precious metals a boost as investors realize that whether or not QE2 works for the economy, it’s definitely going to work for inflation.

Silver has always been a purer inflation hedge than gold, apart from in the days of the bi-metallic agitation, but no one’s really sure what that was about.  Those were the days, when to be a money crank was the minimum standard of a self-educated mind.  Of course the biggest money cranks of all, the fiat currency crowd, won.

But while gold is an inflation hedge as well, it’s also an “OMG the whole world’s going to end and I’m going to be living my life in a bunker” hedge.

The smart money is starting to notice silver, which could make things interesting.  The argument for gold to go up is that not every one’s really bought it yet.  How much more true is that of silver?

Anyway the crucial thing here is the gold to silver ratio.  Currently 52 ounces of silver will buy one ounce of gold (or pounds if you want to think big).  Historically it has been around 30 ounces of silver for every ounce of gold.  But recently there’s been manipulation that’s kept the price down through deliberate manipulation of silver short positions.  Well that’s what some investors are claiming and have named HSBC and JP Morgan in a lawsuit.

Well silver’s been the tearaway kid this week but there’s still some action in gold.  Diwali is over and the Republicans have been elected, which means both Indian jewelery buying and US government spending are going to take a short breather.  Although the dollar went up against a basket of currencies it really looks like these events have suppressed demand for gold.

Central banks are starting to notice gold with countries as diverse as the Philippines and South Africa slowly increasing their reserves.  How long will it be before the foreign currency giants such as China, Japan, Taiwan and the oil states start looking at the only currencies that are still standing five thousand years later?