Gold - it is unlike all other elements on earth. Virtually indestructible, this precious metal has been the source of countless fables and has mobilized the growth of nations and financial infrastructures worldwide. Human beings have been utilizing gold as both a form of currency and an investment for thousands of years. As an asset class, gold is unique. Durable and highly liquid, the economic forces that determine the price of gold are different from the economic forces that determine the price of many other asset classes such as equities, bonds or real estate. A potential safe haven from the uncertainty of economic events, political unrest and high inflation, gold offers investors an attractive opportunity to diversify their portfolios - potentially reducing overall portfolio risk and ultimately preserving portfolio wealth.
Gold, Silver, Platinum, and Palladium are the precious metals group. History shows that precious metals are a strong investment during times of political unrest, high inflation and economic uncertainty.
In the late 1970's early 1980's oil prices were high, inflation was in the double digits and there were major problems in the Middle East. Gold and silver prices exploded to the highest price levels ever. Gold increased from $35.00 an ounce to lifetime highs of $850.00 and silver increased from $1.50 an ounce to $52.00.
Conditions now are very similar to the high inflationary times of the late 1970's. Record oil prices, problems in the Middle East, increasing interest rates and economic uncertainty. If you don't learn from history, history repeats itself.
One of the most frequently asked questions we hear lately is, why are our gold spot prices lower than what is reported in the media, such as CNBC or other business news programs?
This is a good question, particularly since there is often a discrepancy of a few dollars between the popularly reported gold price and the true spot price. And in a normal market, the spot price is less than the futures prices. And as physical gold traders, it puts us in a bad light sometimes. People selling to us may think that we’re ‘cheating’ on the spot price, and people buying from us must sometimes think that we’re misinformed, because we are willing to sell gold to them using a spot price which is clearly less than what they saw on TV.
This has to do with how gold is traded, particularly on the Comex during the US trading day. All such gold trading is done on a ‘futures’ basis, wherein traders buy and sell contracts for delivery anywhere from a month to a year or more in the future. The most heavily traded futures contracts are “where the action is” in terms of volume and liquidity.
For instance, the currently most active market in NY gold is the April contract, so that contract’s price is the most commonly quoted on TV. And directly related to that price is what we call the “spot” price, which is the price for immediate physical delivery. This morning the difference between spot and the April contract is about $3.00.
So, at any time, there is always a “switch” from the most commonly quoted futures price to today’s spot price, and that difference is the EFP, which stands for ‘exchange for physical.’ If, as an investor, you didn’t want to take physical delivery of gold, but just wanted to do a short-term speculation, you would buy contracts (100 ounces each) in an active futures month of gold trading. By owning such contracts, you could control a set amount of gold, and you would have until that month (known as the ‘delivery’ month) to decide whether to sell, take delivery, or ‘roll over’ your position.
As we move closer in time to the trading month, the EFP shrinks. For instance, we will see the EFP versus the April 2008 contract get smaller as April approaches. And as that happens, an increasing amount of trading volume will start to occur in a yet further out contract (the June 2008 contract in this case), as traders look to establish positions with a bit more time on the clock, so to speak. So by the time that the last week in March rolls around, the EFP with April will be less than a dollar per ounce, and once April begins, major trading will have moved on to the June contract, with a consequently larger EFP versus that contract.
So, in conclusion, spot is a more or less imaginary number, continually determined by taking the price of the most active month’s price in futures trading, and subtracting the EFP.
Saturday, Oct 7th 2010
Q.:Are we in a Gold-Price bubble, are we due for a deep correction in the price of precious metals ?
We at the Diamond Connection believe that we continue to see risks ahead for the U.S. economy, and in particular, the U.S. dollar. Significant global imbalances remain – indeed; the recent global financial crisis has served to exaggerate many of these imbalances. Of grave concern is the unsustainable Federal budget deficit, which may have morphed out of control, with no signs of government restraint over the near-term. The U.S. current account deficit remains at a high level, and will likely weigh on the dollar for years to come. Add to this the inflationary pressures brought about by the Federal Reserve Bank’s (Fed) substantial balance sheet expansion – the balance sheet has grown nearly threefold since the beginning of the crisis – which may cause a further devaluation of the U.S. dollar. Despite political rhetoric to the contrary, in our assessment, policies are clearly working against a strong U.S. dollar. Moreover, we are yet to see evidence of a strong, sustainable economic turnaround in the U.S.
We were never in the “V” shaped recovery camp, and our analysis of the data thus far doesn’t support such a thesis. Businesses appear unwilling to hire, with the unemployment rate remaining at historically high levels. House prices have yet to revert to long-run affordability measures, despite historically low interest rates. Banks are not lending despite a plethora of available funds - whether this is predominantly driven by continued bank risk aversion, a lack of demand for loans, or a combination thereof does not portend a strong economic rebound. Debt levels remain high and what debt is not being driven by private sector demand is more than made up for through insatiable government debt growth.
Alcoholics do not drink themselves sober; likewise piling more and more debt onto the system does not rectify a country’s debt-fueled problems. Until we see fiscal and monetary restraint in action rather than words, we consider the medium and long-term risks remain to the downside for the U.S. dollar.
Given current dynamics, we consider there to be many attractive investment opportunities. Of particular interest is the precious metals like Gold and particularly the white metals such as Silver and Platinum. The potential of silver is the greatest, which is far too cheap at the current $23 level. Silver relatively to the price of gold is seriously undervalued, creating a screaming buying opportunity. We started to recommend Silver buying (actual hard asset, not the paper notes or promises) when siver was priced at around $4 to $5 ! Silver, in our opinion has big gains ahead of it, topping off at least at around $80 - $95! Silver, so called "poor man's gold" is also an industrial metal with endless uptrend price potential.
Gold prices would have to reach the inflation adjusted high of nearly 30 years ago of some $2,300/oz before it could be considered a bubble . Having said that there will be many sharp corrections along the way which will see speculators and leveraged traders incur large losses. Predicting the future price of any asset is extremely difficult and as ever passive asset allocation and real diversification remains prudent.
With the popularity of gold ETFs continuing to rise, Kevin Feldman of BlackRock, provided his view on where the yellow metal is heading. “If you look at it on a real-dollar basis gold is still not trading anywhere near its January 1980 high, which would, in inflation adjusted dollars, be about $2,200 an ounce.”
Feldman went on to say that “People are investing in gold right now because of its safe haven status and they’re concerned about risks in the short term given the strength of the recovery across developed markets right now.” He added that with interest rates at record lows, retail and institutional investors have moved into gold to protect against fiat currency debasement.
When asked if gold is now in a bubble, Feldman responded that “It’s hard to make a case for a bubble. Gold was really out of favor for quite a long time before we got to this most recent period of increased prices.”
Gold avoided falling as risk reduction rose –this change looks bullish
Other markets are starting to correct
Is debt going to undermine recovery?
The dollar is strengthening and the euro may have considerably further to fall
Higher prices are likely to dampen fabrication demand
Our Metals Forecast for 2011:
GOLD - Range $1210 - $1850 Average - $1590
SILVER- Range $23.75 - $39.50 Average - $36
PLATINUM - Range $1635 - $2325 Average - $1950