Special Feature
Gold and silver have certainly been shining areas of the marketplace during the last few years as central banks around the world lowered interest rates to historic lows and incrementally flooded the world with cheap money through QE measures. In fact, gold and silver are up around 90 percent since the beginning of 2008 whilst the global index S&P 500 is negative by 4.5 percent — that’s some outperformance. As commodities, demand for gold and silver has historically principally come from actual producers, for example of jewelry. But, in recent years, there has been an incremental amount of demand for both precious metals from investment funds — so skewing the demand equation and adding upwards pressure on price. Only recently I was shocked to learn that, apparently, all the gold ever mined in the world would fill just 3 Olympic sized swimming pools — amazing!
It is our contention that probably the vast majority of the rise, in gold in particular, over the last few years wasn’t because of underlying industrial use, but simply financial investment demand due to the fear of currency debasement and, ultimately, material inflation being just around the corner. Analysts en masse are still bullish on both precious metals as they anticipate another round of monetary easing to occur later this year in the US and possibly Europe. However, we think that the long rally in gold is now running out of steam.
90 | www.financial-spread-betting.com | September 2012
Silver In April last year, silver hit a 31 year high of just under $50/oz as concerns over the debt crisis in Europe intensified and a weak US dollar forced investors to look for other safe havens, with equities deemed too risky at that time. It is important to note that the last round of quantitative easing in the US was actually announced in November 2010. In recent months, many commentators have been expecting more QE from the FED but, excluding Operation Twist, the FED has actually been dampening these expectations as a consequence of recent economic statistics in the US actually pointing to a modestly growing economy and therefore less need to embark upon the QE measures again. With gold up 90 percent since 2008, a number of global macro funds that have been heavy buyers of the metal in recent years have been booking sales to make up for the losses on their equity positions. This thesis goes a long way towards explaining the decline over the last 10 months coupled with a tempering of underlying industrial demand as the price was deemed too high. Considering its peak last year at just over $1900, gold is now down more than 10%, with silver a tub thumping 43%. In the event that the US economy in particular gathers steam, or the worst doesn’t come to pass in the Eurozone, we would wager that gold will likely continue to re-trace the spectacular gains experienced over the last 15 years, and wouldn’t be surprised to see a move back towards $1200 over the next few years. If the recent weakness in treasuries also continues (see our call this month on a “once in a generation short opportunity” here) then this is likely to continue to be a lead indicator for further weakness in gold in particular — gold and treasuries have been pretty highly correlated in recent years as the “anti-dollar/ safe have play”. This is something worth watching closely...