Gold prices low and headed lower

Much like silver, gold prices are flirting with four-month lows. There’s a lot of reasons why. You just have to pick your favorite poison. Here are nine of them.

Much like silver, gold prices are flirting with four-month lows. There’s a lot of reasons why. You just have to pick your favorite poison:

1) October’s inflation numbers were extremely low at 1 percent.

2) There’s a perception that the Federal Reserve could taper its bond-buying program sooner than expected. In recent meeting minutes, officials seemed to support tapering even if the job market doesn’t improve substantially.

3) The job market’s holding up better than analysts thought. “Individuals filing for initial jobless benefits in the U.S. last week fell by 21,000 to a seasonally adjusted 323,000, beating expectations for a decline of 9,000,” reports.

4) There’s a bull market in stocks. That makes it hard to hold cash in gold and silver when you’re watching other asset classes outperform – especially with the Nasdaq up more than 30 percent YTD.

5) China’s contributing to record gold production. “Mining production in the country surged by 4.9% to a good 253 tons in the first nine months of the year,” according to the China Gold Association (source).

6) The Venezuelan central bank is selling 45 tons of gold to Goldman Sachs through 2020. Look for that metal to hit the market further depressing prices (source).

7) ETFs are driving prices down faster than they might have otherwise fallen. Investors can move in and out of gold (via ETFs) faster than ever before. That creates a feedback loop in the physical markets. ETFs sell off and more gold floods the market driving prices down further and prompting more people to sell off their ETF holdings.

8) Gold selling was so heavy on Thursday that the Comex actually halted trading of the metal twice. Resource Investor reports that the exchange was hit with some $200 million in simultaneous sell orders.

9) Speculators could be moving into bitcoin as a proxy for gold and silver. Check out my post: “The case for bitcoin at $100,000.”

The bleeding will stop eventually, but I wouldn’t be “bargain-hunting” right now. Buying into falling prices is the easiest way to dig yourself into a hole. That’s called “catching a falling knife” for a reason. Wait until prices “base” or flatline to consider accumulating gold. In the meantime, take a look at bitcoin in my post Bitcoin inflation hedge: The new gold and silver.

Top 10 gold price predictions for 2013

My personal opinion? Gold likely bottomed at $1,200 recently, but don’t expect spectacular gains through the end of the year. Precious metals need a big catalyst to move higher aggressively.

-Posted by Alejandro Guillú Mendoza

Many people around the world want to know the answer to the question, where are gold prices going?

I invested many hours browsing the internet searching for answers to this question to save you time and money because time is money.

Have another question? Drop me a line. I only answer questions regarding money. Please don’t ask me where your lost dog is or why your boss fired you.

Here are my findings when I searched for the Top 10 gold price predictions for 2013:

1) $1,487 Morgan Stanley

The 15th-leading investment services company in the world downgraded its forecast 16% to $1,487, according to the Wall Street Journal.

Peter Richardson said speculation of selling by European Central Banks and nervousness over the possibility that the United States of America Federal Reserve will end its QE earlier than December 2013 are also top contributing factors.

2) $1,530 David Morgan

David Morgan is the publisher of The Morgan Report and creator of which has been featured on CNBC and Fox Business.

Bernice Napach of the Daily Ticker has written more about this. You can watch the seven-minute video here.

3) $1,550 Goldman Sachs

The second-leading investment services company in the world downgraded its six months forecast to $1,600 from $1,805 and its twelve months forecast to $1,550 from $1,800, according to the Wall Street Journal.

The recent sell-off was “likely excessive,” and it has “exposed a quickly waning conviction in holding gold positions, especially ETFs.”

4) $1,637 Deutsche Bank

The bank lowered its forecast last month 11.8% to $1,637, according to Fox.

“Given our forex strategist’s expectations for continued strength in the U.S. dollar and our U.S. economist’s forecasts for an acceleration in gross domestic product growth going forward, we expect that gold will struggle to appreciate meaningfully against the U.S. dollar.” – Daniel Brebner

5) $1,700 HSBC

The bank lowered its forecast 3.5% from $1,760 to $1,700, according to Reuters.

“Later in 2013, we expect monetary easing, escalating currency wars, and geopolitical tensions to support gold prices up to $1,800 an ounce.”

“Increased inflationary expectations should buoy gold.”

“Any price drop below $1,600 per ounce may stimulate jewelry, coin and small bar retail demand in price-sensitive economies.”

“Further ETF or Comex liquidations could put additional pressure on gold prices.”

6) $1,880 Aubie Baltin

Check out this article: 5 reasons Gold Will Set an All-time Record in 2013. I’m not sure I agree, but the title’s pretty bombastic…

7) $2,200-$3,000 Jason Hamlin

Jason Hamlin is the President and Founder of GoldStockBull and more importantly, one of the Opinion Leaders in the Gold & Precious Metals category at Seeking Alpha.

Pent-Up Potential For Precious Metals in 2013 is an interview by The Gold Report where he discussed his prediction.

8) $10,000 Societe Generale

“With some rare exceptions … analysts don’t like to stand out from the crowd. It is dangerous and career-challenging. In that vein, we repeat our key forecasts of the S&P Composite to bottom around 450, accompanied by sub-1% US 10-year yields and gold above $10,000.” – Albert Edwards

Read more in Doomsday? SocGen Predicts S&P to 450, Gold at $10,000 by Sam Mamudi.

9) Franklin Templeton

The tenth-leading investment services company in the United States of America does not offer a specific numeric forecast. However, they believe the price of gold will go up. You can read their recent financial analysis here.
Keep in mind only eight investment services companies in the world make more money than them.

10) Hebba Investments

Hebba Investments is one of the Opinion Leaders in the Gold & Precious Metals category at Seeking Alpha and although he does not offer a specific numeric forecast, he believes the price of gold will go up. You can read his recent financial analysis here.

My personal opinion? Gold likely bottomed at $1,200 recently, but don’t expect spectacular gains through the end of the year. Precious metals need a big catalyst to move higher aggressively.

How low can gold prices go? Has the rebound arrived?

On April 15th, the price of gold dropped $140 in one day when Goldman Sachs drastically reduced its average price forecasts and recommended a short Comex gold position for their clients. Things have been shaky ever since.


For many years, people have relied on gold as being a stable and worthwhile investment in an otherwise constantly fluctuating market. Back on Sept. 5th of 2011, gold reached an all-time high of $1,900.30 per ounce and was considered a mandatory component in every investor’s portfolio. Unfortunately, it dropped drastically to $1,690 the following year and is currently being sold at only $1,340 an ounce. The price of gold has been dropping quickly since it hit its peak two years ago, but most investors are more interested in the question: How far will it fall before it starts to rebound again?

Gold Fell to $1380 in Mid-April

On April 15th, the price of gold dropped $140 in one day when Goldman Sachs drastically reduced its average price forecasts and recommended a short Comex gold position for their clients. This immediately brought the price down to $1395 per ounce, which dropped even further the following day to $1380. Fortunately, less than two weeks later, Goldman Sachs decided it was time to close out the gold shorts that were previously recommended and the price of gold has been wobbling between $1,200 and $1,400 an ounce since.

Lower Price Expectations for Gold

The recent collapse in gold prices, however, caused the UBS investment bank to downgrade its price expectations for all precious metals. Gold has displayed great resilience at these lower levels in the past, which has prompted several long-term holders to actually add to positions. There are also some strong signals of converting ETFs and metal accounts into allocated holdings. For additional information on the views of the UBS in regards to the decline in gold prices; please read “Gold market needs time to heal.”

Gold Should Go Up from Here

Forecasted gold prices for the end of the year range between $1,480 and $1,700 per ounce. HSBC has the most optimistic estimate for the year at $1,700, and Mitul Kotecha (Credit Agricole’s head of foreign exchange strategy) is predicting that gold will finish the year at $1,480 and drop to $1,318 in 2014. Most experts feel gold has dropped as low as it will go in the near future, and a MarketWatch survey of ten different forecasts shows that all predictions for the average price in 2013 are higher than its current price. In the same survey, over a half of the 2014 price predictions are also above the current price of gold.

Although gold is down almost 25% since it reached its peak in 2011, there are several indicators that it won’t drop much further. It has been rebounding the last few weeks and should continue on an upward trend for the remainder of 2013. It may drop back down again in 2014, but not as low as it reached in the middle of April.

Revising gold price targets for 2012 after the plunge

The pros haven’t started down-grading their gold price targets for 2012 yet, but they’re certainly not saying we’re going to hit $2,500 an ounce anytime soon.

It’s difficult to downplay the severity of the sell-off in gold. Just a week ago, the yellow metal closed at $1,805 an ounce. Since then, it’s fallen as low as $1,540 – a loss of 14 percent. Silver prices have performed even more dismally dropping 35 percent from a peak of $40 an ounce.

After the sell-off, gold is still up 15 percent on the year while silver’s just about flat. The scary part is (as Eric Fry at Daily Reckoning points out), U.S. Treasuries have actually out-performed precious metals! The 20+ Year Treasury Bond ETF (NYSE:TLT), for instance, is up nearly 25 percent since Jan. 1.

“That’s right,” Fry writes, “the debt securities of the now-AA-rated and heavily indebted US government remain the safest safe haven around.”

That’s a sign that investors are losing faith that the recovery we’ve been promised – despite the near-zero interest rates and the $2.3 trillion the U.S. government has pumped into the economy since 2008 – isn’t coming.

Fears of a 2008-style global financial meltdown feel almost palpable. In the words of Nouriel Roubini, we’re facing “unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”

It’s hard to stand by your investments when you hear economists telling you to stock up on food and make sure you have access to an isolated safe house. The moves in gold prices have even hardened gold bugs wondering whether or not they should stick with the metal.

And no one seems to know for sure where prices are going to go in the near-term. Daily Reckoning’s founder Bill Bonner sees the potential for gold to tumble as low as $1,000. Momentum traders see gold prices touching $1,517 an ounce and silver hitting $22.45.

“Following this rebound (in gold prices), which I expect to get underway this week, there will be a longer slowdown,” GloomBoomDoom analyst Marc Faber told CNBC Tuesday. He says the metal could fall as low as $1,100 an ounce.

Famed commodities trader Jim Rogers seems to concur. “I have no idea what is going to happen this year. I doubt if it will go to $2000 an ounce in 2011, it is more likely to have a correction which will last for several weeks, several months,” he told India’s Economic Times.

Despite their dire warnings about gold prices in the near-term, though, all of the traders mentioned above are unanimous in arguing that this is just a temporary set-back for precious metals.

“Silver has been one of your favourites, but that is down 24% in the past week,” the Economic Times asked Rogers. “Are you still buying?”

“Not yet,” Rogers replied, “but if silver continues to go down as we have discussed before, I will buy more silver too. Do not sell your silver, do not sell your gold unless you are a short-term trader, but anybody who is in this for a long term, silver and gold will both go much higher over the next few years.”

While the pros haven’t started down-grading their gold price targets for 2012 yet, they’re certainly not saying we’re going to hit $2,500 an ounce anytime soon. One ominous research fact points that it could be a long time before we even see gold at $1,800 an ounce again: The gold market has only dropped 20 percent peak-to-trough twice in the past 10 years (per the Financial Times). It happened once in 2006 and once in 2008. In both instances, it took about 18 months for prices to re-touch their highs.

We’ll eventually see gold at $2,000 an ounce (reference my post 10 reasons why we’ll see gold over $2,000 an ounce). These dips are painful, but they’re definitely buying opportunities for patient and disciplined investors.


10 reasons why we’ll see gold over $2,000 an ounce

We’re a long way from a top in the gold markets. Here are 10 reasons why.

The burden of debt is large. While consumers have cut back on spending since the start of the financial crisis, governments have refused to do the same. It’s looking more and more like the government’s only way out of debt is through substantial and sustained money printing. And that’s fueling what UBS has dubbed an “explosive cocktail” for gold prices. Grumblings of a speculative bubble aside, I think we’re a long way from a top in the gold markets. Here are 10 reasons why:

1) Gold prices mirror the expansion of the monetary base. The image to the left shows the startling correlation between the expansion of the monetary base and the rise in the price of gold. Since the supply of gold remains relatively stable, it acts as a barometer for the purchasing power of the dollar. That means a rise in the price of gold isn’t strictly an indication of increased demand, but also an indication that the dollar just can’t buy as much as it did 10 years ago.

2) QE3. After the end of QE2 in June, much of the world’s wondering what the Federal Reserve’s next round of quantitative easing will bring. Chairman Ben Bernanke made sure to point out that he’s got a “range of tools that could be used to provide additional monetary stimulus” after the Jackson Hole symposium closed late last month. More quantitative easing means greater expansion of the monetary base, and that means higher gold prices.

3) Rock-bottom interest rates. The Fed’s also went on the record saying that the Federal Funds rate will be held near zero for at least another two years. By giving banks access to cheap cash, the Fed hopes to encourage lending, but there’s also a nasty side effect: a weak dollar. No one wants to hold the greenback in a low-interest environment. That pushes investors out of CDs and money market accounts and into riskier assets like stocks and inflation hedges like gold.

4) A brand new jobs package. Tax cuts in President Obama’s proposed $447 billion jobs plan have the potential to significantly boost consumer spending (which accounts for two-thirds of the national economy). Obama argues that the plan shouldn’t cost the government any money, but it’s yet to be seen how such a large decrease in Federal tax receipts will be covered. More than likely, the costs will be deferred, which will increase the strain on the Federal budget and dampen the prospects that the country can organically grow its way out of stagnation.

5) Keeping up with inflation. The government currently calculates the inflation rate at 3.6 percent. However, if you calculate that same rate using the methodologies in place in 1980, the inflation rate would actually be closer to 11 percent. Smart money knows that, and they’re moving into gold as a way to hedge against that inflation. So long as inflation remains high, so too will gold prices.

6) We’re not the only ones fighting inflation. As I wrote recently in a post titled “How to invest in the Swiss franc,” inflation has become a global problem. It’s not just the dollar that’s sinking, it’s the euro, the yuan and the pound. When currencies destabilize on a global scale, there is no safe place to stash your wealth outside of hard assets. That’s what makes the current market so worrisome. The run-up in gold prices in the early 1980s was largely a U.S. problem. This time, it’s gone global.

7) A niche market. Gold’s record-breaking string of price increases has garnered a lot of attention in the press. That exposure tends to make people think that everyone and their neighbor has invested in the metal. Eric Sprott of Sprott Asset Management (which happens to manage the Sprott Physical Gold Trust – NYSE:PHYS) argues that there’s a whole lot of investment potential left for the yellow metal. According to his numbers, just .75 percent of all financial assets are currently invested in gold. When a larger chunk of the public starts investing in the metal, prices could spike much higher, much faster.

8) Central banks are still buying precious metals. Last year was the first time in 20 years that central banks around the world became net buyers of gold. That trend is continuing in 2011 despite record prices. Just this week we learned Kazakhstan plans to buy all of that country’s gold production through 2014 (a quantity that could approach 100 tons). Even the Eurozone’s Central Banks are getting in on the action as they became net buyers of gold in June. That’s the first time that’s happened since the inception of the Euro.

9) A recession appears imminent. Evidence that we’re headed toward a recession seems to mount every day. The government reported zero job growth in August, consumer confidence fell to its second-lowest level of the year last week and – most troubling of all – bond prices are edging up as investors grow increasingly risk-adverse. Should the economy take a decided turn toward negative GDP growth, another financial rescue package seems inevitable. More government spending means a much weaker dollar (and much higher gold prices).

10) We haven’t seen a true bubble yet. The gold market has shown signs of overheating in recent weeks. The Comex has raised margin requirements twice and spot prices for the yellow metal have seesawed in high-volume trading. But the overall trend is intact. We’re in the midst of the eleventh year of the bull market in gold. There hasn’t been a blow-off top yet, and – until that happens – count me among the gold bugs.



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Gold prices take biggest plunge in 30 years; CME hikes gold margin requirements

On a fateful day in August 2011, gold prices collapsed more than $100 in a single day of trading.

Gold bullion prices collapsed more than $100 an ounce yesterday. According to Reuters, that’s the largest single-day drop in nominal dollars since 1980, and the largest one-day percentage drop (at more than 4 percent) since 2008.

Markets are jumpy right now. Investors are positioning themselves for an announcement from Fed Chairman Ben Bernanke on Friday morning. Bernanke will speak from his annual pow-wow with several others central bankers in Jackson Hole, Wyoming. While many were anticipating Bernanke would announce more economic stimulus (just as he did last year after the Jackson Hole meeting), that notion seems to have gained a lot less traction in recent days. That’s lent some strength to an otherwise ailing dollar and pushed investors into riskier trades – particularly equities.

One trader told Bloomberg that he started getting really nervous about gold prices when he heard that the total value of the SPDR Gold Trust (NYSE:GLD) had surpassed the value of the SPDR S&P 500 ETF (NYSE:SPY). SPY’s been the world’s largest ETF since 1993. Seeing it kicked to the No. 2 slot in favor of gold was a sign that perhaps stocks were underbought.

When it rains, it pours

The CME Group doused even more water on the price of gold after it announced late last night that it was raising gold margin requirements 27 percent after trading on Aug. 24. The move follows a 22 percent margin requirements hike on Aug. 11. If gold prices bounce back after today’s collapse, I wouldn’t rule out even higher margin requirements.

When the CME started raising margin requirements on silver this spring, they didn’t stop until the market had given up a month’s worth of gains. During one nine-day period late in April, the CME raised silver margin requirements by 84 percent.

One of the big drivers for equities yesterday, and a downward force on gold prices were better than expected numbers on durable goods orders. Orders for things like airplanes, automobiles and business equipment rose 4 percent last month. That was more than twice as much as expected. And that bit of good news overshadowed the bad: namely, that business spending fell 1.5 percent last month. That’s the biggest decline in corporate outflows since January, and it’s an indication that businesses started tightening the reins on their pocketbooks over fears of a double-dip recession.

The arguments for investing in gold (reference my post “Why invest in gold“) have gotten an added boost thanks to inflation not just in the U.S. but around the world. The Swiss Central Bank has even considered pegging its currency to the Euro so its export market can remain competitive. That leaves few safe havens for investors and it’s even pushed up the value of U.S. treasuries in the wake of a downgrade for U.S. debt. Investors invest not just to make money, but to protect the capital they’ve already accumulated. With the dollar expected to remain weak through at least 2013 (when the Fed may begin raising interest rates from historic lows), I don’t think we’ve seen the last of the gold story. This is just a temporary bump in the road.

How to short gold with ETFs

ETFs make it easy to bet against the yellow metal. Investors can short the flagship SPDR Gold Trust (NYSE:GLD) (which would have been good for a 3.3 percent gain yesterday), or go long on the PowerShares DB Gold Double Short ETN (NYSE:DZZ), which spiked 10.3 percent yesterday. GLD holds physical gold deposits in a London bank, while DZZ attempts to return twice the inverse of the Deutsche Bank Liquid Commodity Index. If the index goes down, DZZ should go up twice as much as the index’s decline.



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Why invest in silver?

Gold prices could dip in near-term as profit-takers move in

We’re in a bear market for currencies, and that means the recent dip in gold prices is just another buying opportunity.

The price of gold bullion has been in a powerful uptrend rising from $1,600 to $1,800 an ounce in the course of a month. That was good for more than a 10 percent gain in 30 days, and that led to what I expect will continue to be short-term selling as investors lock in profits.

FastMarkets research analyst James Moore told TheStreet that gold prices could fall as low as $1,680 before consolidating and resuming the uptrend.

Gold hit an all-time record high of $1,817 an ounce last week as investors digested bad news. The U.S. lost its AAA credit rating, unemployment numbers got revised upward and consumer spending dipped.

The market did get some good news on Thursday, though, that helped alleviate smoldering fears of a double dip recession: jobless claims fell to a four-month low (per Reuters).

Fred’s best guess: The dip in demand for gold looks like an excellent buying opportunity, particularly if prices fall near $1,700 an ounce. I’m just not convinced that we’re out of the water yet.

The debate over the debt ceiling gave us a glimpse of just how bad the nation’s debt problem has become, and I’m convinced that we’re overly-optimistic on the job market.

Earlier today, The Atlantic posted an excellent chart showing that the unemployment rate is actually closer to 12.5 percent – not the 9.1 percent the government’s touting. Too many people have given up looking for a job altogether.

Consider this: over the past 60 years, the official U.S. unemployment rate has only hit 9 percent or higher for 43 months. Twenty-four of those 43 months have occurred since Obama took office. The economy’s in a dark place, and the debt crisis has taken a lot of ammo out of the government’s gun.

That’s not to say the U.S. is the only economy around the world that’s hurting. It’s a global problem, and it’s one that’s hitting currencies the hardest. The best way I’ve heard it described so far is this: We’re in a bear market for currencies.

Don’t buy that? Consider the recent news that the Swiss government’s considering pegging the value of its currency to the Euro! When the unflappable Swiss are considering inflation, the global economic train has jumped the rails.

And what’s bad for currencies is good for precious metals. Count me in the bullish camp for gold. Not because I love precious metals, but rather because I’m scared of the future for the dollar.



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Why invest in gold?

Too many investors miss the point of gold, but the yellow metal has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. Therein lies its beauty.

Too many investors miss the point of gold. They look at it like a lump of metal well-suited for gathering dust in a vault. Gold, though, has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. And that’s the key behind the metal’s meteoric price rise over the past decade.

As governments around the world quietly inflate their currencies, they are – in effect – reaching into our bank accounts and skimming some coin off the top. They do it quietly and most of us are none the wiser.

Right now, for instance, the official inflation rate in the U.S. stands at 3.56 percent. That means that if you stuff $10,000 into your mattress on Jan. 1, it’ll be worth $356 less than it would have if you spent it right away.

The numbers on the front of your bills stayed the same, but the actual purchasing power of those dollars went down. The supply of gold, on the other hand, can’t be arbitrarily increased based on political decisions out of Washington. If demand goes up, the price of gold is going to go up with it.

And, if the dollar’s going down at the same time the demand for gold is going up, the relative change in the value of gold will be compounded.

Still not sold? What if we hit double-digit inflation? You might have your cash sitting in a bank account that’s earning 1 percent interest every year. If inflation hits 10 percent, that means every dollar you have actually loses 9 percent of it’s purchasing power every year!

What’s scarier is the fact that many believe we’re already suffering through double-digit inflation. John Williams at calculates what’s known as the SGS-Alternate CPI number. It’s not something he made up. It’s actually the exact method Bureau of Labor Statistics used to report inflation through 1980. Since 1980, though, the government’s continuously fiddled with its calculations to make inflation look tamer than it would otherwise be.

Right now, ShadowStats reports that the inflation rate stands at 11 percent. That’s a scary number – unless, of course, you’re getting an 11 percent raise at work every year and your 401K is pumping out double-digit returns. Since most of us aren’t that lucky, precious metals like gold start looking attractive.

And, if metals look attractive to you and me, then they definitely look attractive to the Top 10 percent of the wealthiest Americans. Keep in mind, too, that that Top 10 percent owns fully 80 percent of all the outstanding stock in public companies. They know how and where to place their bets, and a lot of them are flocking to gold.

More arguments against gold

I’d rather invest in something tangible, naysayers argue. Something like oil or real estate.

Those aren’t bad ideas, but gold has distinct advantages over each of those alternatives. The most important advantage is the fact that supply of gold is largely static. Oil and real estate are intimately tied to market conditions.

If the cost of oil goes too high, consumers drive less and spend less. On top of that, businesses incur greater expenses and the price of goods rises. That slows down economic expansion and eventually drives down the price of oil. The same goes for real estate.

If the official inflation rate hits double-digits, there won’t be a bank in its right mind that would be willing to loan a consumer the funds to buy a house at today’s interest rates. And not many consumers would be interested in buying a house with a fixed mortgage around 10 percent.

The value of gold can’t be inflated away, and therein lies its power. In a world where economies around the world are racing to devalue their money, there are few places investors can turn. That’s why I’m confident we haven’t see the end of the bull market in gold.



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Silver prices in August 2011 look to keep rising

As congress hemmed and hawed over the future of America’s debt, silver prices climbed nearly 18 percent last month, and it looks like that trend is set to continue in August.

As congress hemmed and hawed over the future of America’s debt, silver prices climbed nearly 18 percent last month, and it looks like that trend is set to continue in August.

What’s bad for the economy is good for silver – and the economy doesn’t look great. Cases in point:

 •   The Commerce Department reported yesterday that consumer spending weakened in June despite a 0.1 percent rise in disposable personal income. Consumers spent some 0.2 percent less to kickoff the summer. That doesn’t sound like much, but it adds up to $21.9 billion (source: Bloomberg).

 •   Last week, we learned the country’s gross domestic product grew at 1.3 percent in the second quarter. That was far less than the 1.8 percent economists were calling for (source: Wall Street Journal).

 •   Worst of all: U.S. manufacturing is slumping back toward a recession. We learned yesterday that the Institute for Supply Management’s index of manufacturing tumbled to its slowest pace in two years. The index fell to 50.9 percent in July from 55.3 percent in June. That’s just 0.9 percent away from an officially contracting (i.e. recessionary) economy (source: TheHill).

In July, physical silver ETFs (led by the iShares Silver Trust – NYSE:SLV, which was up nearly 15 percent), outperformed all other ETFs (per IBD).

In an environment where there’s little optimism over economic growth, investors don’t seek out profits so much as they start looking for spots to preserve the capital they’ve already got. Silver and other precious metals fit that bill – particularly in an environment where the returns on bonds are low.

But there may be yet another more insidious factor that could drive silver prices higher in August: namely, the specter of QE3. If the bottom genuinely falls out of the stock market and the economy starts contracting, the Federal Reserve could feel pressure from Capitol Hill to find ways to prop up the ailing economy (particularly as we move toward another election cycle).

Such a move would stoke even more fears of inflation, and could hamper the U.S.’s economic growth in the years to come. It’d be better to take our medicine now, and start working toward a balanced budget, but I’m just not convinced the Fed feels the same.

Seeing Yellow in the South China Sea

Gold spiked to a new all-time record Tuesday on news that the Bank of Korea added more than $1 billion worth of gold to its holdings – the first net increase for the bank in more than a decade.

Apparently, the Bank of Korea has quietly added more than 25 tonnes of gold to its holdings over the past two months (per the LATimes). The dollar’s falling status as a safe haven has left central banks with few alternatives for stashing their surplus reserves. What’s particularly troubling about the news is the fact that the Bank of Korea has been a long-time buyer of U.S. Treasuries. A move into precious metals should be a signal to policymakers in Washington, and – perhaps more importantly – to retail investors looking for ways to protect their capital.



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3 reasons to move from silver into gold

Precious metals investors are re-assessing their holdings, and here are three reasons why gold will likely out-perform silver in the months to come.

The manic rise and fall in silver prices over the past few months has a lot of precious metals investors re-assessing their holdings. In the near-term, it looks like gold bugs have the upper hand. Here are three reasons why the yellow metal will likely out-perform silver in the months to come:

1) Slow and steady wins the race. The fundamental case for gold and silver hasn’t changed, but investor perception has. Whatever the cause of silver’s violent 30 percent plunge, the aftershocks of that move will likely continue for several months. Meanwhile, gold’s proven that its support won’t be knocked out so easily. Over the past month, the iShares Silver Trust ETF (NYSE:SLV) has shed nearly 18 percent of its value. The SPDR Gold Trust ETF (NYSE:GLD) has actually appreciated 0.4 percent during the same time span. That shows unflappable support for the yellow metal even as panic seemed to set in for commodities across the board. When the muck truly hits the fan, there’s nowhere safer than gold.

2) A ratio gone mad. There’s been a lot of speculation about the gold:silver ratio of late. Silver bulls like Eric Sprott of Sprott Asset Management – which manages the Sprott Physical Silver Trust ETV (NYSE:PSLV) and the Sprott Physical Gold Trust (NYSE:PHYS) – have been calling for titanic shifts in the ratio. Sprott’s actually argued that the gold:silver ratio could fall as low as 10:1 (meaning gold would cost just 10 times as much as silver). If that were the case today and gold stayed at $1,491 an ounce, we’d be looking at silver prices around $150 an ounce. Perhaps such a move will be possible over the course of several years, but don’t expect it over the next few months. Since the 1980s, the gold:silver ratio’s been closer to 60:1, which means $25 silver is just as likely as $150 silver (in fact, it’s probably MORE likely). In the words of Dave Kansas at the Wall Street Journal: “It’s more likely that the ratio will revert to modern-era norms rather than race back to the Napoleonic era.”

3) Silver ETFs push down prices. One of the most powerful drivers of silver prices today comes from physical silver ETFs. These stock market vehicles use the cash they get from issuing new shares to buy physical silver. Conversely, when the price of silver falls, ETFs like the SLV must liquidate their physical silver holdings to buy back shares. When the market’s trending up, the SLV can accelerate the rise in silver prices. During extreme silver sell-offs, SLVs decline floods the silver market with excess supply.

“On May 4th as silver plunged below $40, SLV experienced such heavy differential selling pressure that it was forced to liquidate 4.8% of its holdings in a single trading day!” writes Adam Hamilton and Scott Wright of the Australian investing site, TheBull. “This was 16.8 (million) ounces of physical silver that hit the markets!” That’s an enormous amount of silver. Hamilton and Wright point out that it’s 60 percent of Silver Wheaton Corp.’s (NYSE:SLW) silver output for an entire year, and it hit the market in 6.5 hours!

Gold’s stability in the face of panic selling in the silver market is evidence that gold holders have the stronger hand. More selling in the silver space, though, could be on the slate as the gold:silver ratio moves back toward reasonable levels. The ratio hasn’t fallen as low as it did last month in 30 years, after all. Interpret that how you may, but I see it as evidence of an anomaly that’s in the process of correcting.



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