This summer could be a great time to buy gold
Gold is having an ugly time of it. Having had a strong spring, it made a "double top" at $1,260 an ounce towards the end
of June. And it has spent July in an apparently inexorable decline, noticeably outperformed by other markets.
Last week, one afternoon, following a stronger-than-expected US housing report, it sold off another $20 - over 1% - in
just a few minutes. The chart is looking tired, the buzz about the metal has subsided, interest is waning. It could be the
perfect summer set up...
Two signs that this summer could be a good time buy gold
I have long argued that gold is not so much a hedge against inflation or deflation, but a hedge against governments. Now
that the Greece problem - and the contagion to Spain, Portugal and Italy - has been 'solved'; now that the Gulf of Mexico
oil leak has been plugged; now that we in the UK have an efficient government bent on austerity; the world appears to
have lost interest in gold.
Whether they agree with it or not, all readers will be aware of the fundamental case for gold. So I'm not going to dwell on
that here. Instead, I want to draw readers' attention to some typical patterns that gold makes, as I believe a good buy-
point for gold is approaching. First, gold seems to have a couple of nasty corrections every year. These shake out the
weak hands - the over-leveraged, the trend-followers and those who are less convinced about the case for owning gold.
(And gold attracts a lot of slightly, shall we say, 'jittery' people).
We were overdue a correction. I said as much several times on live television in the recent past. Silver was lagging, the
gold stocks were lagging - the signs were there. This, in my view, is just another one of those corrections. It's too early to
say for sure whether it's something worse. Second, the gold market - indeed much of the resource sector - has a tendency
to go to sleep a bit in the summer. So what we are seeing is not abnormal.
Take a look at this chart, which shows gold since 2001, when the bull market began. The red arrows mark the July-
August timeframe. You can see that consistently this has marked an excellent timeframe to roll into gold and gold assets.
Indeed, in many cases it has been the buy-point of the year. The exception, of course, was 2008 - but if you held on until
the following spring, you were still in the money.
A good marker for entry-points is turning towards 'buy'
There are 252 days in the year when markets are open, so the 252-day moving average shows the average price of the
previous 12 months - the 52-week moving average is its weekly equivalent. Since the bull market in gold began in 2001,
gold has repeatedly returned to its 252-day moving average and bounced off it. The only exception - again - was 2008,
when it smashed through it to the downside.
In this next chart, the black line shows gold and the blue line is its 252-day moving average. You can see what a
consistently good marker for entry-points the latter has proved to be. (High and low prices are also marked). The 252-
day moving average currently sits at $1,110 and is rising.
The same applies for UK-based buyers of gold. Here is a chart of gold priced in pounds. It has seen quite a decline over
the past three months, as sterling has risen. But the 252-day moving average (blue line) has consistently marked a good
entry point - even in 2008. This average currently sits at about £710 and is also rising. Gold costs about £765 an ounce.
So when should you buy gold?
To conclude - we know that the July-August timeframe has been a good time to buy gold in recent years. Given that in
the coming weeks gold looks likely to touch, or come close to touching, its 252-day moving averages, which have proved
such a consistent marker over the last ten years, I'd suggest that if gold falls another $50 or so from here, that could well
mark an excellent buying opportunity for those who don't currently have, or those who want to add to, a position in gold.
(And, by the way, somewhere just beneath the blue line might mark a sensible place for a stop).
Of course, it's possible that the bull market is over. I don't think it is, but that doesn't mean I'm right. I see $1,040 - the
old high - as a big number for gold. If it falls beneath that, then we need to have a serious rethink.
And if gold did go to $600 per ounce, he added, the Dow could be at 5,000. "You have to decide where you want to be, I
wouldn't have everything in gold." "Buy more" if gold goes down to $1000 per ounce. Thus suggested it is more likely
that gold could go as low as $1,000 per ounce, but any significant drop would be met with "significant buying from all
over the world, especially central banks. China, India and Brazil don't have "nearly enough gold right now; of China's
$2.5 trillion foreign reserves, only 3 percent or so may be gold. They need a lot more gold.
But here’s the dilemma I have... Gold is often perceived as a safe-haven investment but most people forget
that Gold is a commodity and it trades just like a commodity. That means, it has no built-in returns or
dividends other than price appreciation. On the contrary, the cost of holding Gold substantially reduces returns
over a longer period of time. From that perspective, Gold cannot be considered a must-have long-term asset. It also has
a rather mixed record in terms of providing a real inflation hedge as the cost of holding gold reduces that hedge further.
The Adjusted for inflation gold prices are still short of the 1980 highs of 850$ per ounce values of
Gold does however provide a sort of feel-good or feel-safe factor. Its luster has not diminished over the millennia and in
times of economic uncertainty, the shiny metal continues to attract the weary and panic-stricken investors. Who knows
where the price of gold might be one year from now...
Why the silver price looks set to surge
Silver has an ugly reputation as the 'poor man's gold'. Most investors hate it. In fact, many would prefer to class it among the base
metals - along with nickel, zinc and copper. But they are missing out on what could be a pretty remarkable investment opportunity.
Because in truth, silver is probably the most undervalued of all metals in the market today. Why? Well, the strongest recommendation
for silver at this time is that it is both a precious metal and an industrial metal. And that means two opportunities to profit. The first
will be if economies continue to recover and industrial demand rises. The second is as an inflation hedge if economies perform less
well than I expect. Silver is an investment 'each-way bet' - we could win on one count, or we could win on both. And having lagged
the price of gold, now is a great time to buy into silver.
Why silver is perceived as a 'dinosaur metal'……For the best part of a century, photographic film was silver's major industrial
application. In 2000, 218.3m ounces of silver were used in film manufacturing; by 2008 this had halved to 104.9m ounces. It dropped
again in 2009 to 82.9m. Digital cameras have been eating into this market to the extent that film is declining in use at something like
a 20% per annum compounded rate. It's clear that the decline of silver's traditional applications in recent years has put the metal in
the shadows, but in fact silver's less than sparkling reputation goes even deeper. Metals analysts have always regarded silver as a bit
of an orphan for two important reasons.
Two reasons why metals experts have always scorned silver
First, it is rarely mined on its own. It is much more frequently produced as a by-product (or co-product) of mining for copper, lead,
zinc or gold. This means it gets mined irrespective of the silver price, so analysts cannot construct a meaningful cost curve for its
primary production. It is seen as insensitive to its own price economics.
The second reason for its orphan status is that its use in photography gave rise to extremely efficient recycling. With the exception of
medical x-rays, which are retained, silver is washed out of the film during both manufacturing and processing. It is quite easy to
recycle. Silver used in batteries and electronics can also be recycled relatively cheaply.
VM Group, a commodities analytics firm, estimates that around 400m ounces of silver are being returned through recycling annually.
This needs to be set against 2009 mine production of just over 700m ounces. But even so, the dynamics of both the industrial and
investment markets for silver are improving dramatically.
Let us explain.
Two reasons why we're about to see a resurgence in the industrial use of silver
Silver as a conductor
On the industrial side, silver is valuable for two special qualities: it is the best thermal and electrical conductor available, and it is a
super-effective steriliser.As a conductor, silver is used in radio frequency identification (RFID) tags for goods and people (in
passports and ID cards, for example). VM Group estimates that the manufacture of such tags will exceed 30 billion units by 2020.
Another growth area for silver is solar energy. Here, each crystalline silicon solar cell that is produced contains some 1.2g of silver per
watt of energy produced. VM Group estimates that by 2020, solar energy equipment will be using around 50m ounces of silver
Finally, on silver's applications as a conductor, we are all aware of silvered mirrors, but what about 'invisible silver'? This is a
transparent coating of silver on double-pane thermal windows. It reflects the heat from the sun back outside and the heat from inside
back into the house.According to the Silver Institute, claims are made of 95% efficiency, and such technology could generate a huge
new market for silver.
Silver as a steriliser
Silver oxide (a highly-charged silver) is finding new and wide application in the treatment of bacterial disease.
For example, the cosmetics companies Beiersdorf and Johnson & Johnson have both introduced silver-based bandages. These new
ranges use silver in the wound pad to disinfect and protect cuts, scrapes and scalds. Silver is also used in catheters, pacemakers, heart
valves, orthopaedic implants, and increasingly in surgical clothes and bed linen.
Food hygiene is also becoming an important sector in terms of silver demand because silver acts as a 'biocide', a type of bacteria killer.
It is used increasingly in work surfaces and vending machines, as well as for the linings inside cardboard milk, soup and juice
containers.Obviously, the amount of silver in each ID tag, catheter, band aid or pair of pong-resistant socks is minuscule. But a tiny
bit in each of billions of applications adds up to a potentially huge market.So much for the industrial case for silver. What about the
investment side? Here, we find the case is even more compelling.
The trend that makes the investment case for buying silver
In contrast to gold, which currently trades at just about historical nominal highs, silver is nowhere near its historical highs of 30 years
This does not exactly make it 'cheaper', because those highs were in many ways artificial. That's because the Hunt brothers' attempt to
corner the silver market in 1980 sent the metal soaring to $50.Still, there is a sound case for maintaining that silver is cheap relative
to gold. A glance at this 20-year chart showing the ratio between the two metals will best illustrate this:
Click here to enlarge
An ounce of gold currently sells for just under 70 times the price of an ounce of silver. The 20-year range has gone from 100 in the
spring of 1993 to just over 40 in the spring of 1998. So the current ratio of 66.5 is slap in the middle.What makes the chart
particularly compelling though is the spike in gold's relative performance in 2008 and the subsequent drift back towards silver.The
previous major gold peaks of 1993 and 2003 took several years to fully wind down to the ultimate low levels. If history is to repeat
itself, we might expect the ratio to continue in favour of silver for some months to come.
Silver - a 'double whammy' precious metals play
So there are a number of reasons to hold both gold and silver in current markets. But silver has the edge.Of course, it is possible that
the silver price will struggle to gain further upside, or that some of the technological developments which rely on silver as a
component could be discontinued.
Another risk to consider is the prospect of a double dip in the economy. This may hurt industrial demand for silver, causing softness
in the price.But on balance, we like it as an investment idea. If economic growth does re-accelerate as we expect, silver will get the
'double whammy' effect of being an industrial metal as well as a precious metal.And if economic growth disappoints, silver should still
maintain its historical role as a long-term source of value.
ShamikBhose@yahoo.com or Shamikbhose@rediffmail.com
To see various commodity, currency and related world financial market articles see www.commoditylive.in and click
on the reports icon on the top left corner of the screen and you can also visit www.4shared.com and type Microsec
And Or www.scribd.com and type Shamik Bhose in the search column