04 January 2011

2011 Gold and Silver Outlook

BullionSupermarket founder gives his opinons on the drivers for 2011 precious metals action

With 2010 done and dusted, investors will be turning their attentions to what 2011 might bring. 2010 chalked up the 11th consecutive year of price rises in Gold and Silver. When BullionSupermarket.com celebrated its 2nd birthday in December last year those holding Gold for that period enjoyed a impressive run, anyone who bought Gold on the day the BullionSupermarket.com started would have seen around an 82% rise in Dollar terms, 70% in Pounds and 74% rise in Euros. Over the same period, those holding Silver have enjoyed an even greater gain. A user who bought a troy ounce of Silver on the day we started the service saw a 204% rise in Dollar terms, 186% in Pounds and 191% rise in Euros.

With precious metals having notched up significant gains in 2010, and many commentators predicting further gains in 2011, we examine some of the factors likely to drive the market in 2011

IMF Gold Sales

On September 18, 2009, the International Monetary Fund published plans to dispose 403.3 tons of its gold reserves. The mainstream financial media heavily reported this.

Plans for IMF gold sales had been mooted by several central bank and various government figures (including Gordon Brown, who's record on Gold market dealings might be considered by some to less than competent) threatening to significant portions of its Gold as far back as 2003 under varying schemes.

From as far back as this, each rumor surfacing in the press that the IMF might be selling gold send the gold price tumbling downward for few weeks. Some commentators saw this as part of a conspiracy to suppressing the price of the metal.

In 2007 the rumors solidified into plans for actual sale. The IMF sold off its gold over a 27 month period, faster than anticipated, after which on 21st December 2010 it announced that it had completed the sale. This now combined with the fact that central Banks became net buyers of gold in 2010 meant that perhaps the biggest potential seller of gold has been removed from the market.

Second Credit Crunch in European debt markets

Fears that European debt markets could be struck by a second credit crisis over the gargantuan value of new bonds that must be sold by governments and banks in 2011.

With reportedly Banks requiring refinancing of €400bn worth of debt in the first half of the year, and with European governments requiring €500bn over the same period, as well as mortgage backed debt maturing, the potential for fresh chaos in the credit markets is very real.

If the crisis occurs, it will almost certainly spark a dash for hard assets, as governments try to print their way out of the mess. Precious metals will likely be a significant beneficiary.

Inflationary Pressure & The Race to Debase

The flood of easy money created by Governments has boosted the entire commodity complex as well as precious metal prices.

Potential credit market crisis aside, the main threat to western economies is still seen as deflation. Policy makers continue to be engaged in unprecedented money printing. With further currency debasement likely in the coming year, the outlook for the gold price and related metal complex remains favorable.

Criticism of the federal reserves quantitative easing policy has become more vocal recently, and inflation expectations have driven higher Treasury yields. Some strategists are arguing that inflation and even hyperinflation lays ahead. Egon von Greyerz of Matterhorn Asset Management forecasts gold price in the next few years is anywhere between $6,000 and $11,000 per troy ounce.

Gold and Silver Edge Ever Closer to the "Mainstream"

We have said before on BullionSupermarket.com that we think that Gold and Silver are edging closer to the world of mainstream investment. This trend was further underlined to me personally in the somewhat unlikely setting of a provincial branch of a mainstream bank in September 2009.

Having been personally invested in physical Gold since August 2004, I received nothing but snorts of laughter from "investment professional" acquaintances for my decision. Over the past 6 years, attitudes towards my Gold holding status from these professionals has turned from snorts of laughter, to warnings that Gold doesn't earn a return, doesn't perform over the long term, is in a bubble, to finally outright interest in how, when and who to buy from.

Even so, it was my view that Gold and Silver are still far from the radar of the average man in the street. I always expected this to change. In September 2010, I got the first indication this is starting to happen. In a conversation with my Bank Manager in the local branch, he indicated to me that the bank regularly received enquiries, in branch from customers wanting to buy Gold. Not a Gold fund, or an ETF, but physical Gold. The shiny yellow stuff. This is not a branch of Coutts or some other bank frequented by sophisticated wealthy investors but a Hertfordshire branch of a high street bank.

Whatever the technical chartists, or the gold bulls, the gold bears or the gold bugs tell you, this is a significant shift in attitude and may indicate a large, very large, unrealised sector of Gold Investment demand.

Depending on how fast and far it develops, will almost certainly pile additional demand on physical Gold and Silver bullion supplies.

Food for your 2011 thoughts on Gold and Silver. It will be interesting to sit and write the 2012 version of this article in 12 months time.


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