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24 May 2010

Gold Prices - The long game

As the dust settles in Gold and Silver Markets on Monday – We take a look at the reasons for holding precious metal.

The dust appeared to settle on the precious metal markets on Monday following last weeks carnage, with the Gold price afternoon fix settling at $1,187.00 and the Silver fix at $17.78 both representing orderly rises of over 1%. In contrast European Equity indexes were largely flat or down. Gold and Silver have both seen these types of equity market driven cash scramble corrections over the last few years, and last weeks is by no means likely to be the last we've seen.

At these times it is sometimes useful for Gold and Silver buyers and holders to revisit the fundamental reasons for taking the decisions they have taken to hold precious metal. This post looks at some of the bullish reasons for holding precious metal.

Euro Currency Debasement

Western governments are currently labouring under huge debts. The current manifestation of this is in Greece which has seen the Euro nations create a 500 billon Euro bailout fund in order to fund Greece’s borrowing. But similar problems exist in Portugal, Ireland, Italy and Spain, not to mention other larger economies in Europe. The chances of a significant bank failure in Europe are significant right now, as just today the Bank of Spain has stepped in to save a local lender, and it is unlikely to be the last. The chances of a European Union member nation defaulting on its obligations are unlikely as the EU will likely bail out any defaulter. Longer term, the outcome of this age of bailouts is likely to be a weaker euro. As a result of this, we are already seeing European investors flocking to Gold, see Gold and Other Precious Metals look good as Euro Worries persist, causing physical gold shortages in Europe.

US Dollar Currency Debasement

The US dollar has shown its resilience as a safe haven up to now. However the United States is also laboring under massive debts and some expect further shocks to the financial system which will damage further the value of the dollar. Combine this with continuing low interest rates and still huge deficit spending, and long term it adds up to good news for precious metal.

Inflationary Pressure

The combined effect of this bailout and race-to-the-bottom currency depreciation longer term is inflation, just how much inflation analysts disagree on, but this is good for Gold and Silver prices.

Central Bank Gold Purchases.

2009 saw a shift from the worlds central banks moving from being net sellers of Gold to net purchasers of Gold. This type of market action is likely to be supportive of Gold prices moving forward. Indian Central Bank purchase of 500 tonnes of IMF Gold has lead to speculation that Chinese buying in a similar scale is likely to follow.

Gold Supply and Demand

The supply and demand factor is important in determining the gold price. Some analysts argue there is insufficient gold being produced to satisfy global demand. Above ground stocks of gold are around 160,000 metric tons, mostly held by central banks, and only increases at a rate of about 2,400 tons a year, which is only 1.75% while demand keeps expanding faster than this.

Gold and Silver Price manipulation

If you like a good conspiracy theory, the Gold Price manipulation theory is another good reason to hold Gold. Gold Price manipulation is a controversial theory that has been discussed among gold bugs for two decades. Conspiracy theorists reckon gold prices have been artificially suppressed over the last 20 years by central banks and governments. The theory is that as investors cotton on that the precious metals market is manipulated, gold prices will rise explosively.

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