Physical Gold and Silver are the Ultimate Form of Financial Insurance

The global gold market was relatively uneventful in the last two weeks, but by last Thursday gold prices edged higher on the back of a softer US dollar and declining stock markets.

The price of the yellow metal pretty much flat-lined for most of last week and closed out the week at $1250 an ounce. Gold prices are having difficulty moving higher, but are also reluctant to move lower, and are thus temporarily stuck in a very tight trading range.

From the beginning of October, gold prices have fallen sharply. The price dropped below US$1,300 on Oct. 4th taking prices back to pre-Brexit levels, erasing a move that had been consolidating for three months. The next day it lost another US$14, and now we are seeing prices hover around the $1250 an ounce level.

While the sharp drop in prices that occurred last Tuesday, in which prices were down around $40.00 an ounce and hit a 3.5-month low, is being blamed on a stronger U.S. dollar (mainly due to a big drop in the British pound), nothing could be further from the truth. As we all know now, the price drop took place on the opening of the US session on Comex where some entity dropped over 1000 tons of the yellow metal onto the market in a few minutes. Most contracts on the Commodities Exchange are settled in dollars. As a result, the banks have devised schemes to leverage their actual gold holdings to more and more profits.

They deal in “paper gold,” which is just a promise to deliver the gold if someone asks for it. Since people rarely do, the banks can sell gold they don’t have and pay off the contracts in dollars.

Even though this price drop changed the appearance of the charts and made the near-term outlook appear fairly bearish, forcing some disappointed longs to sell, one must understand that the market of Comex is a purely speculative market and does not reflect the real situation of the physical markets. But, as the two markets are intertwined, and due to the sheer volume of paper contracts traded on Comex, this market determines the benchmark for the physical market. It is totally absurd, but this is the structure of the market at the moment.

Even though prices have been temporarily driven by the trader sentiment on Comex, prices will re-adjust to the situation in the physical gold market. And, the current situation looks very bullish for gold prices. There are still a lot of gold bulls out there who will buy into these dips, muting the slide. From a chart perspective, there is significant support in the US$1,250-$1,260 level. That is the pre-Brexit support platform and could well represent the new normal for the rest of 2016.
It’s important to note, that at US$1,260 per oz. gold is still up 16% this year. Even if it feels like gold’s rise happened ages ago, precious metals have mostly held onto their gains – and those gains were big enough to absorb corrections.

Corrections will continue. Gold in particular will react to economic data (like the US jobs report), monetary policy of central banks especially that of the US Federal Reserve, geopolitical events which are worsening daily, and the US election.
While it appears that the chance of a rate hike in December is increasingly likely, the market may have already priced in a rate hike. And, as far as I am concerned any tiny rate hike this year is not going to have any major impact on global gold prices.

With regard to the current presidential race and as of right now it looks like it will be taken down to the wire. The two candidates have some very different views on many issues including the economy and foreign policy. There’s a lot of uncertainty regarding the election and nobody really knows what November 2016 brings and thereafter. So investors are not willing to make a move when they don’t know what the future is and, therefore, whether that move is going to be worthwhile or not. So many investors remain on the side-line awaiting the outcome of the elections.

Meanwhile, although the U.S. economy seems to have normalised after the financial crisis in 2008, world economies are currently faced with a number of key issues that could potentially shape monetary policy and global growth for years to come.
The trend of negative interest rates – something which I have never seen until now – will push investors into precious metals. When you get into an environment where you have zero- and no-interest-rate policy… and in either case, you have negative real returns when you factor in inflation, it is time to disinvest out of government bonds and keep as much cash as you can out of the banking system.

Currently, there’s about $12 trillion of negative-yielding government debt in the world, most of it from Japan and Europe. In the meantime, equity markets could potentially tumble, and the flight to perceived safe haven assets such as gold and silver could possibly result in dramatic price increases for these precious metals.

The case for the general gold bull market remains intact. US equities are overpriced, which means stocks fail to offer security or value. Bonds are overpriced and even a fairly mild rise in yields would hammer prices, erasing capital that yields will take a long time to repay

I believe this is a correction within a secular bull market. Gold and silver will appreciate in value, and can provide a meaningful hedge against inflation and a number of other economic issues.
Now is the time to be proactive in case the situation escalates. Now is the time to consider an allocation in hard assets that may potentially rise in value during what could be a very turbulent time for the global economy and banking system.
Gold and silver have been acquired for centuries as a form of wealth preservation, as a long-term store of value and as safe-haven assets in times of financial and political turmoil. And, there is lots of that coming our way.
Gold and silver bullion are the ultimate form of financial insurance and in these uncertain times all investors and savers should allocate a portion of their funds to these metals.

25 October 2016 – by David Levenstein