Thoughts on Markets

Sunday, August 17, 2008

What Is Going On With Precious Metals?

I cannot overemphasize the importance of a long term view on the prices of precious metals. Here we have the 5-Year Graph of the price of gold. Though gold has dropped 200 or so from the all time high of 1000+ this year. Notice that the low for the last five years was 358.40. The appreciation is not quite 20% per year. It is about twice that now at 791.10.

Both silver and gold are showing a bit of life in Asia at present. Both are up against all major paper currencies of the world at this time.

Over the past two weeks, we have seen the most significant drop in the price of both precious metals. What is going on? The dollar has moved up rather strongly, as well. Nothing has changed fundamentally to cause the dollar to rise. We still have the vast growing debt owed to the world, the balance of trade has yet to improve significantly, China has passed us in manufacturing output, we remain dependent upon the world to buy some $2 Billion of our debt daily, we still have a spending binge at all levels of government, and we have yet to see the end of foreclosures in real estate and bank failures. But yet the dollar is stronger.

Governments normally do not go bankrupt and can only be sued when they let themselves be taken to court. There is no way for the U. S. to pay its debt without further devaluation of the dollar. That means that the dollar will be inflated over time.

There is another change as a result of the Georgia conflict. Remember this is an eastern country in which we have military advisers and which we have provided military equipment. We even sent "humanitarian" aid to them after the conflict. Georgia attacked its neighbor and was promptly militarily sent retreating by the Russian military. We stood by and did nothing. The world sees and has widely reported that we did nothing. Thus, we are seen as weak and impotent while Russia is seen as a great power actively protecting its interest. Russia is striving for closer relations with Europe and seeks to be recognized as a world power. Thus, we have lost some more international political clout.

As to the recent drop in the price of gold and silver: From all appearances, I agree with James Turk ( that this is a loss in derivative or paper prices of the metals and not the price of the physical metals, themselves.

Have you tried to add to your stash of coins lately? There are almost none available or the time between locking in a price or making payment and receiving delivery is very great. There are almost none available. Why? No one is willing to market the physical precious metals at the lower paper price. The demand is certainly there, but the stock is very slim at best. James reported that the large bars are in good supply, at present, but the small items and coins are not. Even those that can be found carry a very high premium over the price of the metal. The price is too low to give refinery or wholesaler to desire to take their products to market without a very high premium. This has the same effect of governmental price controls. The supply dries up in either case.

Both silver and gold are greatly oversold. In fact, I am wondering if this is the "sell the farm" time for which we have been waiting. I am hesitant to go all out on purchases of mining stocks, but do plan to slowly add in more shares during the remainder of this "correction." It is very likely that we will see some $40 - $50 jumps in the price of gold as the oversold condition is balanced.

The futures contracts for silver expire on August 26th, as I recall. I know it is near the end of this month. That could be the turning point in the paper versus physical prices of the metals. It is very important to keep a careful watch on your portfolios and follow the price of the precious metals. We could see some significant upward moves going into the fall and winter season just ahead.

I pray that the Lord will give us wisdom to know how to be good stewards of that with which He has entrusted us and the courage to act in accordance with His wisdom. The results are up to Him, but at times we are too timid to act out the wisdom He gives us. We must continually praise Him for the care with which He treats His people through His unmerited grace.

Best to each, Doug


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