Unusual market volatility in financial markets worldwide has spilled over into precious metals trading as well.
At the G-20 Group of Nations meeting of finance ministers and central bank governors in late February in Shanghai, China, there was no consensus on how governments should try to manage the turbulent markets.
Representatives from China, the United States, Japan, Germany, France and Great Britain each had their ideas, many of which contradicted each other. In such gatherings, the announcement at the conclusion is usually scripted before such meetings begin. With so much disagreement over the nature of the economic problems and what to do about them, there was no such concluding statement this time.
Unfortunately for investors, who desire market stability and predictability even if it is not the optimum environment, the failure to reach a consensus at the G-20 meeting indicates that financial markets are likely to remain volatile.
The Chinese government indicated that it will try to support the value of its yuan currency despite almost everyone else, including the Chinese citizenry, expecting further devaluations.
Japan will continue aggressively devaluing its currency, even though that policy has failed to stimulate the domestic economy. The United States government will continue to pretend that it still carries as much economic clout as it used to, despite soaring debt in the nation.
The French government claims that it lacks the financial resources to participate in any bailout programs. The German government wants everyone to tighten their belts and ride out the economic downturn.
The British government does not speak with one voice, where some politicians support the idea of the nation leaving the European Union after the June 23 vote, while others insist that the UK will remain in the EU. Who is the investor supposed to follow as showing the best direction?
Similar conflicting signals are coming from precious metals markets.
On Feb. 23, both the New York COMEX March gold and silver options contracts expired. The silver options were for one of the higher-volume traded contracts in the yearly cycle.
The higher that the spot prices close on the COMEX on such expiration dates, the greater number of such call contracts will be “in the money.” That means that a greater number of contract owners will be able exercise their option to purchase and take delivery of the underlying physical metal at the “below market” contract price. Any surge in demand for physical metal contributes to tighter inventories, which can lead to higher prices afterwards.
To minimize this surge in physical demand, it has been almost automatic to see gold and silver prices knocked down on such expiration dates. But, not this time. Not only did it not decline, gold rose by a much greater percentage than normal. Even silver gained almost one percent for the day.
Such an unusual development might lead investors to think that precious metals prices might be on the verge of shooting upward. Well – not yet.
When the U.S. President or the Federal Reserve chair is making a major public speech, or there is a significant American or international meeting – such as last week’s G-20 meeting, there has almost always been a major drop in gold and silver prices. It did not surprise me to see the prices of both metals fall as the G-20 meeting got under way.
While the general investor sentiment toward precious metals is still heavily negative, things are changing. Thus far this year, multiple ultra-wealthy people have disclosed that they have taken sizeable positions in gold or silver, with billionaire Mark Cuban perhaps being the latest.
One thing that has surprised me is that I anticipate that the gold/silver ratio (the price of gold divided by the price of silver) would decline this year. In bull markets for precious metals, silver normally rises a greater percentage than gold. With the larger decline in the silver spot price toward the end of February, the gold/silver ratio rose above 80. In my non-scientific judgment, I figure that the long-term ratio will be somewhere around 35 or 40 to one. What this means is that I expect the price of silver to outperform that of gold in the longer term.
While precious metals markets are still up significantly year to date, everyone wants to know if this strong performance relative to paper assets will continue. In the intermediate to long term, a surprisingly high percentage of analysts think so. But that doesn’t say what will happen in the coming weeks and months.
I think the practical approach is to realize that all paper currencies eventually fail. Thus far in history, the average life of a paper currency is about 40 years. Therefore, it makes sense to own an insurance position of physical gold and silver to protect against further declines in paper asset values (stocks, bonds and currencies).
The good news for those seeking to acquire bullion-priced gold and silver coins and ingots right now is that supplies are available at pretty much immediate or short-term delivery delays at near typical premiums. Even if prices drop a bit further from current levels, I think today is a wonderful time to build your wealth insurance holdings of physical gold and silver to protect you down the road.
Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).
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