After 45 years in the precious metals markets some things remain the same. Primarily derisive headlines in the media like, “Gold loses its luster”, and “Gold bugs got squished”, appear on every price decline.
Other things are relatively new, such as exchange traded funds (ETF’s), a paper proxy for holding the real thing. Another is naked short selling, where institutions can sell gold contracts representing metal that they don’t own, in extremely large numbers, forcing prices downward and discouraging buyers. When the panic subsides, the contracts are “bought back” at lower levels, generating large profits. No physical metals have changed hands. This activity makes the physical market risky and difficult to operate in, since prices are derived from these futures trades.
I have suspected for some time that the groups that manipulate these prices into a trading range, keeping them at low levels, are also the same ones simultaneously acquiring the physical metal for their own benefit. It seems like it should be illegal since it is all under government regulation, but nothing is ever done about it. Central banks have been net buyers of gold for several years, the Bank of China being the largest, accumulating an amount equal to 13% of world gold mining output annually. Of all the gold ever mined, 25% resides in government vaults.
Instead of focusing on daily price fluctuations I think gold and silver should be viewed the same as real estate; a long term store of value rather than as a trading item. The main advantages over real estate, however, are portability and instant liquidity.
On the topic of prices, I just concluded a spirited phone conversation with Harry Dent, a well-known author and economist. His current recommendation is to buy bonds. Surprisingly, he is not anti-gold. He just doesn’t want to buy any unless it hits $700 per oz. That number has been kicked around for three years now and would require massive sales of physical metal to achieve it. One thing we did agree on: cash is a good thing to have!
Currently, the consensus of consumer sentiment is one of extreme confidence on rising stock and real estate values. That, coupled with the enthusiasm for crypto currencies has drawn resources away from precious metals. The question then is, “how long will this situation continue?” A simple answer is, until the next “Black Swan” event occurs, which could be next month, six months, a year or more. Like an earthquake, you know it’s going to happen and there won’t be any warning, so make preparations in advance.
In my September comments I listed 10 reasons to buy gold and they still apply. Acquiring metals (cheap at today’s levels) will still provide peace of mind and protection against the unthinkable possibility of financial collapse.