by Louis Golino for Coin Week
Gold, silver, and platinum have begun to rebound, but the financial media continues to run articles suggesting gold’s bubble has burst with more declines coming.
For example, on October 4 the Financial Times of London published an op-ed by Mark Williams of Boston University which argued that gold’s run is over and predicted that the spot price will soon decline to $700.
But gold and other precious metals can not be understood in the abstract, or only by considering the macro-economic environment.
To understand the role they play in the economic and financial universe and where prices are headed requires a broader and deeper analysis that is missing from articles such as that of Prof. Williams.
In fact, most arguments against gold completely ignore supply and demand fundamentals, the bullion market, and other important considerations.
First, there is a big difference between the paper or futures market and the physical gold world..
Recent margin increases and the need to cover losses on equity investments have done more than take precious metals well-off their previous highs.
In fact, the recent metals sell off seems to be flushing out a lot of the hot money speculators and hedge funds, which is leaving physical gold increasingly in the hands of long-term investors.
Those investors and most likely central banks are taking advantage of this drop to add to their holdings. Most of them have no plans to sell anytime soon.
Moreover, action in the physical gold world is picking up as demand is exceptionally strong, especially in Asia.
Premiums on bars and bullion coins are rising considerably, and physical supplies are getting tighter, especially after all the recent bargain buying. This emerging supply squeeze is a key cause of the current rebound.
This is true of gold, but it is especially true of silver and platinum.
Silver appears to be in the midst of a short squeeze as futures traders look to cover their bets that the price will continue declining.
In fact, those silver and gold proponents who believe prices are manipulated by the banks and the federal government have argued frequently that some day, when the buyers of futures contracts and ETF investors demand physical metal, not paper, and there is simply not anywhere near enough metal to cover those investments, prices will explode to the upside in a big way.
90% silver coins made before 1964 used to be available to wholesale dealers for substantially less than melt value. That allowed them to send the coins to silver refineries to be melted and earn a decent profit.
But rising premiums for these coins at the wholesale level are a likely sign than higher silver prices are coming soon. Prices have already recovered to the $32 level after trading as low as $28 earlier this week.
Platinum is another interesting case. It is currently trading 10% below gold despite the fact that it is a lot rarer than gold.
Even at the height of the liquidity crisis that emerged during the 2008 financial crisis, gold and platinum traded at roughly the same level.
Platinum’s decline has a lot to do with its role as an industrial metal, especially in the automobile sector, where demand is expected to lag, but I believe it is a good value at current levels.
In the long-term it will again trade at a substantial premium to gold, especially when the economy rebounds.
What is often not mentioned in the mainstream press is that it is virtually impossible to buy platinum bullion – especially in coin form – for anywhere near spot prices.
Even the wholesale market for platinum bullion trades at a substantial premium over spot prices. At the retail level, premiums run around $100 an ounce or more over spot, and supplies are virtually non-existent. Premiums on coins smaller than an ounce run even higher.
If you doubt this, try buying a quarter ounce platinum eagle. If you do find it, you will be amazed at the premium, which suggests a physical platinum price much closer to $2,000 an ounce, not the $1500 spot price.
In addition, gold continues to outperform other asset classes, especially stocks.
For the year, equities are down at least 20%, or closer to 30% for sectors such as emerging markets, while gold is up about 16% for the year.
One way to look at this is that gold has consistently averaged a return of about 15% per year in the past two decades. Whenever its price began to substantially outpace that average, it has corrected back to about the normal yearly return. That is probably what happened in the past couple weeks rather than a bursting of the mythical gold bubble.
Gold has suffered as investors have turned to the dollar in recent weeks, but that is likely to end at some point since Treasuries provide a negative real return after inflation.
For some people precious metals have lost some of their safe haven appeal recently because of increased volatility.
But that is a view that is driven by a short-term outlook. Long-term trends continue to remain strongly bullish for the same reasons I have identified in previous columns.
The Fed’s recent "operation twist" may have disappointed those looking for something more dramatic, but several foreign countries are moving towards more monetary easing.
Japan is unhappy with the strength of its currency because it is an exporting economy; the Swiss have pegged their currency to the euro to keep it low to help exporters; the Bank of England is increasing its quantitative easing targets; and the European Central Bank may be on the verge of announcing a rate cut, especially once ECB President Jean-Claude Trichet of France is succeeded by Mario Draghi of Italy.
Central banks are very unlikely to unload their recently purchased gold for less than they paid for it.
In addition, all the easy to access gold in the world has been found and mined already. It is becoming more and more expensive to locate and mine new deposits, and that suggests that future supplies will be constrained, which will help drive prices higher.
Then there are the demand-side factors like the expanding middle class in emerging markets, who are looking for wealth preservation against inflation and weakening currencies, plus the usual concerns about money printing, inflation, and economic uncertainty.
So it is clear that one should not write off gold and other precious metals
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for Coin Week, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.