by Louis Golino for CoinWeek ……
In 2012 gold and silver prices were up for the year, but they failed to retrace the record levels of 2011. Silver outperformed for the year, achieving an increase of 9.4% compared to gold, which was up 6.6%.
It has been more challenging than usual to analyze the precious metal markets in the past year because they have generally performed in counter-intuitive ways.
As I have argued several times before, precious metals now often trade in the same direction as stocks and other risk assets instead of going up when stocks are down.
Metal prices have been declining in recent days, as the prospects for a deal in Washington on the fiscal cliff move further away after seeming closer just days before. A resolution to the fiscal cliff should actually provide a boost to metals because it would help support an appetite among investors for more investment in risky assets like stocks and metals.
As usual, much of the mainstream media that is largely biased against precious metals is drawing the wrong conclusions from recent price action and arguing that precious metals have peaked and are due for a major correction.
But looking forward towards the coming year, I see a lot of grounds for bullishness provided one keeps a sense of perspective and does not put too many eggs in the same basket. And many large banks such as UBS and Bank of America and metal analysts see higher prices coming for metals next year, predicting gold will reach $2,000, and that silver will outperform gold.
There are several reasons for this bullishness despite the sharp declines of the past week.
First, last week Federal Reserve Chairman Ben Bernanke essentially launched a fourth round of quantitative easing that will push the total amount of Fed asset purchases to $85 billion a month, or over $1 trillion a year. That will bring the total asset purchases at the end of 2013 to $4 trillion.
So far all that QE has not resulted in much inflation, especially because most of that money remains in banks where it is held in reserve.
But when the economy finally does take off in a big way, that money will start moving around, and the Fed may not be able to move quickly enough to raise rates to tamp down inflation.
The other major announcement Bernanke made is that for the first time interest rates will be tied to two specific economic indicators, unemployment and inflation. He pledged that rates will not be increased until inflation exceeds 2.5% and unemployment comes down below 6.5%, conditions that are unlikely to be met any time soon, especially with all that uncertainty and pressures on consumer demand and business spending. Moreover, he said that even if those conditions emerge, that does not automatically mean rates will go up. Other factors will be considered too.
In addition, the QE programs will not be tied to measures that specific but to a much broader range of factors that assess how the economy is doing. Most analysts interpret that to mean that QE is here to stay for a very long time, which is of course very bullish for precious metals.
When these announcements were made, the markets failed to push higher, either equity or precious metals, probably because the information had not yet been digested. There are, in fact, two specific reasons why metal prices failed to rally after the Fed action. QE announcements no longer pack the punch they used to, and market participants mistakenly interpreted what Bernanke said about interest rates as suggesting that they will be going up relatively soon.
Central bank purchases, especially by China and emerging market countries are expected to continue to grow in the coming year and beyond, which will also be very bullish for metals. Several recent reports have noted that China will continue to dominate the global gold and silver markets as a fabricator and buyer of the metals.
In addition, gold coin sales have been very strong recently in the developed world. Figures for November were 130% higher for U.S. Mint gold coins compared to the same month a year ago. And investors in Germany are eagerly scooping up gold coins too. Barry Stuppler notes in his latest gold and silver report (www.mintstategold.com) that 69% of German own gold despite the strength of the German economy because of concerns about fiscal well-being.
As the metal web site, Mineweb, has just pointed out, the global trends analysis project of the U.S. National Intelligence Council , which forecasts the end of U.S. global dominance in the coming years, is also bullish for metals. An end to U.S. global economic dominance may eventually also translate into an end of the dollar as the global reserve currency, which would push U.S. government borrowing costs and interest rates way up. I think that is all still a ways off, and may never happen, but I do expect the dollar will continue to come under pressure in the coming years.
The report projects that the Chinese economy will overtake ours by 2013, and that the global middle class will grow to three billion people.
As I have explained before, a rising middle class in China and other emerging market countries, especially when coupled with central bank purchases in those nations, means a major increase in demand for metal prices, as those individuals seek to preserve their wealth against inflation and economic uncertainty.
Another bullish factor is the European Central Bank is expected to continue its asset purchase programs, especially after its President Mario Draghi said he will do whatever it takes to defend the euro, and the Banks of Japan and England will also seek to support growth with easing programs.
Looking ahead, it does not seem very likely in the near future that governments in the developed world, especially in the U.S. and Europe, will take the necessary steps to shore up their banking systems and provide the foundations for sustained economic growth until events force them to do so, at which point it may be too late to prevent a lot of damage. Both areas seem likely to remain mired in a combination of debt crises, low growth, and high unemployment. Mineweb notes that in such an environment gold and silver will continue to be seen as safe-havens.
As always, caveats are in order. Metal prices will not go up in a straight line, and corrections will take place.
It is possible that Washington and Europe will get their acts together at some point since they have to, but even so, that will likely result in higher economic growth which will produce higher levels of inflation. And that will probably result in investors seeking precious metals once again for the more traditional reason of protecting against rising inflation.
I think it would be a mistake to pin too much hope on endless QE, a dollar collapse, and the hyper-inflation that many gold bulls are certain is coming. But at the same time, there are clearly a lot of objective reasons for remaining cautiously bullish about metal prices in the coming year.
What all this means for coin prices and the numismatic market is another story, one that will be explored in the second part of my year-end review, which will appear soon.
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 CoinWeek, “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.