The Coin Analyst: What’s Going on with Precious Metals?

by Louis Golino for CoinWeek ………

So far this year gold and silver have really been underperforming. Both have been stuck in a trading range for most of the past two months, and they have erased last year’s gains, which were already modest compared to their performance in the preceding decade.

Precious market bulls keep pointing to all the factors that support higher prices such as strong physical demand, central bank purchases, and the Federal Reserve’s quantitative easing programs, which just got another boost recently when Fed Chairman Bernanke confirmed that they are not going away anytime soon, particularly now that they are tied to getting unemployment down.

At the same time, the equity market is booming, hit new all-time highs during the past week, and has erased all the losses of the financial crisis known as the Great Recession. Those who stayed invested in stocks have seen healthy returns, especially after factoring in compounded dividends, whether one is in an index fund or owns shares in specific companies.

gold questions The Coin Analyst: What’s Going on with Precious Metals?Gold skeptics point not only to the stock market but also to declining interest in gold among owners of gold-based ETF’s, and the sharp reduction in gold positions of some major investors like George Soros. ETF outflows in mid-February were the highest since January 2011, hedge funds and other investors have been shorting gold like crazy, and overall sentiment has been very bearish.

With interest rates expected to remain low for another year or longer, according to the consensus among financial experts, both the U.S. and global economies improving, and American company profits soaring, a lot of people see continued strength in equities. The biggest headline risks, namely the euro crisis and the budgetary one in Washington, have clearly not gone away, but investors seem to take them more in stride.

The perceived safety of the stock market in such an environment is bound to put pressure on gold and silver, while platinum and palladium, as one would expect in a rebounding economy, are showing greater strength than gold and silver.

Recently, gold experts noted that what is known as the death cross came close to being achieved. That is a reference to a term technical experts use to refer to what happens when the short term, or 50-day moving average, goes below the longer-term, or 200-day moving average price of an asset. That cross in the charts is supposed to be a sign that prices are moving even lower.

But given that gold prices have stabilized a little below the $1600 level recently, it is probably more likely that gold’s support level is currently around $1550, as that level seems to bring out more buyers.

Meanwhile, central banks continue to take advantage of low gold prices. It was just revealed that the government of South Korea has increased its gold reserves by 24% by acquiring 20 more tons of gold, bringing its total reserves to 104 tons, according to Barry Stuppler’s Mint State Gold web site .

Silver prices seem especially cheap these days, with many people noting that the ratio of gold to silver, which is currently very high, suggests silver is undervalued.

And physical demand for silver is close to record levels. A good barometer is sales of U.S. Mint silver eagles, which have reached almost 12 million already this year.

So what is an investor to make of all this? Will gold and other precious metals remain stuck, or are they due for a breakout? Of course, that is the million dollar question.

Morgan Stanley remains bullish on the yellow metal, even touting it as their number one commodity investment earlier, but others such as Goldman Sachs have turned much more bearish, cutting its projection for prices at the end of the year by $200 to $1600.

More bullish experts caution that gold is more oversold today than at any point since 2008, when gold dropped just as every other asset class except U.S. Treasuries did.

Morgan Stanley’s top metals expert, Peter Richardson, says “The reasons for owning gold may be evolving.”

In his view gold as an investment has gone through several stages, and it has now returned to having a close correlation to the value of the dollar, which is a result of investors having fewer concerns about the global economy. That is also associated with periods of consolidation in the price of gold. And consolidation periods in many different asset classes are typically followed by periods with new highs.

This is clearly just one expert’s view, and the position his company supports. Whether right or wrong, it draws attention to something I have argued many times in this column, which is that gold’s role in the world economy and as an asset class is changing and cannot be understood in static terms.

That is why one should take with a large grain of salt the more pedestrian view that many financial experts espouse, which is that gold is something you only need if you think the economy and dollar are collapsing.

In fact, as worries about the world and American economies recede, the prospect of eventual higher rates of inflation will begin to loom, especially when the Fed eventually has to unwind its massive increase in the money supply through its bond buying programs.

And whether or not you believe that we are headed towards another era of hyperinflation, gold could prove to be a good hedge against higher rates of inflation that are probably coming in the future. So some patience may be in order these days.

golino portrait thumb The Coin Analyst: What’s Going on with 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 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.

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