Cash Was King, Now Its Gold

December 15, 2010 | By | Reply More

The first question to answer is whether Gold is in a bubble? There are still many pundits, some who are genuine disbelievers, more who are in thrall to Wall Street, its commissions and vested interests, who scoff at the merits of investing in Gold and are happy to tell their followers that the yellow metal is in a bubble and to beware its imminent bursting. Do they really still think that cash is still king, we’re talking US dollars here.

Their usual line is that gold earns no interest, has little industrial demand, and is a played out anachronism in the modern financial world where it has no place as a viable alternative to stocks, bonds etc. as a wealth preserver and hedge against inflation. We shall see!

Gold is Not in a Bubble

Here at Precious Metal Investments we strongly believe that gold is not in a bubble in the accepted sense of the expression. That is that everyman and his dog is piling in to get a piece of the action without thought for the fundamental reasons for investing and so chasing the market.

The dot com boom and the property market blow off come to mind. There are some very practical reasons why the price of Gold has risen nearly 300% in the last five years.

Cash is no Longer King, Now Its Gold

More astute observers worldwide who follow the precious metals market began to invest in Gold as a result of their rising concerns of the economies of the developed world, the state of personal and national debt, the unflagging excess in personal consumption and national borrowing to finance expenditure that in many cases was becoming  out of control (Ireland and Greece).

By mid 2007 the price of Gold began to accelerate as the recession loomed and the printing presses went into overdrive to print more dollars, yen and euros and the other developed world fiat currencies as their governments desperately ploughed this debased cash into their economies to stave off the hardships of a full blown depression and they continue to do so to this day.

As these currencies continue to lose value more and more investors, governments of wealthy emerging or oil rich nations, hedge funds, etc., have found that there is no better alternative for long lasting wealth protection than Gold, that ages old standby. In the meantime, with markets awash with cash, speculative short term plays with stocks, bonds, treasuries, commodities, currencies are soaking up the ever increasing piles of paper money that nobody wants to see lying idle and deteriorating in value by the day.

It won’t take much to bring the whole house of cards down with a crash that will finally signal the passing of the old world regime of the US and Europe to the emerging nations with China and India leading the charge.

Lest we forget, India is the worlds largest buyer of Gold, China is the worlds largest producer of gold and continues to import even more from other sources and neither suffer from debt ridden economies.

The Trend is Up, Keep topping Up

There are a host of other facts that support the continuing rise in Gold in the shorter term along with the longer term scenario of deteriorating currency values and the shift of economic power to support the old investors adage of “the trend is your friend”.

It won’t be all one way traffic, there will be pull backs, so use whatever technical indicators you prefer to recognise opportunities to top up your holdings or play the options card. We are not great believers in technical analysis but for shorter term plays we like the head and shoulders pattern, Bollinger Band breaks, Williams%R and candlestick indicators in combinations to give us a guide to go along with any significant fundamental developments when we fancy a gamble.

Do Not Sell Gold

At this stage we will not be tempted to unload any of our core Gold holdings and do not expect to be tempted for another year or two minimum and most spare cash will go into building up our mainly ETF and bullion holdings over the period.

We have some tasty miners that we may add to with any remaining cash, hopefully made from our rare speculative plays. Sell up prematurely and you may not be able to get back in without a loss.

Digressing into Energy

Not on subject but may be of interest, yesterday we added to our long term holding of Enerplus Resources Fund, (ERF-NYSE) an oil and gas play that pays out a good dividend several times a year, a nice little yielder.

We were originally drawn to this stock as we liked the idea of  an income source in the energy sector and added to it on the basis that the deteriorating value of the dollar is persuading oil producers to trade in other stronger currencies which may benefit Enerplus via its smart management. Trawling through this one for info should not be a waste of your time.

Stillwater Mining Options Worth a Look

Finally today both Silver and Gold are trading down a tad as we write, worth keeping an eye on the Stillwater Mining April $23  call , if it goes under $1.80 offered, currently $2.00, with the shares (SWC) trading at $21.17.

Make your own minds up on this as this is just a personal view for our speculative portfolio, we are already making a nice profit on this one so boosting our position by buying more at a higher price lessens the risk of a major loss. Stops in at $1.40.
Investors, please don’t forget to follow the trend.

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