Gold & Silver – A Diversity of Opinion ?

April 23, 2011 | By | Reply More

This last week gold has indicated that it has now reached a floor of $1500 an oz while silver looks well established  above $45 an oz. Both have recorded a series of record highs although silver has yet to reach that epic peak of $49.45 an oz. it attained in 1980 when Bunker Hunt and his brother attempted to corner the market.

If silver continues its heady rise that record is likely to be surpassed  within the next five trading days. Actually neither gold nor silver are yet any where near the true value of their earlier peaks if, as it should be, account is taken of the much diminished purchasing power of the greenback. Values of $2500 or more for gold and $100 plus for silver are nearer the mark.

However, those many investment websites and the financial media gurus are arguing both sides of the gold and silver bubble debate with increased vigour for their entrenched positions. Such is the diversity of opinion that we feel our readers might benefit from our own, hopefully commonsensical, approach less littered with statistics and with our emphasis on profit opportunities in this sector.

The first question to be addressed is whether gold and silver are in a bubble or not. Dealing with gold, the five year chart shows an increase from $600 an ounce to today’s $1500 an oz.

The upward trend has been steadily in place throughout the period while at the same time the deterioration in the  purchasing power of the dollar has accelerated also, at the same time, the US deficit has grown by a factor of three.

The full consequences of the dire US economic situation are still to be realized, this may take six months or six years, we cannot possibly know how long before the Feds priming of the money supply via QE 1 and 2, or possibly a further 3,4,5, or more can no longer prop up the “house of cards”.

It is also possible that Obama, Bernanke and Tiny Tim decide to bite the bullet, reverse their throw away money policies and make every effort to bring back respect to the once mighty dollar. We can only live in hope!

There are a host of other factors to take into account when evaluating gold over various time spans, supporting the opinion that gold is in a bubble about to burst. Of course that “bubble” may stay intact until gold reaches $2000 or more, it may burst in two weeks, two months or two years.

Sooner or later it will peak, from there it may drop like a stone, it may consolidate and drift for years or go into a steady long term downtrend. There can be no argument that one of these scenarios will prevail.

On the other side of the coin there are just as many, if not more, convincing reasons to suppose that this present five year uptrend will remain in place for the next 5-10 years, not least of which is reflected by the behavior of the dollar. We can argue about the difference in opinion, or statistics, concerning demand and supply, jewlry issues in India, China building up its gold reserves, central banks buying/selling gold and so many other factors.

As they say, in a bull market investors climb a wall of worry. We bring our argument against the chances of gold being a near term bursting bubble down to the dollar. While it is in free fall we believe gold will power on upward. When doubt about the continuance of quantitative easing after June make their presence felt we are likely to see either a  correction or consolidation, we do not think there will be “bubble bursting plummet”.

We must then await the next positive step that Bernanke and his boys take. An election is coming up so rate rises, which really cannot be avoided, will be part of the plan. Will the rise be sufficient to stop the dollars’ free fall? Will another round of QE be introduced to boost Obama’s hopes of a second term?

It is quite possible that if a period of indecision transpires, it will provide a golden opportunity (pardon the intended pun) to pick up more gold exposure. The next two, three months could throw up some great profit opportunities.

We will go out on a limb here with our opinion that gold, notwithstanding a substantial correction, is and will, remain in an uptrend well into 2012.Then the presidential electioneering will add some yet to be known elements to the situation which will have to be evaluated at that time and in those prevailing economic conditions with great care.

Until then we will stay in gold. It is so easy to over complicate investment decisions, we are not great advocates of using technical analysis for our medium or long term investment decisions ( it is v.usefull for short term speculative plays). We believe that the principal outcome to profiting in gold is dependent upon the behavior of the US dollar.

If you are in the Euro zone or a British Pounds investor, much the same applies. The deteriorating value of your currency or, hopefully, otherwise, and your central banks and government responses to the continuing devaluation of your fiat currencies will directly apply to the price of gold. Forget about the temporary lock steps with oil, the remimbi, or anything else. This is all about the US dollar. No gold bubble will burst in Euroland or the UK unless it does in the US.

Our conclusion, and the path we intend to stick to with our own gold investments, is that gold is not yet in a bubble, but on its second upward wave. It is very possible that breaching $1500 an oz signals the third and final upward wave that is, more often than not, the most powerful in a longterm bull trend and could last many months, if not years.

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