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Traders Workshop

Are Gold and Silver Now Zombie Metals?

Commodities / Gold and Silver 2013 Jun 29, 2013 - 01:37 AM GMT

By: Investment_U

Commodities

Sean Brodrick writes: The action in the gold and silver markets is enough to drive precious metals traders crazy, and in some cases, I think it has.

Analysts who once talked up the metals are now saying gold will slump to $900 an ounce… or lower. Investors who once loved mining stocks now loathe them. And on the other side, you have respectable people, furious over gold’s decline, talking about the metal going to “infinity.”


You know who you are, and if the shoe fits, start upping your meds.

It’s easy to see that the short-term forces have turned against precious metals. However, those who say gold and silver are “zombie” investments – slowly shuffling their way into the financial graveyard – don’t have a leg to stand on.

On the contrary, there are plenty of longer-term forces lining up for gold’s next big move higher. And silver – which always outdoes gold on both the upside and the downside percentage moves – is dirt-cheap and not likely to stay that way.

Can gold get cheaper? Don’t kid yourself – of course it can.

But that’s an opportunity – those of us who didn’t buy enough gold and silver the first time around may soon get the buying opportunity of our lifetimes. Heck, silver under $20 an ounce is a steal. And if it gets under $16, just back up the truck to my front door, ’cause I’m buying in bulk.

Let’s look at why gold and silver are such horror stories now, then review some of the bullish forces that the bears are missing.

1. Ben Bernanke Pees in the Punchbowl. The Fed Chairman’s recent statement that the Fed would scale back its $85 million a month in bond purchases and end them next year sent the U.S. dollar soaring. Sure, the easy money party has to end sometime. But since gold is priced in dollars, that is weighing on gold mercilessly.

Bernanke’s announcement affects gold in another way, too.

2. Treasury Rates Are Making an Explosive Move. In fact, the surge in benchmark U.S. interest rates is unlike anything seen in the past 50 years.

This chart has scary potential for gold. Gold struggles to compete with rising interest rates because the metal does not pay interest or dividends.

You’ve probably read that gold can do well in a time of rising interest rates, and that’s true – longer term. Central banks jack interest rates higher to try to cool inflation, and gold is a hedge against inflation. But we are very close to official deflation now.

So, short term, rising interest rates could put even more downward pressure on gold. That said, the interest rate surge is overdone, and when it goes back in the other direction, gold will probably go higher.

3. ETFs Are Selling Gold. For years, investment funds bought gold through ETFs because gold went up and up. Recently, gold has underperformed many other assets, and funds that never should have owned the metal are selling it.

In physical terms, gold bullion held by ETFs slumped 29% to 31.7 million ounces from a record of nearly 45 million ounces in December 2012. On Tuesday, the gold ETFs tracked by Bloomberg saw outflows of 749,000 ounces. That’s huge – and the flood of metal on to the market is pile-driving gold prices lower.

I don’t know when that selling will end. And until it does, it is a bearish force on gold.

These short-term bears are hammering gold, but they disguise longer-term bullish forces at work underneath the surface.

1. Central Banks Keep Buying Gold. The world’s central banks used to sell gold into the market. Since 2010, they’ve bought more than they’ve sold. It’s funny that the banks tell people not to invest in the “barbarous relic,” then snap it up themselves. Look at this chart.

That, my friends, is a bullish trend. Global central banks purchased a net of 534.6 metric tons of gold in 2012, up from 456.8 the previous year, according to the World Gold Council.

And they keep buying. Russia, Turkey and Kazakhstan all added in the most recent month.

2. The Cure for Falling Prices Is Falling Prices. As gold prices fall, miners’ profit margins disappear. Production costs can be as high as $1,200 to $1,300 per ounce, so unless there is a rapid recovery in both silver and gold prices, a number of mines may have to close.

In fact, one big miner after another – Barrick, Newmont, Gold Fields, Newcrest – is putting billion-dollar projects under review or shelving them as costs spiral out of control. That’s future gold supply that is disappearing.

Meanwhile, South Africa’s fastest-growing mining labor union is demanding gold producers in that country more than double the wages of entry-level miners. What do you think that will do to costs in the fifth-biggest gold-producing nation in the world? I’d say there’s a supply squeeze coming, big-time.

3. Chinese Purchases Keep Growing. We know that Chinese consumers are buying lots of physical gold, which they consider cheap at current prices.

China’s gold demand will overtake India’s this year; China could gobble up anywhere from 1,000 to 1,500 tons, which would be more than half of annual global mine supply.

To be sure, China’s ravenous demand is being met by plenty of gold being sold out of the ETFs. But ETF selling has to end sometime. What do you think will happen when it does? I think gold could be on the launch pad.

There are other bullish forces for gold simmering under the surface, such as booming sales of gold coins to mom-and-pop investors around the world and declining ore grades. We’ll discuss those in more detail another time.

The point is, gold may be battered, but it’s not dead yet. If you’re looking for zombies, try the graveyard. Gold and silver will spark back to life soon enough.

Good investing,

Sean

Source: http://www.investmentu.com/2013/June/are-gold-silver-zombie-metals.html

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