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For such a
wonderful year for precious metals investors, the final calendar quarter left
little to celebrate. Just as people now take for granted that their phones
will also take pictures, play music, and surf the internet, many investors
have come to expect gold and silver to move up in a straight line.
In fact, in a
recent CNBC interview one analyst claimed that gold's recent correction
proves that it is not really a safe haven. In truth, such a statement merely
proves how little some analysts know about markets.
However much the fundamentals may be on your side, there are always
mitigating factors that affect price movement. In the case of gold and
silver, the temporary resurgence of the dollar versus other fiat currencies
alternatives has been the dominant factor - but even that isn't the whole
story.
STAMPEDE OUT
OF EUROS
The critical
factor that has been in play the past few months has been the European debt
crisis going critical. I have said all along that the US is in worse shape
than the EU overall because the EU has less will and capacity to resolve - or
even temporarily paper over - its problems. The flip side is that, absent the
massive stimulus the US has received, Europe has been forced to deal with its
sovereign debt problems first.
Global investors have been spooked since the credit crunch of 2008. That
means they are more likely to follow the herd rather than stick to the
fundamentals. It takes a certain firmness of character to watch your
investments sell off by double digits and not have a moment of self-doubt.
So, what
we're seeing is big moves into and out of asset classes. But what is
important to understand about these circumstances is not the scale of the
moves but the direction of the trend.
Right now,
the dollar is riding high. But it's still down over 30% over the last decade
as measured by the generous US Dollar Index. Gold, by contrast, is up over
350% in that period. Of course, past performance does not guarantee future
results, but the fundamentals have not changed. It's worth remembering that
mainstream analysts chose the dollar over gold in almost every report over
the last 10 years, based on a blind faith in the power of the US government
to centrally plan the American economy. The market proved them wrong.
Once again, the mainstream narrative is that the real danger is in Europe and
therefore the US offers a safe haven. This has caused a stampede out of euros
and into dollars. But as we've seen over the last few years, the euro and
dollar can decline simultaneously - and will continue to do so as more and
more investors realize that the real safe haven is gold.
SHOOTING STRAIGHT UP
There is a
reason assets don't move up in a straight line. Besides varying liquidity
needs and risk appetites of investors, there are also built-in mechanisms to
flush speculators out of a skyrocketing market.
As silver approached $50 this past April, the COMEX raised margin
requirements for futures contracts on the metal, thereby pushing many
speculators out of the market. While this practice presumably prevents
speculators from overusing leverage, it also has the effect of crushing the
short-term price of the metal. Both gold and silver have been subject to
increased margin requirements this past year.
While we can now rest assured that future price increases are driven more by
long-term investment than short-term speculation, it is not without costs.
Speculators serve to reduce volatility in a market by buying in anticipation
of future scarcity and vice versa. So, pushing out the speculators may
increase volatility in the future. However, it's my feeling that in truth no
gains have been lost at all - they have merely been postponed.
IS THIS THE TOP?
In order to
determine whether the recent sideways movement of gold and silver is cause
for concern, let's look at what lies ahead for 2012.
It is clear from 2011 that the new Tea Party members of Congress are not
strong enough to stop the fiscal bleeding, and with the Occupy Wall Street
movement in full swing, President Obama doesn't have a lot of room to
compromise. Washington has been reduced to short-term measures to
"pay" its bills, and the bills are mounting faster than ever.
Meanwhile, Ben Bernanke's Federal Reserve seems intent on pushing all the
boundaries of monetary policy. In its most recent ploy, the Fed has engaged
in a covert bailout of Europe through the use of currency swaps. From an
investment perspective, this goes to show how deluded dollar investors are -
they're buying into a currency that is being printed for any and all comers.
This news should have caused the dollar to tank and gold and the euro to
rise, but again, the fear trade is overriding all other considerations.
2012 should see more trouble from Europe, and therefore potentially more dollar
buying. This might even be the year we see a few members exit the euro.
However, there is no way to know how the euro will react in the short-term to
such events, as such scenarios may already be priced into the market. In any
event, long-term, the eurozone will be stronger
without its weaker members. If they cannot mend their profligate ways, better
to force them out now than compromise the solvency of the stronger members.
For smart investors, dollar strength caused by euro fears is simply an opportunity
to buy contra-dollar assets on the cheap. Yes, I believe sub-$30 silver and
sub-$1600 gold are still cheap for what's ahead. And with 2012 forecasts of
$2,200 by Morgan Stanley, $2,050 by UBS, and $2,000 by Barclays, it appears
I'm not alone.
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