I’m sure China, Russia, India, Turkey, Brazil, Kazakhstan, Korea, and many other non-Western nations will greatly appreciate you helping to drive the price lower so they can buy more metal at a lower cost.
Having tumbled through important technical levels on Wednesday, gold and silver are set to become even cheaper in the days ahead and this will surely accelerate what will someday be looked back upon as one of the greatest transfers of wealth in history – from West to East.
In the West, we print more paper money and sell gold while, in the East, they continue to trade in this same paper money for dumb ‘ol gold that just sits there and provides no return.
Though they keep this sort of thing secret and probably won’t tell the world how much gold they own for many years, officials at China’s central bank are no doubt buying the yellow metal as fast as it’s being shed from the SPDR Gold Shares ETF (GLD).
Silver ETF holdings such as those in the iShares Silver Trust (SLV) have been remarkably resilient amid the recent selling and this indicates still steady domestic demand, but U.S. hedge funds and U.S. futures traders just can’t seem to get rid of their precious metals positions fast enough.
Apparently, none of the factors that caused traders to bid the gold price up toward $2,000 an ounce a year-and-a-half ago are relevant any longer.
Earlier this year, I compiled a list of then-current reasons why U.S. investors were selling precious metals and it’s worth reviewing:
- Threat of another financial crisis is no longer a concern.
- An improving economy has lessened demand for safe havens.
- Investors will continue to rotate into low volatility equity markets.
- Real interest rates are rising (they’re still negative, but rising).
- Inflation has failed to materialize despite Fed money printing.
- The fiscal cliff was a non-event and U.S. credit will not be downgraded.
- The dollar will stay strong since Europe, Japan, and the U.K. are worse than the U.S.
- The sovereign debt crisis in Europe is over, fears of a Greek exit were unfounded.
Scratch number four from the list since U.S. inflation made a U-turn last month and real rates are again falling, but, for the time being, most Americans still seem to think that the other seven items are reason enough to sell precious metals. My guess is that they’ll regret that decision when they realize most of them are only temporary conditions with the possible exception of number seven since the stupidity of policy makers in Europe seems to know no bounds.
(Note: Since the Cyprus debacle, we can probably scratch the first half of reason number eight.)
U.S. investors are far too fascinated with rising U.S. stock prices and rising U.S. home prices that go a long way in explaining reason numbers two and three above. Of course, the fact that none of this would be possible without the Federal Reserve printing a trillion dollars a year in new money and deficit spending of almost the same amount (most of it financed by the Fed) is lost on most Americans.
Over the last few decades we’ve learned that, as long as asset prices are going up, don’t ask too many questions. Of course, things never seem to end well after asset prices stop rising, but that’s not something that anyone needs to worry about today.
That brings us to reasons one and five above and I continue to argue that one of these two (perhaps both) are in our not-too-distant future. You just don’t keep interest rates freakishly low for such a long time and print this much new money without either creating even bigger asset bubbles than before or much higher inflation.
One of these two will likely be the key to changing sentiment in the precious metals markets, though U.S. policy makers still have a shot at it since U.S. budget woes related to reason number six above have only been delayed, not solved. More budget wrangling is fast approaching as the nation quickly catches up to the can it “kicked down the road” a couple months ago and another credit downgrade is still quite possible.
To be sure, futures traders are in control of precious metals markets these days and the technical picture is pretty horrific. Absent a new catalyst of some sort – the Crisis in Cyprus offered only a temporary reprieve – it’s hard to see what could halt the selling over the near-term. But, anyone thinking that any of those eight reasons above are permanent is fooling themselves.
In the meantime, precious metals will continue to flow from the West to the East where it is better understood and appreciated as money used over the millennia in our present day world that is awash in paper money summoned in unprecedented amounts to fix what prior paper money excess caused.
So, go ahead and sell your gold and silver. Billions of people on the other side of the world will thank you.
Additional disclosure: I also own gold and silver coins and bars.