You’d be hard-pressed to find an arena of the market that is full of more fear-mongering, conspiracy theory and downright silliness than precious metals.
There are rumors that Germany’s gold stockpile is missing or fake. There are rants about the gold standard — both vehemently against the fiat money regime and equally dismissive of the gold standard. There’s predictions of gold at $10,000 an ounce.
You get the idea.
It’s typically dangerous ground to make any bold call on gold or silver. So in this post, I’ll try to stick to the short-term inevitability of precious metals and avoid the broader philosophical and political ramblings.
Because the bottom line is that now could be a great time to buy gold or silver and ride the metals to market-beating gains in the next few months. Gold is trading near seven-week lows, and silver is too.
Here are some points in favor of investing in precious metals or related funds that include the iShares Silver Trust (NYSE:SLV), the iShares Gold Trust (NYSE:IAU) or the flagship SPDR Gold Shares (NYSE:GLD):
The Fed: Again, I don’t want to get lost in the annals of Fed conspiracies, so I’ll simply say that zero-interest-rate policy and Operation Twist benefit gold. You can debate the philosophies and pitfalls of central banking in the forum section, but hopefully we all agree that low interest rates punish savers and drive down bond yields — meaning beyond quick swing trades or case-specific options strategies, there are few options other than precious metals and equities to get decent returns. As for equities …
Stocks Are Stalling: The market has started to stall as earnings season has proven ugly forecasts to be largely on the money. The S&P has lost about 4% in the last week, but some of the biggest names on Wall Street have taken it on the chin even harder — including Apple (NASDAQ:AAPL), which is down by double-digits in the last month. One has to wonder if the rally so far in 2012 is at best running out steam or at worst just a product of irrational exuberance. That means asset allocation could start to favor other vehicles beyond equities in the near-term as traders get defensive.
Emerging-Market Demand: It’s not just the U.S. central bank or investors at play, however. Standard Bank’s commodity team recently was quoted on Mineweb as saying that it thinks gold will stay soundly above $1,700 an ounce thanks to “steadily improving physical demand for the metal out of Asia.” And HSBC (NYSE:HBC) agreed in a recent note, saying that “Emerging-market demand for gold bullion has picked up.” That’s because central banks in these growing economies will continue to be a long-term source of gold demand for diversification in sovereign holdings beyond Western currencies.
Gold Technical Analysis: Here’s a great video from FX Empire that shows support at $1,700 and the possibility for a breakout to $1,800 or $1,900 if the $1,750 mark is breached in the next few weeks. That’s a 6% to 12% gain — not huge, but not bad for a few months’ work. And there’s always the possibility of gold moving higher beyond this short-term breakout … though the longer you look, the fuzzier technicals tend to be.
Silver’s Overdue Rollback: Since peaking in early October, silver has dropped by nearly 10% — getting punished much more than gold or the S&P 500. This mirrors the performance of the precious metals during the market’s trouble spot in the second quarter of 2012, where gold and the S&P both gave up 4% and 3%, respectively … while silver got crushed with a 15% slide. You could see this as a sign that silver is at risk of bigger declines if things get choppy — or you could see this as the overdue correction to silver’s outperformance after its nosebleed run in 2011 that peaked at a staggering $48.70 an ounce. To me, this selloff makes silver more reasonable .. as it does to trader Addison Wiggin, who’s plotting $50 silver as a possibility by year-end.
Inflation Fears: Inflation currently is under control at a roughly 2% annual rate. But history shows that once inflation starts to become a problem, it is a difficult beast to tame. If you’re of the mind that inflation is on the march thanks to big deficits and the risk of a weaker dollar, consider silver or gold since these commodities will naturally increase in an inflationary environment. The next CPI release is Nov. 15, and that could be key for gold and silver if it shows inflation ramping up.
To be clear, I’m thinking of silver or gold as short-term investments through the year’s end as things start to get a bit choppy after this ugly earnings season and as uncertainty surrounding the fiscal cliff picks up.
I am not one who worships at the altar of gold as the only surefire investment out there. It is a speculative asset — nothing more, nothing less.
It just so happens that in short-term, I think speculating in precious metals is a good idea. That goes for both gold and silver based on the trends.
- Has QE3 fatigue held back the gold market? (Mineweb)
- The bullish case for silver. (Commodity HQ)
- Ah, those darned gold speculators! Apparently they are responsible for the recent selloff. (Resource Investor)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.