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What Affects Gold PricesBy
By: Elizabeth Kraus
One of the great problems in the world is that solid economic truths, concepts and, therefore, advice has been hard to come by as the field is littered with so many “experts” that have bought into illogical and indefensible and false theories. Many of these “experts” have attained high places at universities, news outlets or banking institutions. From these lofty and exposed pulpits they have influenced the power structure and establishment institutions in most countries with their unproven theories.
So it is no wonder that lately we seem to be living between the realms of market volatility/mass paranoia and an unending stream of data collection. Of course the future is an unknown. But something that can be known is the value in Gold. Therefore with value correctly analyzed (especially in the mining sector) one has some assurances of the future worth of an investment even after market drops.
It is also important to have an understanding of basic economic truths which do exist! There are reliable cause and effect relationships that over some period of time eventually determine stock and bond market behavior and there are some major factors and assumptions to help form predictions that will hopefully help with investments. One thing for sure, these are some facts that affect gold prices: U.S. money supply has increased by almost $1 trillion in just the last three years, the greatest three year increase of money in the history of the world.
Then there is the European money supply increases were $3.7 trillion (2.75 trillion Euros) over the last 10 years. That’s more money created in 10 years than the last 2000 years of Europe’s existence. With The European budget problems and debt levels continuing to be a force for a loose monetary policy – at least for 2-3 years is obvious. A default will not be allowed under any circumstances (this is actually an assumption but one that is so strong it becomes almost as good as a “fact”.)
India and China are now more important than the United States to certain industries, therefore some industries will boom because of China. India and China have increased their money supplies so dramatically in the last 5 years that the inflationary repercussions will be profound. India’s money supply has increased 160% in 5 years, China’s 180%.
Silver and gold buying has been exceptionally strong in these countries in the last 5 years and as inflation rates in these countries increase over the near and medium term precious metal buying will accelerate. The largest economy in the world is the U.S. economy, but the key problems facing the U.S. , is high unemployment, huge built-in debt increases on state and federal levels, looming pension shortfalls in most state, national accounts, and corporate shortfalls, weak housing and auto markets
From the above we now can move into logical conclusions and hopefully guidance on the future trends of various investments. The U.S. monetary policy will remain loose until the economy improves further as the authorities are still under pressure to boost the economy. Interest rates and inflation rates will increase in almost all countries from an overexpansion of money and credit the last two years. These increases will not be severe in 2011 but will accelerate in the following years. As fears of debt defaults continue in most of the G-20 countries, it will drive a loose monetary policy for the foreseeable future. Central banks raising interest rates are not a sign of tight money or a change of policy. It is very easy for the Fed or the ECB to raise rates by 1-2% and still create $500 billion of fiat money overnight.
How will it affect GOLD?
China and India will experience higher inflation rates than the U.S. and Europe, therefore precious metal buying from these countries will increase. As U.S. stock market and economy muddle along due to the enormous liquidity increases in recent years and low interest rates, as inflation returns to the U.S., interest rates will rise to keep up.
European economies will also muddle along from the liquidity created from the recent country bailouts and prior money supply increases, and China and India will also be a dominant force effecting precious metal prices due to more of their populations entering middle class status.
Demand for oil will continue to outstrip supply even if most world economies move sideways. I believe long term bonds will be dangerous investments as higher inflation rates force interest rates higher. Gold will remain in a bull market trend. Unfortunately after a major move up from the last two years a consolidation and trading range is most likely. A range between $1250 and $1650 is definitely a decent trading range 2011. And Gold will eventually go much higher over the next 5 years. All this is obvious as Gold buying by institutions has increased due to fear of monetary defaults. Gold will go into another major leg up when inflation returns at high or even alarming levels. Keep in mind almost no establishment financial institution (even those bullish on gold) is expecting inflation rates of 10-12% in the U.S. and Europe. If this scenario comes to pass then gold buying will go into a bubble mode. This could take many years to unfold.
Gold investors that were momentum players are now exiting the trade and will dampen demand but it appears that most of the money going into gold is from people and institutions that want asset insurance. It is my belief that these people will not sell gold and will in fact be buyers on pullbacks. Therefore corrections in gold should have plenty of underlying support.
Silver will be more volatile than gold because silver is the poor man’s gold. It will outperform gold in 2011 and for years to come since 90% of the world’s populations are poor.
Senior and mid-tier gold and silver mining stocks are currently selling at reasonable (for precious metal mining stocks) 9-12 times next years (2012) cash flow estimates and therefore no where near a speculative high or bubble valuation. This means purchases on pull backs makes sense.
Mining stocks will experience high volatility as the underlying precious metal pricing dynamics are: 1) near all time highs; 2) absorbing a huge run up in just the last six months and susceptible to trading sell offs; and 3) gloom and doom buying could be curtailed as the banking systems have not collapsed as advertised or feared.
Therefore trading positions as well as long term positions are advised. Value and production growth should be the key criteria for all mining investments. Grass roots exploration stocks should be avoided, or at best be only a small portion of your portfolio, as these are among the highest risk investments in the world.
Money management in 2011 will be best served by a conservative attitude and higher than normal cash positions to take advantage of any pricing sell offs in the precious metal sector and selected industrial stocks
Real estate is probably becoming a better long term bet at this time. But local knowledge should be your guide. With inflation surely on the horizon, real estate will again be a place for some assets. This will not be a get rich quick sector again for decades but with “blood in the streets” some long term values are surely showing up.
With inflation one has to worry about the stock market, since higher inflation equals higher interest rates and higher interest rates are not friendly to industrial stocks. I would be very selective in this area. Trading ranges may be the order of day for the stock market and precious metals until more horrific economic problems show up. Be aware that plenty of bad news has been discounted already.
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