Gold Prices Stabilize But Trends Still Intact

Monday, 02 December 2013
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Published in Gold Investing
Gold is stabilizing. Gold is stabilizing. PhotoDune.
Gold prices bounced off their lows of the month to stabilize around the $1,248 an ounce mark, but there’s nothing to indicate commodities, including gold and silver, have found a floor. It’s probably little comfort to investors that the weakness in prices are reflected across a broad range of commodities including crude oil, gasoline, industrial metals, and food products.

First-Strike

Even though gold and silver are unique among commodities for many reasons, they’re still subject to the same economic tidal forces that shape the rest of the market. Lower wages, continued softness in hiring, and soaring medical costs have consumers in a funk, and the lack of aggressive consumer spending is weighing on the entire supply chain.

All the same there are some bright spots for gold on the horizon, particularly on the demand side of the equation. Shipments of gold from Hong Kong to mainland China have nearly doubled since last year, as merchants stock up for what they’re expecting to be a busy holiday season. The lower prices move, the more demand for jewelry, bars, and physical possession it stirs in Asia. Chinese demand is up 5% from this summer’s low, and China is threatening to take over the top buyer spot from India.

The equities gravy train is not sustainable based on current fundamentals.

Physical demand for gold is starting to balance out the outflows from ETFs and other exchange-traded gold products. As prices tumbled, Chinese television showed clips of consumers clearing store shelves of gold bars and jewelry.

There is a certain inertia in the gold and silver markets, just like any commodity, and it’s quite possible the overall downward trajectory will continue, at least for a few more months. Equities are still flying high, and there’s little in the economic news right now that would spur investors toward safe harbor investments like precious metals.

The equities gravy train is not sustainable based on current fundamentals. Valuations of stocks are way too high, and are being propped up by insider stock buybacks. A correction is coming and, if that correction is triggered by a disaster or unrest, it could be a big one. Sales in equities will have big investors looking around for safe investments, and gold at current prices will certainly show up on on their radar screen.

In the meantime, gold under $1,300 and silver under $20 represent an attractive entry point for those looking to fund a precious metals IRA or add to their collection of physical gold and silver. Given the high levels of overseas demand, if there is a market reversal, the price recovery in metals could be sharp and sustained.

Quiet times of declining prices like we’re seeing today won’t last forever, and the time to buy is when a particular investment class is out of favor. Six months from now the investment landscape could look radically different.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.