Gold Tests $1,300 Support Level

Wednesday, 07 May 2014
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Published in Gold Investing
Gold! Gold! PhotoDune.

Heavy outflows from gold ETFs, and a sag in demand for physical bullion, pushed gold prices back below $1,300 in mid-week trading. Gold is currently down $11.44 to $1,296.30, and silver followed gold lower by $0.18 to $19.38. 

Gold pushed below the $1,300 support level despite a weaker U.S dollar, which usually tends to lift gold prices. The price move boosted the Dow/Gold Ratio to 12.71, up from 12.6, which indicates that investors are continuing to leave gold on the sidelines to move money into equities.

Fiscal-Cliff

Silver stayed pretty much in line with current gold prices, with the Silver/Gold Ratio still at 66.9. For comparison, the normal range in the recent past was closer to 50. That indicates that in the precious metals selloff, silver has taken a bigger hit than gold and seems significantly oversold at these prices. There are several reasons why I think silver is due for a spike upward in the days ahead.

Industrial Demand

Unlike gold, which tends to function more like a substitute currency, silver has many industrial uses. Due to its resistance to corrosion, silver is widely used in the solder for electrical components and circuit boards. As the solar power industry grows, so does its demand for solder and high quality connectors, all of which include at least some silver. In addition silver is widely used in jewelry and in industrial chemicals, where it acts as catalyst in the manufacture of many plastics. Another power user of silver is the medical industry, which utilizes silver’s antibacterial and anti-fungal properties in the manufacture of surgical instruments, clothing, bandages, and antibacterial creams.

Silver prices have taken a hit as one of the largest industrial users of silver, the film industry, has switched to digital imaging for both still photos and movie production, temporarily backing up silver in the supply pipeline. As continued expansion of the consumer electronics industry, the space program, and robotics industries gradually work through that backlog, we could see silver prices spike unexpectedly on continued strong industrial demand.

Currently high-quality bullion products like Silver Eagles and Silver Maple Leafs are a bargain. Silver hasn’t tested current prices since 2010; it’s hard to miss in a market like this.

Economy Strong = Equities Expensive

The continued strength of the US economy and the steadily dropping unemployment rate continue to divert investors to equities. But equities are getting expensive, and the market is getting frothy with more investors using any upward movement in the stock market as an excuse for skimming profits. The slightest whiff of bad news, a large-scale natural disaster or unrest somewhere in the world, could push equities into a correction — which would light gold and silver prices on fire.

Back in 2011 I was telling gold and silver investors that, if they needed the money, to sell small lots. Back in those days the Dow/Gold Ratio was 6, so a correction wasn’t that hard to predict. Today my advice is to continue your small, regular buys, split between silver and gold, up to the fixed percentage of your wealth you want to keep in hard assets. If you’ve been thinking about boosting the percentage of your wealth in hard assets, now is a good time.

We’re likely to see sheer inertia carry the markets higher for the rest of 2014 and into 2015; after that things don’t look so good for equities. Right now you have a window to catch up on your hard asset allocation if you’ve been letting it slide over the last couple years. Take advantage of the opportunity to catch up while you still can.

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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.