Gold Up Sharply on Physical Demand

Wednesday, 25 June 2014
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Published in Gold Investing
Gold Up Sharply on Physical Demand PhotoDune.

Gold hit prices it hasn't seen since April, on a combination of factors that include Iraq and concerns over stock market valuations both in the US and the European Union. Gold is up again in mid-week trading, moving higher by $3.68 to $1,321.78, and silver was higher by $0.15 to $21.05.

The boost in gold prices, combined with softness in equities, dropped the Dow/Gold Ratio to 12.74, nearly a full point in just a week! Silver had a blowout week, with the Silver/Gold ratio dipping to 62.7.

First-Strike

The current price action means gold hit my summer price target of $1,300 before it hit Goldman Sachs' target of $1,200, not counting intraday prices. Not that I’d ever use that as excuse to say NEENER, NEENER, NEENER to a company that makes billions of dollars a year, but besting the trust fund rocket scientists on Wall Street is just a tad satisfying. Lucky for them I’m humble as well as gracious. Besides, summer’s not over yet, and there’s still plenty of time for market swings.

Goldman Sachs would argue that no one could have predicted the instability in Iraq — but how smart do you have to be to anticipate instability in the Middle East?

In their defense, Goldman would argue that no one could have predicted the instability in Iraq — but how smart do you have to be to anticipate instability in the Middle East in the summer? First there was unrest in Libya, then trouble in Syria, Egypt was having problems last year, Iran and their centrifuges; when is there not instability in the Middle East? One of the smartest moves the US has made in recent years was stepping up domestic oil production and making our country less dependent on unstable parts of the globe.

Either way, if you took the opportunity last month to catch up on the fixed percentage of your wealth you want to preserve with precious metals, you did well. Just as a reminder, you shouldn't be buying bullion products as short-term, speculative investments. If you want to speculate in precious metals, you should be playing the paper market, like gold, silver, and platinum ETFs. If you’re buying bullion to preserve wealth, you should be planning on holding it a minimum of five years. That’s because bullion products, as with any hard asset, have associated production costs. There are also the logistical expenses of shipping costs. Over time, particularly if you practice dollar cost averaging when making your precious metal buys, those costs will be made good by a combination of inflation and currency devaluation.

Besides Iraq, gold also got a boost from the European economy. The French economy has hit the skids, putting a drag on the entire Eurozone, and Germany's Ifo index of business sentiment fell more than expected in June. So the mood is funky Across the Pond, and on our side of the Atlantic came the gloomy news that GDP actually contracted in Q1, to absolutely no one’s surprise — but the drop was 2.9%, and that did raise some eyebrows.

On the downside for precious metals, the US economy is still showing surprising strength, and is growing again despite a poor Q1 performance which was partially impacted by harsh winter weather. We could very well see gold prices stabilize and, if sanity suddenly broke out in Iraq, prices could correct. Luckily for gold and silver investors, there’s little chance of that happening anytime soon.

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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.