Gold is currently climbing out of the eleventh 10% correction since 2003. Gold has always bounced back and soared higher each time. Gold has been up 10 out of the last 10 years. I believe gold and silver at their current levels provide an excellent buying opportunity. Several geopolitical and macroeconomic catalysts have ignited my interest in precious metals, specifically silver and gold. The time is now to buy silver and gold.
Gold and Silver's Recent Performance Overview
According to a recent Reuters report, gold eased up a touch on Thursday as the euro gave up early gains, with optimism over a pending bailout deal for Greece petering out, though moves were muted ahead of further news on the talks and a monetary policy statement from the European Central Bank. Please review the following short excerpt:
Greek political leaders have agreed on all points of a bailout package except one - pension cuts - and officials said discussions with international lenders would continue so a deal could be concluded before a meeting of eurozone finance ministers on Thursday.
Bailing out Greece will boost the euro against the dollar for a while, making dollar-denominated assets such as gold cheaper and more attractive, traders said. This would help gold maintain its appeal even if the Greek deal diminishes its safe haven status.
"Greece seems to be closer to a concrete deal, which weighs on the dollar and helps gold," said Ronald Leung, a physical dealer at Lee Cheong Gold Dealers in Hong Kong.
Spot gold was down 0.1% at $1,731.59 an ounce, recovering from an intra-day low of $1,725.49. U.S. gold futures for February delivery were up $3.40 an ounce at $1,734.70.
Gold was also boosted by a stronger-than-expected inflation reading out of China, which investors said may mean the central bank will hold off on aggressive monetary easing for now. But many economists expect inflation to ease February onwards, leaving China's policy of targeted monetary and fiscal easing intact.
Gold is seen as a good hedge against inflation, and is regarded as a good investment when accommodative monetary policies raise the outlook for price increases.
Technical analysis suggested that spot could fall to $1,698 an ounce during the day, said Reuters market analyst Wang Tao.
The gold-silver ratio dipped to around 51, its lowest level in more than three months. Spot silver edged up 0.59 percent to $34.16.
Asia's physical gold market remained subdued, as market participants await a clear direction out of the Greek debt saga.
"We don't see much scrap and buying has cooled after prices rebounded, as everyone is in wait-and-see mode," said Leung of Lee Cheong.
Major Macro Catalysts For Precious Metals
- James Steel, Chief Commodities Analyst, HSBC, says the long run bull market for gold remains intact and he sees gold hitting $2,000 by the end of the year. In a video on CNBC.com, he discusses where the demand for the precious metal will likely come from this year. His major point is he sees demand rising from global central banks as they attempt to hedge against global fiat currency devaluation risk.
- Many hedge funds and major market participants have had to liquidate their gold positions recently due to the global liquidity crunch created by the eurozone debacle. Therefore, the recent drop is not an outright fundamental issue with gold but a temporary technical phenomenon that will soon dissipate.
- Recently many central banks of emerging markets lowered their interest rates, consequently lowering the cost of borrowing. In most cases inflation will outstrip the yield on savings, creating negative real interest rates. Thus, investors will take flight to precious metals and protect their wealth from devaluation.
- Gold is incredibly under-owned by institutions relative to historic levels and relative to differing asset classes.
- The long-term trend of the U.S. dollar is lower. Conversely, the long term trend for gold is up. As the dollar's value continues to dwindle and worldwide economies recover, investor focus will swing from deflation to inflation which bodes well for gold.
- The deviation between mining stocks and gold is huge by historical standards. In due course, this trend will reverse and the gap will return to normal levels. Miners burnt by recent earnings misses have curtailed their growth forecasts and earnings outlooks which will accelerate the pace of rebound as they exceed their lowered expectations.
- As the middle classes of China and India emerge, their demand for gold will rise exponentially. Special occasion gifts are mostly conveyed in gold in these countries. India is the largest importer of gold peaking at nearly 850 tons per year.
- Gold is currently trading above its 200 day moving average. This a good reference point to start layering into a new position based on strong historical resistance.
Conclusion
My price target for gold and silver in 2012 is $2,000 and $50, respectively, and both are significantly below these levels. Buying the ETFs and layering into positions a quarter at a time over a month long period to reduce risk is the best play. These are my ETF picks: Market Vectors Gold Miners ETF (GDX), SPDR Gold Shares (GLD), iShares Silver Trust (SLV), ishares Gold Trust (IAU). As far as a specific mining stock, my number one pick is Barrick Gold Corporation (ABX).
The ETF advantage over mining stocks is they are not affected by bad management, bad expectations, company overhead costs or mining issues. The advantage of the ETFs over owning physical gold is it is easy to get in and out of and tracks the price of gold closely. Once you buy coins, smelt or bullion you will find when you go to sell it, most purchasers will only pay an amount discounted 5% to 10% below the spot price. I believe a well balanced and diversified portfolio should have 5% to 10% exposure to the precious metals asset class and this is an ideal time to start a position.
Please use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, SLV over the next 72 hours.
