The Outlook For Precious Metals Prices

by: Avery Goodman

The Times of india is reporting that the Indian government has decided to remove the controversial 0.3% to 1% excise taxes that were recently imposed upon gold, silver and platinum. Cash purchases of jewelry valued at less than 5 lakhs of rupees (5 lakhs = 500,000 = $9,458.05) will no longer be subject to the new tax. Purchases of bullion, defined as coins or bars that weigh more than 10 grams, will not be taxed unless the purchase exceeds a value of $3,782.65.

According to the Wall Street Journal, the import tax increase from 2% to 4% will remain in place. Given the Indian mentality toward precious metals purchases, that might be a positive. All of the metal already in India has been given a price boost, making current holdings more valuable. Indians who purchased before the tax are going to feel vindicated in their decision. They will be able to calculate a profit and confirm that buying was an auspicious thing to do. The expectation of future profits will encourage additional purchases even at a higher price.

In effect, the change removes the tax completely. Almost all gold, silver and platinum sold in India is sold in the form of jewelry. That which is not sold in that form can easily be converted into a decorative piece that qualifies for jewelry tax treatment. Pieces of jewelry, as a whole, may weigh more than 10 grams, but are invariably composed of individual metal components that weigh less than that. Few Indian jewelry transactions ever exceed $9,458.05.

This action will support long term prices. But what the decision may not do is alter the course of the short-term. Prices are determined, in the short term, not by true supply and demand in the real market. Instead, capricious decisions by banks and hedge funds trading at the paper based COMEX and LBMA markets set the so-called "spot" price. A strong argument can also be made that the US Federal Reserve and the Bank of England are heavily involved in influencing precious metals trading decisions by such banks. Astoundingly, the spot price is still used by otherwise intelligent gold market participants, who should know better, as the basis for price negotiations.

We are in the midst of a Euro-zone crisis. As I predicted, victory by the Socialist Hollande of France and anti-bailout forces in Greece has brought further unrest to European financial markets. The potential collapse of the Greek bailout mechanism, and the spector of Socialist driven irresponsible spending in France, supports long term prices more profoundly than anything happening in India.

A number of European banks will be liquidating paper gold, silver and platinum to raise cash. In times of forced asset liquidation, price manipulators, government sponsored or not, thrive. In the short run, and it might only last a very short time, that will may have an adverse effect on the "spot" price. It is still unclear how precious metals are going to be affected by the problems in Europe. Remember, after the collapse of Lehman Brothers, the metals also collapsed. Yet, in the broad collapse of equity markets between January and March of 2009, precious metals soared.

How should one invest? It is comforting to hide some physical gold, silver and platinum coins. But premiums on the purchase of such coins are much higher in western nations than in the east. If the western world does fall apart, physical coins and jewelry will prove to be the wisest choice. But if we are facing mostly monetary debasement and financial repression, which is more likely, and not the end of western civilization, a number of bullion ETFs facilitate investment in precious metals.

Choices include SPDR Gold Trust (NYSEARCA:GLD), Sprott Physical Gold Trust (NYSEARCA:PHYS), iShares Gold Trust (NYSEARCA:IAU), iShares Silver Trust (NYSEARCA:SLV), ETFS Silver Trust (NYSEARCA:SIVR), Sprott Physical Silver Trust (NYSEARCA:PSLV), ETFS Physical Platinum Shares (NYSEARCA:PPLT), and ETFS Physical Palladium Shares (NYSEARCA:PALL). Do your homework and read the prospectuses carefully. GLD and SLV, in particular, are heavily criticized because of the questionable wording of their prospectuses and because their promoters are heavily involved in short selling at COMEX and LBMA.

Another way to enter the precious metals market is to buy mining company stocks. Stock plays include Newmont Mining (NYSE:NEM), Barrick Gold (NYSE:ABX), Hecla Mining (NYSE:HL), Prosperity Goldfields (PPG.V), Yamana Gold (NYSE:AUY), and many others. There is a lot of risk in any equity investment. Platinum miners in South Africa, for example, face constant threats of nationalization and indigenization. Mining shafts collapse and worker safety inspections can close down operations. Equities cannot be considered solely based upon the increase in precious metals prices. Political, management error and executive overcompensation risk is very real.

Disclosure: I am long SIVR.