Generally, the news is a massive sea of information that does more to confuse than enlighten - unless one knows what to look for. And in our current global economy, whose most defining characteristic is a global sovereign debt crisis that ensures a new international monetary agreement will be created as part of the solution, understanding gold (and to a lesser degree, silver) is vital. A global sovereign debt crisis in a world in which debt and currency are inextricably linked means the stage is set for capital to run into precious metals (and to a lesser extent, fine art) as a store of value and as a bartering mechanism. Whichever country/geographic region buys the most gold and encourages their citizens to do the same will find themselves positioned to be a major financial hub with greater demand for consumption.
With that in mind, there are two news stories worth focusing on:
1. Shanghai Futures Exchange Commences Silver Trading. Those who believe there is significant naked shorting of silver that is preventing its price from rising on the COMEX may be particularly interested in hearing that Shanghai will start to trade its own futures silver contracts starting May 10. It should also be noted that these contracts will be denominated in yuan. All of this illustrates that the themes that have rung true for the past 10 years continue to do so: Capital is flowing from West to East, and the result of this will be higher precious metals prices, an internationalized renminbi (perhaps pegged to gold), and a greater role for consumption in Eastern economies. If the stories of naked shorting in silver are true, a migration of the silver market from the West to the East may help put an end to such a situation as well - if Shanghai is interested in offering a better regulatory environment than can be found on exchanges in the West.
2. India Retracts Gold Tax. India's decision to impose a gold tax, the strike enacted by jewelry dealers, and the decision to back off and revoke the tax are very revealing in our current times. They suggest two critical points:
- Countries that choose to nationalize or excessively tax their industries will see their industries decline or go away.
- Countries that create a favorable climate for gold and silver are creating a favorable climate for capital to enter their domain - and thus are setting the stage for all types of foreign direct investment.
Because of these two points, I think the threat of gold confiscation is rather remote - doubly so for those who have secured their gold in Asian countries. Indeed, for the truly international speculator, I believe familiarizing one's self with Asian markets will become increasingly important. Precious metals aren't going from West to East by themselves. When the gold bull market is done, the whole financial epicenter will have relocated from London, New York and Chicago to Shanghai, Hong Kong and Singapore.
Remember the Smart Money
Bull markets are always driven by some type of "smart money" - the term for a group of market participants with the muscle and intent to push prices higher. In today's markets, especially in the natural resource sector, the smart money is China - with India often being a notable second. So, if price is falling and the smart money remains committed, that's a simple way of identifying a buying opportunity. And that is clearly the environment we are seeing today, in light of these important news headlines. China and India are continuing with their plans to import gold and make it easy for their citizens to own gold as well, all while price declines. This is a prime example of a buying opportunity.
Of course, as one who believes gold will go much, much higher - I regard $6,000 as a fairly conservative target - I think it has pretty much always been buying season for gold during the past 11 years (provided one has a sufficiently long-term view), and I don't think that will be changing any time soon. With that said, for those who have outsized positions or are more actively trading, I find it unlikely we will sink below $1,520. In fact I think a drop below $1,600 is likely to be quickly met by buyers. Silver remains more volatile and less predictable, but the story there remains the same as well; gold will ultimately drag it along.
I personally accumulate coins and bullion stored in vaults, although the ETFs (PHYS) and (PSLV) are also options - as are (GLD) and (SLV) for those who want the convenience of ETFs and are taking more speculative positions rather than long-term positions meant to be insurance against a systemic monetary breakdown.
Bottom line: If you're not in gold yet, this is a great buying opportunity. If you're in gold, this is still a great buying opportunity, although if you are looking for an especially good deal, placing an order near $1,520 may be to your liking. Three years from now, the price action we saw today and that we've seen over the past few months will be but a distant memory, and those who got shaken out will may have some feelings of regret. Those who paid attention to the right news and saw that the strong hands were buying will be rewarded accordingly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long physical gold and silver as well as silver derivative contracts.