The fundamentals for owning gold have not been stronger. Paper currencies are becoming less valuable every day. Especially now as we see the major currencies of the world (the euro, the dollar and now the yen) being debased by their governments. The potential for a crisis of confidence in the dollar is not going away; in fact it is growing larger by the day.
The U.S., Europe and now Japan are inflating their currencies (creating more reserves/printing money) at record levels. One would think that as these (fiat) currencies are on a continual debasing trend that gold and other precious metals would inflate compared to these devaluing currencies. Yet the opposite is happening (at least in the "electronic" world of gold).
Gold was down almost 6.5% last week, and is down 22% since its peak in 2011. Silver, as measured by iShares Silver Trust ETF (NYSEARCA:SLV) is down 26% in the last 12 months, but is off of its 2011 highs by 47%. Mid last week Goldman Sachs announced it was shorting gold, and by the end of the week we saw the biggest weekly drop in gold prices in over 16 months. And as of Monday, April 15th, gold closed down from Friday's close $132.50 or almost 9%, at $1,346 per oz. Silver was off $3.12 per oz. to close at $22.83, down 12% for the day.
But something doesn't sit right with the recent action in the paper-traded gold market. You see, while "paper" gold, futures and shares held in exchanged-traded funds (ETFs) like ETF SPDR Gold Shares (NYSEARCA:GLD), have been selling off, the physical metals markets have been in high demand and on fire! In fact, the U.S. Mint is reporting record demand for gold and silver coins and bullion. Also, recent reports, like those from 41-year market veteran Bill Haynes who warned in the King World News Blog that there are 50 buyers of bullion for every seller, and recent demand is so high for physical bullion that it could cause major shortages of retail bullion products.
Then you have troubled smaller European countries like Cyprus who may be forced to sell their gold supplies to fund their bailouts; but it appears the markets won't have any trouble soaking up any supply here as well. The World Gold Council reports that Central Banks buying of gold bullion has been at its highest level since 1964; and that China is buying all the gold it can. Even Russia is reported in the last quarter of 2012 to have surpassed China as the number 1 importer of gold. (Source: The World Gold Council). Why are China, Russia and many other countries increasing their reserves with gold? Perhaps it is because these countries are not ignorant of what has happened throughout the centuries to all fiat currencies that have been over-inflated? It appears these countries are rushing to protect their currencies with gold and at much lower prices of late.
Why is it then, that with demand for physical gold and silver at record levels do we see the price of gold and silver sell off so drastically? One word comes to mind: MANIPULATION. Dictionary.com defines manipulation as: to negotiate, control, or influence (something or someone) cleverly, skillfully, or deviously. When you look at the circumstantial evidence pointed out by Dr. Paul Craig Roberts, who served as the Assistant Secretary of the Treasury for Economic Policy appointed by President Reagan, it is hard to not believe that there is manipulation going on within the gold and silver markets. He goes on to point out that how can anyone else sell (naked) short 500 tons of "paper" gold -- to the tune of $24,800,000,000? Is it also possible that those who have record shorts on gold and silver will benefit from the massive drop in prices, in order to buy back to cover their bets?
This sell-off in gold for whatever reason or name you want to call it, won't last forever; it's a short-term phenomenon. At some point the sellers will be buying to cover their short positions. I suggest you take this opportunity to buy physical gold and silver at much lower prices in the coming days, and hold for the long-term. Physical gold and silver is not for trading. It's a store of wealth. As part of a diversified investment strategy, I recommend at minimum 10% of your investments be allocated to gold, silver and commodities. The gold and silver miners will be even a better buying opportunity as they have underperformed gold and silver prices by greater price margins in last couple of years. Many of the miners as measured by the Market Vectors Gold Miners ETF (NYSEARCA:GDX) are off 45% or more over the last 12 months. All this negative sentiment is creating great opportunities in the deeply oversold gold and silver equities simply from a value/dividend standpoint. They've been on sale over the last year and are now being marked down again.
Its investments like these (gold, silver and other commodities) that will stand a better chance to offset the hyper-inflation that is looming and help protect future purchasing power as paper currencies are devalued.
I believe the world's demand for a sound, reserve currency will favor gold, and with the recent events, this reality just got one big step closer.
Remain diligent in growing and protecting your wealth.
Disclosure: I am long GLD, SLV, GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My firm Trinity Capital Asset Advisors, LLC (RIA) manages positions in GLD, SLV, GDX and many other mining companies within Trinity Gold Fund, L.P. This article is not meant to be specific advise. Womack Investment Advisers, Inc. (RIA) also manages gold, silver, GDX and precious metals equities within individual accounts. Investments in gold and other commodities can be volatile. Loss of capital is possible. Seek professional investment advice before implementing investment strategies discussed here.