Gold and silver traded softer this week with gold losing some ground from $1,171 to close $1,164 up 5% for October to date and silver opened the week at $15.86 and is trading at $15.81 basically unchanged for the week and up 9% for the month so far. Analysts attribute this week’s price action to some profit taking, a stronger dollar in the face of a rate reduction in China and dovish comments from the European Central Bank’s Chairman, Mario Draghi that the ECB is considering more QE and negative interest rates. Gold soared in Euro on his comments.
Regardless of this week’s price action, the trend for gold and silver appears to have turned to near term bullish with excellent returns month to date and strong support for gold at $1,160 and $15.50 for silver. The shortages leading to delayed delivery for all silver investment products continues with increasing premiums among all dealers. This is very bullish for silver prices as we have seen constricted availability of physical silver lead to increasing premiums help drive a a 9% increase in the spot price in less than one month. History has taught us that this price and availability squeeze will manifest in the gold markets as well. Buy gold and silver now, or pay more later.
THE YUAN AS A GLOBAL RESERVE CURRENCY
Indications from the International Monetary Fund (IMF) and China are that the decision to include the Yuan as a reserve currency in the IMF Special Drawing Rights (SDR) will come as early as the November meeting this year.
From Bloomberg, “International Monetary Fund representatives have told China that yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter.
“The most probable outcome is the board will vote to include the renminbi in the SDR basket,” said Meg Lundsager, who served as the U.S. representative on the IMF’s executive board from 2007 to 2014… The U.S. took a step toward backing China’s SDR bid last month… The U.S. now says it will support inclusion of the yuan if it demonstrates it meets the IMF’s technical criteria.”
The inclusion of the Yuan in the SDR is long term bullish for gold as China strengthens its influence in international monetary affairs and gold pricing.
DECEMBER RATE HIKE?
Will we get a rate hike in December? The US manufacturing index for October showed the strongest increase since May, indicating better than expected expansion in the manufacturing sector of the economy. The numbers indicate an annualized GDP growth rate of 2.25%. This is good window dressing for the Fed to justify a rate hike in December after congress increases the US debt ceiling to $19.6 trillion in November, and the Fed prints another $ trillion or so. (The US government has enough cash on hand to operate until November 3rd only.) The Fed must print more money or the US will default. At the same time there is tremendous pressure on the Fed to “normalize” interest rates. A rate hike of 0.25%, while truly inconsequential in the current interest rate environment, will preserve the illusion that the Fed has options in engineering our economy. They do not.
This stealth inflation will be discounted in the markets at some point in the next two years.
ONE FROM THE BILLIONAIRE PLAYBOOK
If you desire to accumulate and preserve financial assets, doesn’t it make sense to follow the billionaires? Warren Buffett, famous for his bland dismissal of precious metals, has over the last ten years accumulated 130 million ounces of silver and an undisclosed number of ounces of gold. He is not alone among his billionaire peers. How did billionaires become billionaires? They bought low and sold high. Buying low almost always means going against the popular opinion of the investment crowd. Billionaires do not chase markets (and they are patient).
So, who is buying gold now?
Stanley Druckenmiller, famous for the Duquesne Capital Fund with average annual returns of 30% from its founding in 1986 to its close in 2010. The Duquesne fund never had a down year. Stanley’s personal net worth is $4.4 billion and he holds 20% of his portfolio in gold.
Ray Dalio founded the investment firm Bridgewater Associates and manages the largest hedge fund in the world. Time lists him as one of the 100 most influential people in the world. Ray’s personal net worth is north of $15 billion and he manages a $154 billion fund. He has allocated 7.5.% of his portfolio to gold.
We have been in a bear market for precious metals for four years and both gold and silver are showing strong support at these price levels. We are at or below the average cost of production for both metals and a shortage of silver has developed. If you bought gold at higher prices, now is the time reduce your cost basis by averaging down and holding.