The gold and silver market has been affected badly when the United States Federal Reserve System announced an end to the monetary expansion known as quantitative easing.
Gold and silver is now at the most bearish mode in the three and half years after prices fell to the lowest level since year 2010.
During my discussion with Benny Lee of Jupiter Securities, who is our Chief
Technical Strategist on the very morning, he was looking at gold hitting $1,180/oz, while silver took a plunge at $16/oz. While gold and silver prices are hitting a 3 year record low, there are 3 major points that I would like to emphasise:
1) EXPLOSIVE DEMAND FOR PHYSICAL GOLD & SILVER
The demand for coin and jewelry surged since gold and silver hit a bear market in April. It was quickly viewed as an excellent opportunity for average investors and bargain hunters who have been waiting for this moment to snap on gold and silver at a much lower price. Soon, the all-time high level of buying caused a global shortage of gold and silver coin even until today.
Dealers across Asia including Singapore, Malaysia and SilverMa- laysia found themselves competing among each other to secure new supplies of stocks as even the mints have difficulties meeting the produc- tion volume of such scale. As a result, it is not uncommon for dealers to extend their delivery lead time to a much longer time frame, some up to 3 months.
China, among the Asian countries was reportedly having the strongest market demand for physical gold.
The Chinese households came under the spotlight with their generous purchase of the gold products amid a global fall of the gold price.
This is what 10,000 people queuing to buy gold in China looks like.
2) GOLD MINES SUFFERING
At the time of writing of this article, (21st June 2013), gold prices are hovering at $1,270/oz while silver is $19/oz. However, the average mining cost for unrefined gold is $1,250/oz and the average mining cost for unrefined silver is $22/oz. This means that in fact, the current price of silver is alarmingly below cost.
In August last year, Nick Holland, the head of South African mine Gold Fields Ltd was warning about the gold industry getting ‘killed’ should gold prices remains at around the $1,600 level. This is because, as Mr. Holland explains, mines would shut as the rising costs of getting gold out of the ground and labor shortages yet the downward trend, if not, bearish trend of gold and silver prices squeeze their margin.
The following announcements were released in the past weeks:
i) Newmont Mining Corp, one of the biggest gold suppliers on the planet, cut 34 jobs in Western Australia.
ii) “Gold output in Ghana, Africa’s second-largest producer, fell 3% in the first quarter as prices tumbled and some unprofitable mines suspended production”, said the Chief Executive Officer of the Government of Ghana Minerals Commission, Mr. Ben Aryee.
iii) The Minera Frisco company, owned by Mexican tycoon Carlos Slim Helu, reported that its El Coronel mine suspended production of gold and silver as a result of being shuttered by workers during a conflict between two rival unions.
Going at this rate and pattern, the current price is unsustainable for both gold and silver as mining companies have difficulties in coping with the operational costs, let alone making a decent profit. The longer the gold and silver trades down at these suppressed level, the higher the number of mines are going to be moth-balled.
After all, what good is gold selling at $1,180 and silver selling at $16/oz if we can’t get any physical gold & silver?
3) US DOLLAR IS STRENGTHENING. YES! BUT…
It may appear that the US Dollar is pretty strong right now, but then again, on what is it even measured to? Is it in comparison to the Euro?
Yen? Otherwise the USD is only stronger now because of the official- policy-driven weakening of the Euro and the Yen!
If the US Dollar were indeed getting stronger due to fundamental reasons, why would China and other central banks around the world continue to dump US Treasury Bills in exchange for more gold purchases?
The Federal Reserve report paints a rosy picture and suggests that things are going so well that they may be able to put an end Quantitative Easing. This is a very successful distraction because in actual, there will be no end to Quantitative Easing so long as the fundamentals are weak.
Richard Duncan, author of the New Depression in one of his articles, underlined that in order for an economy to grow, one or more of the following must happen:
i) Workforce must expand ii) Wages must increase iii) Credit must grow
This is because the size of every economy is determined by the size of the population and by how much the people spend. Duncan also noted that the problem with the US economy is that none of these elements has increased enough to
iii) The rate of economic growth
generate a satisfactory growth rate. Worse still, there is little reason to believe this is going to change within the foreseeable future!
PUSHING A BEACH BALL UNDERWATER
If you have ever tried pushing a beach ball underwater, you will feel that the further you push it down- wards, it higher it gets bounced back up. It is tough to hold a big beach ball underwater. This principle applies in the current gold and silver market as well.
I believe that the beach ball analogy goes to suggest that the current price suppression is only a temporary correction, while my bullish outlook for gold and silver remains for the long run.
However, NONE of this has been reflected in the ‘paper’ price. When reality does emerge from its slumber in the ‘paper’ gold price, we expect the reaction to be sharp and sudden to reflect this huge physical gold and silver demand.
Clearly, the desire to own gold and silver as an investment, insurance and even as jewelries has made itself felt in the physical precious metal market. The precious metals indeed operate on the basic economic fundamentals of demand versus supply.
My view is simple. With the strong demand and constrained supply, this dynamic ultimately drives the long-term price of gold and silver, because you can never hold this big beach ball underwater forever. The longer the price is suppressed, the higher it will bounce when the ‘force’ is released.