By Louis Golino for CoinWeek….
On August 22, the Federal Reserve released the minutes of its last meeting. The minutes revealed that a majority of members of the Federal Open Market Committee (FOMC) believe further monetary easing is warranted soon unless the economy improves substantially.
This suggests that the Fed is likely to launch some version of QE3 during its next meeting, which will take place on September 12-13. A minority of Fed members dissented with this view.
Prior to that development, most analysts thought it was much more likely that Fed easing would take place after the election.
Gold prices increased today by another $17 to $1670, which is a four-month high.
At the same time the European Central Bank (ECB) and European political leaders are believed to be moving towards launching a large bond buying program to provide monetary stimulus to struggling European economies.
Unlike in 2008, when the world’s major central banks launched a coordinated effort at monetary stimulus, this time the Fed and ECB are expected to launch actions that are complimentary but not specifically coordinated.
What do these developments mean for precious metal investors?
In essence it means that gold, silver, and other precious metals are likely to continue their recent bull runs in the weeks leading up to mid-September, and prices could really spike after the Fed and ECB act.
The extent to which the expected QE programs will stimulate higher metal prices will depend on the size and type of action central banks take. There are more options available than many people realize. If, for example, the Fed stops paying interest on bank reserves, that action would likely have greater effects on money market funds than on commodities and equities.
But if there is a large and more significant package, especially one involving major bond purchases, I would expect a much greater impact. Silver should be well over $30, and gold may reach $1700 or more if a larger than expected easing program is announced on September 13.
I agree with other metal analysts that silver may present the best opportunities now, even after increasing 10% in the past several weeks. It remains significantly underpriced since collapsing last year after touching the $50 mark in April 2011.
In the case of silver tighter supplies are playing a key role in pushing prices higher. In fact, veteran metals analyst and investor, Stephen Leeb, told King World News recently that he expects a major supply crunch, and that it will become impossible to acquire large amounts of silver soon.
Unlike gold, whose supply remains constant, especially since the majority of known gold deposits have already been mined, silver supplies shrink more each year. That is because of all the silver that is increasingly used for industrial, medical, scientific, and other applications. In addition, silver has become a much more popular investment vehicle in recent years, as its price has soared.
Platinum prices have also been increasing recently, though they are likely to remain under pressure because there is less need for platinum in a slowly growing economy, and palladium is increasingly being used as a cheaper alternative, especially in terms of catalytic converters and other uses in automobiles.
Investors who bought a long time ago when prices were much cheaper, and who need some capital, should have some good opportunities to cash in some profits in the coming weeks and months, if they need the funds.
Precious metals traditionally do well when the summer ends and the fall begins. The fall and winter are typically when metals do well, though 2011 was a major exception since gold hit its nominal high to date in August 2011.
As far as gold is concerned, many buyers have become skittish in recent months because the metal’s performance has been weak this year until the past couple weeks. But in the aftermath of some dramatic comments from ECB chief Mario Draghi that he would do “whatever it takes” to defend the euro, investors have become much more bullish.
Demand has definitely been down in the past year as far as more average investors are concerned. But high net worth people and central banks, especially in Russia and in the emerging markets have been stockpiling the yellow metal in anticipation of higher metal prices and to diversify their assets.
Large institutional and individual investors are expected to continue to buy gold, which will support higher prices.
Looking ahead, beyond the September Fed meeting and likely continuation of the recent run-up in metal prices, it is political decisions in Europe and the U.S., even more than macroeconomic conditions, or supply and demand factors, that will shape the environment for metals.
The more investors believe that leaders in these countries are going to shirk their responsibilities and allow their economies and currencies to deteriorate, the more likely it is that we will see not just higher prices, but more new highs in the coming months and years.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.
I’ve been having thoughts along the same lines, though you put them much more eloquently than I ever could. I think two other factors may also be contributing to this surge as well.
The first is that war talk between Israel and Iran is heating up. The price of oil has been exploding and may end up dragging gold and silver along on its “coat tails.” Commodities have a tendency to rise and fall in a group. This war talk is real and should not be discounted. Israel is unlikely to permit Iran to acquire working nuclear weapons.
The second is the mining strikes in South Africa. South Africa is where about 80% of the world’s platinum comes from, and the strikes are centered on the platinum mines. As some may have heard, the strike got out of control and the police killed 44 strikers at one mine. The strikes have also spread to other platinum mines in the country and there is concern among investors that this situation may continue to widen. Such a supply disruption in the flow of precious metals would have major consequences.
I’m also pro-platinum. I think that platinum can serve as a decent alternative investment to gold in spite of the weakening of the auto industry. I’m less bullish on palladium because I don’t see a whole lot of interest in it from the usual “metal bulls” crowd.
Captain, Thanks for taking the time to add your analysis and comments. I agree that the two factors you discuss are important.
This is a great article! My dad collects precious metal coins, he knows a lot about them. This article provided a lot of useful information thanks for sharing!