Gold Investment

I was quietly hoping to see gold and silver dip quite a bit this week on reports of Bernanke raising the federal funds rate. In the past, raising the rate usually came along with a strong dollar, but now it seems investors are wising up to the fact that the rate has nothing to do with inflation — printing more money is the key to inflation. When we do see real deflation (reducing the money supply), commodities such as gold and silver tend to fall versus the currency. This is to be expected as less money is available to buy things, so sellers of metals tend to lower prices in an attempt to get people to buy.

Looking at various gold news networks today shows headlines of “Gold dropped” but the charts show the opposite. Gold at the time of this posting is up a few pennies versus the dollar — a surprise to me as I had expected the market to dump gold for dollars. Yet I am less surprised than I would have been 2 years ago as more people I know in real life are starting to understand that paper money is not stable and neither are stocks. It is quite possible we’re seeing a stand-off between investors and physical users.

In such a stand-off you’d see the investors waiting for the price to budge in a given direction — if it was to go up against the dollar, the investors would sit tight and wait for a selling point. If it was to go down against the dollar you’d see profit taking that tends to drop the price more. From the opposite end you have the physical users (jewelers, goldbugs and industrial applications) waiting on the line as well. They need gold cheaper so they can buy more, and they’re likely waiting to see if gold drops a bit so they can buy it up. If it goes up, they wait for the next dip when investors are buying off in unison.

Why are gold and silver moving sideways? Either we’re seeing a true stand-off, or we’re seeing that odd situation where investors are selling off and physical users are buying it up in an equilibrium. I’m a little bothered that it hasn’t dropped, I’ve been sitting on a few federal reserve notes waiting in hope for a significant drop. I’m not an investor (I don’t buy metal for profit but for safety), but I still like to buy during a dip plateau. Call it old indoctrination from my days of stock trading, something I hope I can dispel once and for all as gold starts to push to more realistic numbers — hopefully much higher than we’re seeing today.

I would not be surprised by either a US$500 gold price/US$8 silver price, nor by a US$650 gold price/US$12 silver price. Both make sense to me from a market perspective, and the only ones who are in the know are the mining companies (who can manipulate the available new product), the central banks (who can liquidate their holdings to drop the price) and the physical users (who can buy a massive amount at a low point which tends to push the price up in their favor down the line).

Discuss this article here.