Gold and Silver: Are They Good Investment?
By Saghir Aslam
Irvine, CA

 

Gold recovered the $1,300 a troy ounce level as investors digested last week’s dovish signals from the US Federal Reserved.

But it failed to rally further as it met with continued liquidation of exchange traded funds.

The yellow metal rose above the technical resistance level of $1,300 on comments the previous week by Fed Chairman that tapering of quantitative easing would not begin without firm signs of economic improvement.

Physical demand provided some support but many investors remained wary of pushing the gold price higher and the previous metal was trading higher.

Analysis said the yellow metal was also held back by continuing liquidations of ETFs.

“Aside from the modest inflow of half a tone the first daily inflow since mid June, holdings have continued to trickle lower”.

Chinese demand for gold jewellery and coins remained firm providing underlying support.

Data from China this week pointed to record volumes of gold and silver jewellery sales in the first half of the year.

Physical demand provided support but many investors remained wary of pushing gold higher.

Meanwhile, the World Gold Council, the lobby group for the gold industry, said China was expected to become the leading buyer of gold this year, ahead of India for the first time. China is expected to purchase 950 to 1,000 tonnes while India is expected to buy 850 tonnes.

Gold’s sharp fall last year continued to claim victims, with Goldcorp, the biggest gold miner, this week announcing a $2bn write down on its Mexican projects Global mining sector write downs could exceed $20bn over the current reporting period, according to analysis, and several companies, including Barrick Gold, have warned investors to expect multibillion dollar impairment.

A report from Goldman Sachs failed to provide much comfort for miners hoping for a rebound in the gold price.

The Wall Street bank said it expected the previous metal to remain range bound, trading at about $1,300 a troy ounce for some time.

Goldman maintained its average price forecast at $1,413 a troy ounce said price would continue to fall, deckling to $1,050 by the year –end 2014.

An improving US economy and “a less accommodative monetary policy stance” would push gold lower. It said.

 

Haven asset isn’t gold, it ‘s green

Gold bugs are exultant. When the Federal Reserve Chairman, said that the US central bank might start winding down its bond-buying programme later this year, the yellow metal went into a tailspin. It has perked up again hitting a one-month high.

But hang on a minute isn’t gold supposed to be a hedge? It goes up, or at least holds firm, when everything else takes a tumble? Its recent price action suggests it’s just a speculative commodity like any other. Just like the S&P 500 index, which has hit new all-time highs?

You could argue that gold’s finest hour will come only when there‘s a real crisis. When fairy tale monetary policy ends, it will unleash a firestorm of inflation that shakes the world’s monetary system to its core. That will be the time to own gold – and everyone will want it.

May be. But in the meantime, the haven asset par excellenceseems to be the very antithesis of gold. It’s the paper money standing on a stack of debt and myriad unfunded spending pledges, the one backed by a central bank whose balance sheet has ballooned since the financial crisis began. It’s the dollar.

Through the Lehman collapse the Japanese tsunami various iterations of the euro zone crisis and the recent mini-rout in emerging markets, the dollar index (measuring the US currency’s value against a basket of other currencies) has either declined slightly, or strengthened. When the world looks a dangerous place, the better the devil you know – and know that you can sell.

The dollar isn’t the world’s only heaven currency. The Swiss franc fulfils a similar function as, until recently, did the yen. But the Japanese currency has weakened as a result of the new prime minister’s reflation policies, while the Swiss central bank has said it will step in to stop the franc becoming too strong.

It seems only a matter of time before more unconventional monetary policy is launched in the UK and Europe. That leaves the greenback as the world’s reserve currency.

America’s co-called “exorbitant privilege” isn’t the only reason to believe in the dollar, though. The US economy is further along the path to recovery than our own, because it has sorted out its banks, allowed its property market to correct, and discovered cheap shale gas, which is boosting domestic manufacturing.

A recovering US economy will one day lead to higher US interest rates, and higher rates tend to mean stronger currencies. Rates aren’t going to rise anytime soon, but the direction of the next move is pretty clear – and that’s before you allow for more policy to cheapen sterling.

Making money from a stronger dollar / weaker pound is not as easy as it appears, though I’d be very wary of all those outline services that allow you to trade foreign exchange and use leverage to turn small movements into big losses).

Investing in US shares or bonds – or funds that own them – is an easier way to profit. But other things may cancel out gains made as a result of the rising dollar. As markets factors in future rate rises, bond prices are likely to decline. There are concerns that US corporate profitability cannot raise much further, which might mean shares are overvalued. US market have hit new highs a week after week all major market. All indexes such as DOW - NASD or S and P. 2013 will go in the history as shining star. All market breaking 2013 even matching 2013 may be impossible. But there are also companies listed here in the UK that use the dollar as an accounting currency, including the declaration of dividends which are then more generous in sterling terms.

It’s probably not a good idea to invest in a company on the basis that exchange rate movements might give your dividends a boost, but the good news is that there is so many of these companies – over 40 per cent of the FTSE 100 by market value, including groups such as Shell, HSBC and Glaxo Smithklin – that you own of them already.

It will be very difficult to break even match the 2013 performance in any of the three major indexes.

 

 

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Editor: Akhtar M. Faruqui
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