A Buying Opportunity in Precious Metals
The comments below are an edited and abridged synopsis of an article by Claudio Grass
Gold and silver seem to have entered a period of consolidation. Many speculators and investors have sold their positions fearing a correction. Mainstream market commentators fuel these fears, with proclaiming the end for gold and silver.
Yet all the reasons that caused the metals to rise in recent months are not only still intact, they have grown, spread and find even more solid footing every time new data comes out of the US and the Eurozone. Recession fears hit an all-time high in September as 25% of those asked expect a recession in the next 12 months. More worrying were the results of a survey released last month: 61% of investors with a household income of $225,000 or more say they would give up growth opportunity for downside protection. Among those who have an annual household income of $500,000 or more, 76% say they would make this trade-off.
On the economic front, bad news continues to pile up: the trade war and numerous systemic vulnerabilities; in September, US manufacturing fell to a 10-year low; growth in the services sector declined to the lowest point in 3 years; German industrial orders fell by 0.6%; its economy shrank by 0.1% in the 2nd quarter. This weakness is expected to continue, and another contraction would put the country in recession territory. China’s industrial output slowed markedly.
In addition to mounting recession fears, central bankers are returning to easing polices, which is bullish for gold and silver. The Fed has continued on the cheap credit path, hinting at further cuts, while the markets are taking them for granted. ECB President Draghi unveiled an aggressive easing package in an attempt to stave off a Eurozone recession. The ECB will be buying $22 billion of debt every month, starting in November, for “as long as necessary.” It also changed its guidance on interest rates. It is safe to assume that negative interest rates are the new normal, severely increasing the risks for the economy.
The interest rate environment, the widespread economic weakness and the intense volatility in equity markets all point to a precious metals rally. The long-term picture is exceptionally positive for gold and silver, which have already shown strength and confirmed their value as safe havens.
Allowing irrational fear or unfounded hopes to dictate investment strategy now would be a mistake. A correction is a normal, healthy part of a bull market. It replaces weak hands with strong hands. There will be moment when investors finally understand that they can find the strongest downside protection, at zero interest, with a tremendous upside potential by buying gold and silver. Unlike the other options, physical precious metals carry no default and no counterparty risk. That’s a massive advantage over leveraged debt securities that can be printed out of thin air.