Adrian Ash: Summer Fun For Precious Metals Investors

July 31, 2013

The long term needn't look quite so far off for bullion buyers right now.

 

[This article previously appeared on BullionVault and is republished here with permission.]

 

Put aside the rise in U.S. interest rates, GDP and Fed tapering talk. Just glance at the rest of this summer's headlines, and you'd think it offered a bull market for 'hard money' gold and silver.

  • Japan is doubling its monetary base inside two years, while the People's Bank of China has taken to one-day injections of almost $3 billion for the financial system, boosting shares after a scary jump in bank interest rates.
  • Wage talks in South Africa's gold mining industry stalled Monday, with management offering 5 percent, where the unions want a raise of 60-100 percent.
  • Giant banks who swerved around the financial crisis five years ago are now risking a crash in summer 2013. Barclays Bank—"widely regarded as one of the UK's strongest" according to the BBC—is nearly £13 billion short of capital requirements (almost $20 billion). Deutsche Bank paid €630 million ($830 million) in April-to-June alone to settle lawsuits from customers mis-sold rubbish U.S. mortgage investments.

 

Yet here we are, back down below April's crash low of $1,322 in gold and well under $20 for silver. Yes, that's above June's three-year lows. Yes, the rebound has been strong so far. But so it should be after prices fell at their fastest pace in three decades. Other big banks are in the meantime making great money trading the rise in longer-term U.S. interest rates.

Those rates have risen because the U.S. Fed says it's likely to start trimming its money-printing QE program soon. And those cuts only look more likely after the U.S. Treasury said Monday that its deficit—the gap between what Washington spends and receives—has shrunk 40 percent so far this fiscal year, cutting the amount of new debt it needs to sell to the bond market.

As the trading desks thin out for the summer, however, some big-name investors with longer time horizons are buying this drop in bullion. Michael Cuggino, president of the $12 billion Permanent Portfolio Family of Funds, thinks gold will rise long term on rising inflation.

"What you're seeing," reckons Mark Mobius, emerging markets specialist at Franklin Templeton, which now runs $813 billion for investors, "is a dissonance between real demand and derivatives. So from a longer-term perspective we believe gold prices will trend upwards."

On that point, Swiss bank UBS—a London market aker and major world dealer in bullion—calls China's physical demand "strong" and says it "holds the promise of a sturdy price floor" as banks in the world's second-largest economy widen access to gold bullion through new savings accounts. And on the U.S. government's shrinking deficit, note that:

  • It's still forecast at more than $1 trillion for 2013 as a whole, the fourth largest ever;
  • The relief comes from a one-off payment of $66 billion from the state-guaranteed mortgage lenders Fannie and Freddie, nationalized during the 2008 crisis;
  • There's still the annual stupidity of the "debt ceiling" to get through, perhaps with the real fun and games pushed back to November but risking the same kind of panic thathelped gold hit $1920 per ounce in summer 2011

 

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