Buying gold cheaply and selling it expensively requires understanding the U.S. dollar price movements as shown in the USDX index. The USDX almost sets the gold price.
Parts 1 and 2 in this series covered several primary factors driving the price of gold both up and down. Seasonal trends of commodity trading, political decisions, gold bullion or gold coin marketing, plus fundamental supply and demand issues all drive the spot price of gold. Since gold is priced in U.S. dollars, the value of the USD, as shown generally in the USDX or U.S. dollar index, is primary for the recognized value of precious metals and gold specifically.
USDX Influences Gold Prices Inversely
Six currencies including the Euro, Yen, Swiss Franc, British Pound, Canadian Dollar, and the Swedish Krona make up the USDX. Reuters news agency calculates the USDX giving the following weights to each currency according to Forex Ltd U.K.:
- Euro 57.6%
- Yen 13.6%
- Pound 11.9%
- Canadian Dollar 9.1%
- Krona 4.2%
- Swiss Franc 3.6%
The USDX formula is supposed to represent how U.S. trading partners value the dollar. Unfortunately the Chinese Yuan is not included in the formula detracting somewhat from the value of the USDX as an indicator. The U.S. trades over $400 billion of goods and services with China in 2008 representing over 12% of U.S. global trade volume (Source: China-U.S. Trade Issues, Wayne M. Morrison, Congressional Research Service, June 23, 2009).
Proof of the USDX and gold price relationship appears in the accompanying chart below constructed by Zeal Intelligence, LL.C. This chart displays the gold price versus the USDX value from 2001 through 2008. The relationship is strongly inverse, though not perfectly so.
Predicting Gold Prices with the USDX
Importantly, the USDX drives the price of gold rather than the other way around. Gold rising in price follows the USDX dropping in value. The same principle applies when gold falls. The challenge is predicting the value of the USDX.
Trend predicting carries through the same general technical tools from one market to another. Technical analysis of the volume trends, resistance areas, momentum of the price moves and the rate of rises versus falls can strongly move the odds in favor of a profitable USDX trade indicator. Once the trend for the USDX becomes clear, the direction of the gold price follows.
Awareness of the primary 5 factors driving the gold price can provide investors the keys for buying cheap gold and selling expensive gold. Profit follows with the proper timing of the gold coin or gold bullion purchases.
Buy Cheap Gold, Sell Expensive Gold- Timing Gold Prices
Bill Miller, Michael Steinhardt, Warren Buffet, and Jesse Livermore all beat the stock market average returns during their investment careers. Steinhardt produced average compounded returns of over 24% while the S&P500 averaged about 8%. This performance alone decapitates the Efficient Market Theory.
Buying Gold, Selling Gold: Good Timing = Good Profits
Efficient Market Theory came from Prof. Fama at the Univ. of Chicago Booth School of Business in the 60’s. This theory lead to the Wall Street mantra of “an investor can’t beat the market, so invest for the long term.” For Wall Street bankers and stock brokers, the money keeps rolling in. For investors, keeping money in a market- even the gold market- without regard to price cycles can lose money in a portfolio.
Buying gold in the form of gold coins, gold bars, bullion gold, or gold ETF’s requires becoming acquainted with some well known market cycles. Unfortunately, most gold buying occurs when the gold price rises dramatically and makes news. Gold selling by the general public often occurs when the gold price drops. Following the herd when buying and selling gold- or any investment- can lead to dramatic losses.
By following gold market timing principles, an investor could have sold gold investments in 2008 near the peak of $1000. After gold prices dropped to the $800 level, a fast acting technical trader could have bought back in and enjoyed a more than 20% return on investment year over year. That is the essence of buying gold and selling gold for profit.
When to Buy Gold and When to Sell Gold
A number of factors affect the price of gold.
- The rise and fall of the U.S. dollar as reflected in the USDX.
- Seasonal trends in gold coins, gold bars, gold bullion, and gold jewelry buying.
- Political changes including economic summits, reports, potential conflicts.
- Supply and demand fundamentals with mining production and investor purchases.
- Gold coin and gold bullion marketing to investors.
While these 5 factors interplay between each other, they have distinct effects.
Factor number 5 was demonstrated when famous silver analyst Ted Butler’s friend I. Friedman wrote an article recommending purchase of U.S. Silver Eagles. Almost immediately, the U.S. Silver Eagle program experienced record demand for silver coins. Gold coin marketing has had a similar effect. Even the Chinese government has recommended gold coin and silver coin purchases.
Factor 4 generally drives long term price fluctuations though it can quickly change markets if a country or mine shuts down production. Great surges in demand can also cause gold coin prices to rocket higher. Recall the effect Ford Motor had on the palladium market when it sent the metal from $60 to $1100 by stockpiling because it feared a shortage. The same dramatic rise can occur with the tiny gold market.
Factors 1, 2, and 3 push gold prices on a day to day basis more predictably than either 4 or 5. Understanding how the USDX trends, seasonal effects, and political changes move the gold price puts the trading odds in a gold investors favor. Another article will explore these factors in enough detail for a gold investor to apply them in making potentially profitable trades.
Peter Koven May 27, 2010 – 8:30 AM ET | Last Updated: May 27, 2010 9:16 AM ET
Investors cannot seem to get their hands on enough silver. And that trend will continue to drive prices for the coming year.
That is a key conclusion from this year’s edition of the World Silver Survey, which was released Thursday by the Silver Institute and prepared by precious metals consultancy GFMS Ltd.
Silver had a very strong year in 2009, with an average price of US$14.67 an ounce. GFMS reported that it is the second highest yearly average since silver prices peaked in 1980. The price also gained more than 50% over the course of the year.
Silver soared despite the fact that there was a fairly massive surplus in the market last year of 283.7 million ounces, according to the survey.
That surplus mattered little, because investors were there to pick up the slack. The survey reported that implied net silver investment increased by an incomprehensible 184% year-over-year to 136.9 million ounces. Put another way, investors were happy to take up every extra ounce that hit the market.
“We’re going to continue to see a large surplus in the silver market this year,” GFMS executive chairman Philip Klapwijk said in an interview.
“And we believe investors will continue to take that surplus, and take it willingly enough to push up the average [silver] price. We’ll probably see price gains over the balance of this year.”
Like gold, investors are turning to silver as a safe haven investment to protect their portfolios amid the many global economic concerns. It also has industrial uses, and Mr. Klapwijk noted that over the last year, there were numerous times in which the silver price closely tracked the copper price. It then played “catch-up” to gold.
While the outlook for silver looks strong, Mr. Klapwijk warned that anything that undermines investor interest in precious metals would have a major impact on the price. That could include a resolution of Europe’s debt crisis, reduced inflation concerns, or higher real interest rates. None of those things appear to be on the immediate horizon.
Charles Fuchs asked Coach to find out Bob Chapman‘s viewpoint towards silver by the end of 2011. Bob Chapman answered where he believes both silver and gold will be at the end of 2011.
Every expert will give you his or her not so humble opinion on how much gold should you own. You will see figures ranging from as little as 2 percent to as much as 50 percent of your entire portfolio. The main point to consider is why are you buying gold. Here are 4 different scenarios,
a) How much gold to buy if you only want to own it as insurance against weak dollar? I would suggest a figure in 10 to 12 percent range. That should be enough for those investors who believe that eventually things will go back close to where they were just few years ago, but still want to make money if gold goes up, and have a bit of an insurance just in case.
b) How much gold should you own if you firmly believe that U.S. dollar will ultimately loose its reserve currency status and/or we will be in economic turmoil because of global competition, weak consumer spending, future deflation/inflation or what have you? Well then, you should put at least 25 to 40 percent of your liquid assets into gold and probably more. With other 10 to 25 percent, you can also venture in other high-value, portable assets like silver, diamonds, guns or ammunition. I am not making fun or ridiculing anyone, on a contrary dishing out a sound advise.
c) How much gold should be in my portfolio if I want to simply profit? Here I would treat gold just as stocks. If your are playing the market, then whatever you can afford to buy, just buy it, based on charts, technical analysis and of course, geopolitical situation.
d) How much gold to buy if you simply like it or collect certain coins? If you enjoy the heaviness and shine of uncirculated gold coins or want to collect every Chinese Panda since the first issued in 1982 or every Canadian Maple Leaf design, then buy them as long as you can afford without going overboard. One coin a month or two, three on the dips, or whatever.
You should always think of what effect gold will have on your finances. Own as much gold as you want, as long as you have enough cash left. Just as you do not spend every penny on the stock market and do not buy ten million dollar life insurance policy, you do not throw everything in gold only because everyone tells you to.
One thing is for sure, gold will always be worth something. You can always leave it to your heirs or a charity. Also, when deciding how much gold to own, do not listen to gold critics who say that gold performance can not be modeled, there are no proven ways to predict with any certainty how much gold will rise or fall next quarter or year. Did they model any stock market crash or the housing bubble?
You have to plan ahead to stay ahead. Many sliver price predictions are quite daring. Many insiders forecast silver prices literally going through the roof, soaring in relative terms in the end of 2010 and beginning of 2011, just as they did in the 1970s. Of course, you have heard such prediction before, but the facts and fundamentals remain solidly in place for silver as it remains very undervalued on an historical basis, and is undervalued even against gold. Meanwhile gold has been getting plenty of attention from retail investors, thanks to a concerted push by everyone on TV, Talk Radio and Internet. Even Yahoo! Finance now shows gold prices under Market Summary on its front page. Yet silver remains obscure, the preserve of relatively few contrarian investors with the media and financial press barely covering it. That is why the only response bullish silver price predictions elicit is total disbelief expressed by light facial shock with eyes rolling sky high. All it is now when the silver prices are sitting in the intermediate stage of a bull market that will rival or surpass that of the 1970s.
Silver today is worth less than $17.75 per ounce and was at $20.88 per ounce in March 2008. After an 18 month period of correction and consolidation, silver price looks set to challenge that high in the coming months. Our predictions continue to be bullish on gold (see Gold Price Direction – Gold Prices Forecast 2009 – 2010), and we firmly believe that silver will likely outperform gold and quite substantially. In fact our silver prices forecast for 2010 and 2011 is such that silver will exceed its non inflation adjusted high of $48.70 per ounce and its price can reach $55 to $65 range in the coming years.
Why silver is in a bull market and what is the highest price prediction?
In recent years, gold and silver have outperformed equities and real estate. Due to the very bullish fundamentals, this trend is set to continue in the coming months. The forecast for silver prices in 2010 and 2011 is based on:
– the increasing global macroeconomic, currency and geopolitical risks
– silver historic role as money and a store of value
– the ever declining and very small remaining silver deposits
– significant industrial demand
– significant and growing investment demand
Gold, oil, potash, and other major commodities went over their record highs in recent years because of growing demand and short supply, geopolitical risks and concerns regarding the emergence of inflation and stagflation – all pointing to higher silver prices in the long term.
Silver rose from under $1.50 per ounce in 1970 to nearly $50 in 1980, increasing by some 2,400%. Were silver to replicate that, it would have to rise from $4.37 per ounce in 2001 to $110 per ounce. Such seemingly outlandish silver price predictions make many people laugh, but the silver record high in 1980 adjusted for inflation, according to the US government inflation figures, was around $130 per ounce.
Silver prices forecast considers dwindling supplies
According to commodities-research CPM Group, there were close to 2.2 billion ounces of silver in the world. While it may sound huge, the number of ounces stood at 12 billions in 1900. Today, there is less than 1 billion ounces of above ground refined silver. More than 90% of all the silver that has ever been mined, has been consumed by the global photography, technology, medical, defense and electronic industries.
While the birth of digital photography certainly diminished use of silver in the photo industry, based on current and projected supply and demand trends, the amount of above ground refined silver is to shrink to even lower levels in the coming years as demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. However few in the investment world and almost nobody in retail are aware of this important fact.
Why silver price has not gone up? We do not believe in conspiracy theories. The increased demand has been met by silver ounces from inventories and official government stockpiles, which today are getting close to depletion. Those include U.S., China, Russia and India reserves. Now 80% of silver has been mined as a byproduct of other base metals such as copper, nickel, zinc and lead. In the event of a global stagflationary or deflationary slowdown, you can not expect these base metal miners to increase production for the sake of silver as demand for their core product would likely fall, thus further decreasing the supply of mined silver.
There are only a few pure silver mines remaining, all with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price rise. All these facts comprise a powerfully bullish picture which is unique to silver.
Increasing industrial demand is bullish for silver
Silver today is used more than ever in traditional applications such as mirrors, batteries, medical devices and electrical appliances as well as more recent ones like cell phones, flat-screen televisions, laptops and other modern high tech devices. Increasingly, silver antimicrobial and antibacterial qualities are being used in many types of medical applications. There are many ongoing research projects on the use of silver based compounds for therapeutic and antibacterial purposes. Increasing industrial demand and application for silver forecast higher prices due to economic growth in China, India, Vietnam, and Brazil. Their growing middle classes are now demanding the quality of life and standard of living enjoyed by many in the West and thus the demand for silver will likely increase.
An important side note – unlike gold, silver is not recycled because of its much lower value. So silver is in a way like oil – as it is consumed and used, it’s gone forever.
Increasing investment demand
With the recent hiatus in real estate and stock market and with gold being very expensive, predictions of increasing investing demand for silver are coming to fruition. There has been a marked increase in investment demand for silver in recent years. The introduction of ETFs that track the price of silver, a new global liquidity bubble, the significant growth in the global money supply, the proliferation of wealthy people, hedge funds and the exponential growth in derivatives. In 2003, Warren Buffet called the latter financial weapons of mass destruction.
Investors in silver bullion coins and bars are hedging themselves against further deflation and falls in property and equity markets. They are further protecting themselves against rising inflation, possible currency devaluations and still very prevalent geopolitical and macroeconomic risks such as those posed by the humongous global derivatives market.
Silver is very undervalued comparing to gold
Silver has gotten grossly undervalued versus gold with the gold-to-silver per ounce ratio at 62:1 ($1,105 / $17.75), which goes against a long term historical basis with average gold-to-silver ratio of 15:1. It has bee estimated that geologically there are some 15 pieces of silver for every one piece of gold. In 1980, this ratio was 17 ($850 / $50) for a short time while the average in the 20th century has been around 40:1. So if the ratio gets close to 40 at today gold prices, the silver price should be around $27.50 ($1,100 / 40).
So silver price predictions for 2010 and 2011 are based on the facts that this is a unique metal in terms of being both a monetary and an industrial metal. Silver is priced at less than $17/oz today. The average nominal price of silver in 1979 and 1980 was $21.80 per ounce and $16.39 per ounce respectively. In today’s dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60 per ounce and $44 per ounce in 1979 and 1980. Add to this the rising gold prices, geopolitical complications, ever decreasing value of paper money and dwindling supplies, the seemingly insane silver prices forecast does not sound that crazy anymore.
It is widely known that J.P. Morgan (NYSE: JPM) holds a giant short position in silver. Furthermore, some observers are accusing the bank of acting as an agent for the Federal Reserve in the market – every tick higher in the price of silver undermines confidence in the U.S. Dollar. A lower silver price helps keep the relative appeal of the U.S. dollar and other fiat currencies high.
By selling massive amounts of paper silver in the futures market, JPM has been able to suppress the price of the precious metal. It is believed that these short positions are naked (i.e. they are not backed by any physical silver). In fact, reports indicate that JPM is short more paper silver than physically exists in the world.
An article by Max Keiser which appeared in the Guardian on December 2, 2010 claims that the size of the short position is 3.3 billion ounces of silver.
In recent days, rumors have been swirling on the internet that JPM’s massive short position is about to blow up in their face in the form of an almighty short squeeze and potential COMEX default as large traders demand physical delivery of silver that COMEX does not have in their vaults.
J.P. Morgan is currently under investigation by the CFTC for allegedly manipulating the price of silver. The investigation into the bank can be traced back to November 2009 when London metals trader and whistleblower Andrew Maguire contacted the CFTC to report market manipulation prior to it actually occurring.
Maguire had been told by J.P. Morgan commodity traders that the bank was manipulating the price of silver and subsequently reported this to the CFTC. He also gave the CFTC two days’ notice about an impending silver manipulation that would take place around the Nonfarm payrolls number on February 5, 2010.
The manipulation played out EXACTLY as Maguire had predicted. You can find the emails between Maguire and Ramirez here. Shortly after this information came to light, the whistleblower was involved in a bizarre hit and run accident in London which caused him and his wife to be hospitalized.
The price of silver has absolutely exploded in recent months as these reports have surfaced and it is clear that blood is in the water. The predator (J.P. Morgan) has now become the prey. Every tick higher in the price of silver brings more pressure on the bank to cover their short position. This in turn puts more upward pressure on the silver price.
It is not clear if JPM has been actively trying to reduce their exposure or not – but something is definitely going on. The price of the widely traded iShares Silver Trust ETF (NYSE: SLV), which tracks the spot price of the precious metal, has exploded in recent months.
On August 23rd, the SLV closed at $17.61. The ETF closed on Friday at $28.60 and the price of silver is now trading at 30 year highs. Over the last three months, SLV is up over 47%.
In the overnight futures session on Sunday night, silver is currently trading 2.27% higher at $29.935. SOMETHING IS GOING ON. Making matters worse for JPM is the fact that a viral campaign (Crash JP Morgue Video) to buy physical silver and “crash” the bank is now spreading like wildfire on the internet. Just Google Crash J.P. Morgan Buy Silver.
Furthermore, it appears that significant physical silver shortages are developing in the marketplace and the metal is being sold well over spot where it is available. Shortly after popular financial blog ZeroHedge posted the “Crash The JP Morgue” video (linked to above), the website which created the video, goldsilvergold.com, reported that it was sold out of inventory and will not be taking new orders until December 6.
Another report indicates that JPM may really be on the ropes with their short silver position and are attempting to hedge themselves by buying $1.5 billion worth of copper. According to the Telegraph, the bank has bought “between 50% and 80%” of the 350,000 tonnes in reserve at the London Metal Exchange.
ZeroHedge opines that “JP Morgan is now intent on cornering the copper market, as the monopolist firm stretches its FRBNY-facilitated muscles in an attempt to stem the massive losses incurred via its silver short.”
Readers who are interested in learning more about this story are encouraged to do follow up research and post comments. Those who wish to participate in squeezing the living daylights out of JPM, may want to consider buying physical silver, silver futures and SLV.
Keep a close eye on this market during the coming week…
Source: Scott Rubin
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- Buy Gold or Sell Gold Now?
- Investors propel silver boom
- Bob Chapman Silver and Gold Prediction. for 2011
- How much gold should I have in my portfolio?
- Silver price predictions – silver prices forecast 2010, 2011
- J.P. Morgan Getting Squeezed In Silver Market? (SLV, JPM)
- Robert Kiyosaki: Silver is the best hedge against inflation!
- The 10 Best Silver Coins for Investment
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