Gold Investors have seen a wild ride over the past few weeks, with prices trading in a range of over $100. After peaking recently at close to $1,390 an ounce, the price of gold fell off a cliff when it was recently reported that the Chinese economy is slowing and that the People’s Bank of China doesn’t plan on printing more money to fuel growth and expansion. This is an about face for the Chinese Central Bank, who has made the Federal Reserve’s recent monetary expansion from $900 million to over $4 trillion over the past several years look like child’s play. The price of gold fell as low as $1,270 yesterday intraday before bouncing and ultimately closing above $1,290 an ounce.
While it’s certainly difficult to predict the price of gold in the short term, we believe that we’ll likely continue to see an upward trend in prices as long as geopolitical risks remain in Eastern Europe, and in particular, Ukraine. While the annexation of Crimea into Russia was done relatively peacefully and without bloodshed, the West and Russia have stepped up the rhetoric as of late with a buildup of military presence along the Ukraine border. Strongly worded warnings from the United States thus far thus far have remained unheeded, and there’s no sign of either side backing down anytime soon.
In fact, economic sanctions that have been threatened by the West seem to have made Russia more defiant, as Russia has responded by threatening to trade oil for other currencies and commodities. If they are able to successfully do so, this trend could catch momentum; potentially even causing the dollar to lose its status as the world’s currency. Many precious metals experts believe that this would immediately cause the dollar to lose a substantial amount of its value versus other currencies, which would bode well for the precious metals market. Unfortunately, however, this would likely also cause the price of gas to spike north of $4.00 a gallon in short order.
We’re hopeful that cooler heads will prevail in the Ukraine situation, but as long as the matter remains tense, we expect for gold and silver to benefit as a safe haven. If the worst possible situation occurs and we ultimately go to war, gold and silver may skyrocket upwards in a parabolic move as we saw in 2011.
In addition to the above, we believe that there are other factors that are likely to support strong gold and silver prices. In particular, there appears to be no slowdown of demand in the East for gold, as is evidenced in part by the United States’ record level of exports to Hong Kong in January, huge attendance recently at a coin show in Singapore and continued smuggling of gold into Indian to avoid oppressive import taxes. In fact, one Indian businessman went so far as to swallow nearly a pound of gold bars to smuggle it into the country.
While the overall global economy appears to be showing some weakness, the case for gold (and silver) continues to remain strong, which should lead to these assets outperforming more traditional investments. Higher prices will likely attract the attention of investors, causing them to move off the sidelines into the gold and silver markets, further contributing to a strong market. Unless the Federal Reserve surprises us with an abrupt change in monetary policy, we would expect for the price of gold to remain above $1,300 an ounce for the foreseeable future.