The last two weeks in the precious metals market have been some of the most active and gut wrenching times in recent memory. The price of gold, silver and platinum have all seen a sharp pullback in response to recent comments made by Fed Chairman Ben Bernanke, which has been exacerbated by China’s continued monetary tightening. While some are of the opinion that the Fed’s recent comments point to an improving U.S. economy, China’s efforts appear to be in response to rising inflation, which could potentially plunge the Chinese economy into a recession. Investors, and in particular, gold and silver coin investors, become concerned in a down market, which tends to affect their buying habits. In this article, we’ll analyze what we’re currently seeing in the marketplace and attempt to answer a question that’s at the forefront of most buyers’ minds; is it time to stop buying gold and silver coins?
When the current pullback in the gold and silver market began, with prices still above $1,400 and $22 an ounce, respectively, investor interest was high, with many individuals attempting to take advantage of depressed prices. As gold and silver continued to drop, buyer demand lessened, and once it broke the $1,300 and $20 support levels, coin buyers began to question whether this is a temporary pullback or a sign of a downhill slide. Many of these individuals appear to be content with sitting on the sidelines waiting for confirmation that the bottom is in before wading back into the market.
While we’re not economists, forecasters, or financial advisors, our recommendation to gold and silver coin buyers has always been to evaluate their reason for buying gold and silver coins to see if any fundamental changes have occurred. If they have, then a complete analysis should be conducted to evaluate the proper strategy going forward. If not, then any buying opportunities should be exploited; especially for those individuals that have a long term investment horizon.
Reasons for Buying Gold & Silver Coins
Based on our years of conducting business, and numerous conversations with customers, we’ve determined that there are several reasons why individuals purchase gold and silver coins. The stated reasons include as a hedge against inflation, a safe haven in response to economic and financial crises, to combat against record high debt and large annual deficits, to use as money in the event of a dollar collapse, and to serve as a portfolio diversifier that has a low correlation to other assets in one’s portfolio.
Inflation Hedge
Let’s evaluate each of these reasons individually to see if any of these reasons no longer appear to be valid. Inflation rates have been relatively benign, with current rates below 2%; however, this is primarily due to minimal lending activity by lending institutions. The Fed’s current program of monthly long term bond purchases of $85 billion will eventually result in inflation if banks began to lend again and if the Fed doesn’t begin unwinding at the right time; therefore, we suggest that buying gold and silver coins as an inflation hedge remains a valid reason for acquiring gold and silver bullion.
Economic & Financial Crises
While economic or financial crises are difficult to predict, it’s apparent that most of Europe is in a recession (some are referring to it as a depression), Japan appears to be heading toward a recession, with the Bank of Japan (BOJ) stepping up their quantitative easing efforts, and China potentially has choppy waters ahead with a slowdown in their economy and tightening monetary policies. The Fed also has trillions of dollars of toxic mortgages on their books, so if they unwind and sell these toxic assets back to the banks at one time, we could potentially see a number of banks collapse; therefore, buying gold and silver coins as a hedge against economic and financial crises still appears to be a valid reason.
National Debt & Annual Deficits
Thirdly, individuals are concerned about the record high debts and deficits that we’re experiencing, with on the books debt at approximately $17 trillion and a debt to GDP ratio of approximately 105%. Annual deficits are also expected to be in the trillion dollar range for the foreseeable future. Some individuals have projected the present value of our future liabilities at a much higher value. Among them are Dr. Kotlikoff from Boston University, who projects that are real debt is closer to $222 trillion!
Gold & Silver Coins as Money
Many individuals are of the opinion that gold and silver coins will be used as money if the dollar collapses. Typically the price of gold and silver moves inversely to the performance of the dollar, so a weak performing dollar would imply a strong precious metals market. Additionally, gold and silver coins have been used as money for thousands of years and in fact, were used as money in the U.S. as recently as 1933 for gold coins and 1964 for most silver coins. Furthermore, gold and silver coins fulfill the four qualities of good money, as espoused by Aristotle. None of the recent developments in the U.S. economy are sufficient to influence opinions one way or the other.
Portfolio Diversifier
Lastly, how have gold and silver performed relative to other asset classes? Over time, the correlation coefficient of precious metals and the stock market as well as precious metals and bonds has been zero, or even slightly negative. The lower the correlation, the better the diversifier, so it appears as though gold and silver have been and will likely continue to be strong diversifiers.
Conclusion
In summary, we’ve highlighted the most five common reasons for buying gold and silver coins. Assuming that the above analysis has convinced you that little has changed from a fundamental standpoint, and in fact, in some respects, has worsened, the case can be made that now may be the best buying opportunity in three years.
