Should you buy silver?

The silver market, at around $9 billion, is 5 percent the size of the gold market. Silver is cheaper than gold, but its relative affordability and smaller trading market doesn’t mean you shouldn’t buy silver. The silver market has exploded in recent years and trading volumes are up. Silver prices rose over 700 percent in the decade to 2011 and reached a 31-year high, according to the Wall Street Journal.

One of the key reasons why investors should buy silver is related to supply considerations. Industrial applications include currency coins, imaging, mirrors, and electronics. New technological applications such as solar panels and water purification suggest that silver demand is likely to continue growing.

According to the Silver Institute, in 2010 total mine production was around 735 million ounces while total industrial demand was 560 million ounces, leaving only 175 million ounces for investment, coinage, and consumer use.

While gold has a high reuse rate, almost all the silver in industrial use is trashed after completion. Around 25 percent of demand must be derived from existing supply. For many years the world has used more silver than it produced. Given the growing demand, prices are likely to rise over the long term, and investor thinking to buy silver may find it a profitable strategy.

Or perhaps…buy gold
Gold has also performed extremely well over the past 10 years, with prices growing around 470 percent in the year to 2011 (according to the Wall Street Journal). Some investors have been concerned with the short-term volatility associated with gold prices in recent times.

However, short-term volatility as observed in early April 2012 can be an indication that it might be a good time to buy gold by taking advantage of lower prices. Indeed, investors still highly value gold. The US CNBC’s quarterly survey in March 2012 found that investors named gold the “best investment”, outranking property and the stock market, with many choosing to buy gold rather than stocks or property.

Another factor to consider when assessing whether to buy gold is gold’s status as the ‘fourth currency’. With the US overwhelmed by debt, Japan’s ageing population, and Europe’s dire debt problems, gold’s status as a safe-haven fourth currency may see prices continue along similar lines to what we have seen in past decades.

In uncertain times, gold and silver remain two of the most sought-after precious metals. Whether you choose to buy gold or to buy silver will depend on your investment goals, and a diversified portfolio may include both commodities.

Wealth creation can be realised when you buy gold or sell gold, and factors that influence gold bullion prices are varied, but all relate to demand or supply. Some of these factors include:

• Cultural and seasonal factors. Indian and Chinese cultures value the use of gold in cultural and religious practice. For example, demand for gold in China usually experiences a hike before the Lunar New Year, when private individuals buy gold as presents for the annual festive period.
• Monetary policy. Central bank policies on gold and interest rates can affect gold prices. Higher interest rates can lead to an easing in demand and encourage people to sell gold as prices start to drop.
• Global volatility. When there’s high volatility in world markets, investors tend to turn to stable investments such as gold. Central banks, too, buy and sell gold to maintain their official gold reserves and in order to manage foreign exchange risk. Gold is one of the highly valued precious metals (or safe-haven assets) for hedging against financial stress, whether it’s inflation, deflation, or currency devaluation.
• Prices. High prices can cause investors to sell gold when prices reach a level where their ideal return on investment has been met. Similarly, low prices can encourage investors to buy gold while prices are relatively affordable but likely to increase.
• Production. Many countries don’t produce enough gold to meet their consumption, investment, or industry requirements to buy gold.
• Major currencies. The movement of major currencies can have an effect on gold prices as currency trading and gold are investment alternatives. The US Dollar is the most-traded currency in the world, and a high US Dollar tends to boost demand for the US Dollar. Gold prices tend to rise in times when investors turn away from currency trading.
• Socioeconomic trends. Major socioeconomic trends can have a massive influence on the price of gold through the demand. India and China, each with a large and growing middle class, are two examples with a strong demand to buy gold.

Gold bullion prices are affected by a wide variety of factors that range from government policy and market volatility, to production and major socioeconomic trends. Seasoned investors study the market by examining these factors when choosing whether to buy gold or sell gold.

According to the Financial Times, China imported around 428 tonnes of gold (via Hong Kong) in 2011, around three times the numbers for 2010. The 56.9 tonnes for September 2011 was a six-fold increase from 2010. A report from Reuters noted that there was a 20 percent jump in imports from October to November 2011, when a record 102.525 tonnes were imported as demand to buy gold soared.

Quick facts:

• China imported around 490 tonnes of gold in 2011, double the 245 tonnes estimated for 2010 (according to the Financial Times).
• India imported 969 tonnes of gold in 2011 (according to the World Gold Council).
• China’s total gold demand rose by 20 percent to hit 769.8 tonnes in 2011, while overall global demand exceeded 4,067 tonnes for 2011 (according to the World Gold Council). It’s clear that many Chinese consumers wanting buy gold were unable to find sufficient supply from local producers.
• A recent report by Reuters suggested that the doubling of the gold import duty by the Indian government could lead to an easing of the Indian demand to buy gold and cause China to become the world’s biggest buyer.

The PRC is already the world’s top gold producer, with its gold output exceeding 360 tonnes in 2011 (according to the China Gold Association). However the rise of its middle class has led to a burgeoning demand to buy gold, making it a top importer as well.

Demand to buy gold led by China’s rise is likely to be bullish for gold prices. China has around 6,328 tonnes of explored gold reserves but its insatiable internal demand for gold exceeds the country’s ability to match local production with demand. For this reason, Chinese demand will probably continue to play a significant role in the gold market.

China’s rising middle class is opting to buy gold in order to safely store wealth. Much of China’s demand comes from private individuals, but the government itself has been vocal about gold’s attractiveness. The central bank of China has suggested that to buy gold is a safe approach. According to a news item in the Business Insider, Zhang Jianhua, an official from The People’s Bank of China, stated in December 2011 that “the only choice to hedge risks is to hold hard currency –gold”.

Reuters reported that while many miners were reporting record profit margins, capital costs for building new projects were surging with energy, material, and labour prices. An example of this was Newmont Mining’s recent shelving of its Hope Bay gold mining project. The project was cancelled and written off for $1.61 billion. With many investors keen to buy silver, rising costs of mining and exploration could potentially push up silver prices.

Are silver supplies going up or down?

Will we see a curtailing of supply due to cost pressures driving higher demand to invest in and buy silver? Based on very long-term historical averages, Mexico has been the world’s largest silver producer, providing around one-third of the world’s silver over the past 500 years. It was overtaken by Peru in 2009 but still accounts for around 20 percent of world silver production. In 2010, Mexico produced 3,500 metric tonnes of silver. Peru, China, Australia, Chile, and Bolivia are some of the other major silver producing countries that tend to produce and sell rather than buy silver.

The Silver Institute’s 2011 World Silver Survey found that total silver supply rose by 15 percent in 2010, though the growth was led by producer hedging and government sales and recycling. Mine production grew by only 2.5 percent in the same period, although supply levels were at a historical high of 23,889 tonnes.

Scrap supply or reuse rose by 14 percent in 2010, predominately through industrial and jewellery recycling. At the same time, industrial demand to buy silver grew by 20.7 percent, with strong growth in coin minting, solar panel production, the car manufacturing industries, and the jewellery industry, all of which drove the demand to buy silver.

Is it time to buy silver?

While figures indicate that silver production is still high, it should not be taken for granted that supply will be sufficient for everyone who wants to buy silver. Demand to buy silver across different sectors is growing, particularly in the industrial sectors. Should energy and labour costs continue to grow to the extent of affecting viability of new projects, silver prices could continue to see high growth over the long-term. This could mean that now might be a good time to buy silver.

• Historically, silver has proved more volatile than gold, fluctuating more dramatically, but while the silver market is generally smaller than the gold market, silver has mostly followed the same price patterns as gold even though fewer investors are keen to buy silver.

• In 2011, silver almost doubled in value in a matter of months, reaching a high of $49.21/ounce around April. Gold also increased at the same time, but not such a percentage. This silver high ended in early May.

• Silver has grown in value 37.62% from 2001-2010 and is continuing to rise suggesting that people are more willing than ever to buy silver. It is also worth noting that over the last decade, silver has ruled the precious metal markets in terms of returns, sitting at an annual return of 20% while gold is at 19% (and copper at 18%).

• Surprisingly, though, this trend was not replicated at all last year. Gold increased overall in 2011, while silver decreased by about 10%.

• In 2012 however, gold and silver are both currently surging since the Federal Reserve has now prolonged its low interest rate policy from mid 2013 to late 2014, making it possibly an ideal time to buy silver.

• In 2012, some analysts predict that there is a strong possibility silver will at some point reach the $50 or $60 threshold and catch up to gold in terms of growth.

• Reuters, however, is forecasting that silver will only increase up to $35 in 2013, despite some potential $50 highs, while gold will move to $1,835, which is only a 4% increase from their 2012 forecast.

• It’s quite likely that whatever happens, silver will closely follow behind gold’s fluctuations, with the potential to surpass it in growth at various points in the near future, especially given the instability of the global markets.

• If you’re looking to buy silver, it could be better to invest now, while it’s cheaper to buy silver. Also, some investors are showing a reluctance to buy silver, given its slump in 2011, making it more accessible than gold.

Will be buy silver or gold in 2012? Perhaps some investors will be tucking a little of both into their portfolios.

• 2011 saw the performance of gold rise dramatically around July and August. But with the significant economic declines of late 2011 and the Eurozone debt crisis, many investors found themselves having to sell gold to cover other losses, creating fluctuations in gold prices. However, there is much hype in the market that gold will likely rise in 2012, making it 14% higher than its value in 2011 and 26% higher than it was in 2010, according to Reuters. So 2012 might just be the right time to sell gold and make noteworthy profits.

• While gold is increasing in value, its rise rate may well slow down. While the increase in gold value has jumped significantly in the past two years, some commentators suggest that this may slow down. So while gold will still increase, its rise might not be as dramatic, meaning that 2012 could be a good year to sell gold.

• It may be a good idea to hold onto your gold if you’ve only had it for a short period of time. Gold value is largely influenced by supply and demand and some claim that gold still has much potential to increase in value. If 2012 is an early year in your gold ownership, you may want to wait rather than sell gold now. However, nothing is guaranteed, so if you bought gold years ago when prices were lower, 2012 may be a good time to sell gold if you need to cover shortfalls in other areas of your portfolio.

• Gold buying is up around the world, especially as gold popularity continues to grow as an attractive commodity for investors, banks and other institutions. As a gold owner, this is good news for you, as it means that this might be a good time for you to sell gold or at least look into the potential of your investment, even though buying prices are high. Many other investors are looking to jump on the gold train, meaning it could be an opportune time for you make the most of this popularity and cash out if you need to sell gold.

It will all come down to your situation and your confidence in 2012 gold prices. For some it may be the perfect time to sell gold, while others may decide to stock up instead!

Such is the case in China, which recently installed and activated its first ATM in Beijing that dispenses not cash, but allows users to buy gold bullion. A further 2,000 of the buy gold ATMs are set to be installed around the country over the next two years by the Beijing Agricultural Commercial Bank, in association with an independent gold trading company. Consumers can exchange physical cash or use bank cards to buy gold bullion for their personal investment needs and to protect themselves against inflation.

This makes China the first country in Asia to introduce the buy gold bullion ATMs into their economy, following in the footsteps of Italy, Germany, the United States and the United Arab Emirates. With its recent, 2011 purchase of 200 metric tons of gold, China is currently considered the largest economy in Asia to buy gold bullion, approximately on par with India, and both are clearly paving the way in the Asia for a surging trend in gold bullion trading.

According to Asia Times Online, Operations Manager Li Weizhou of Gongmei Gold Trading anticipates the ATMs to be popular in China and it is expected that more will be installed in China’s major cities with locations likely to include banks, private clubs and landmark locations. The withdrawal limit on the ATM is set at 5.5 pounds, which is worth approximately $156,000 and market purchase prices are updated every 10 minutes. Asia Times Online also claims that consumer demand for gold in China has jumped 25% from 2010 to 2011, making gold a highly sought after commodity and a peak time for those who wish to buy gold and expand their portfolios.

This is a ground-breaking step forward for China, which has joined a bid, in association with Russia and the United Nations, to develop a single, global currency based on a gold standard, in order to help protect economies from fluctuating and declining commodities markets.

Will we be queuing up to buy gold? And are we ready to buy gold from an ATM?

• The company has engaged in trading gold bullion for years, in exchange for future mining rights. Having created Agrigolden Ltd., the World Food Association has been excavating gold dust at various Alluvial Gold mine sites in the Kibi-Winneba region of West Africa.

• The company intends to sell off fifty tons of gold to interested investors and other members of the general public who desire to buy gold – a sizeable step forward in the bullion industry. In a PR web release, Henry Ford, the Director of Agrigolden Ltd. and PR Manager for the World Food Association, expressed his appreciation for support and contributions, stating that they “show the growing concern for those that are less fortunate.”

• According to the association’s website, the gold purity ranges from 92% to 95%, the equivalent of 22 to 23 carats and will be sold at the 2nd fixing in USD for the price of gold in London, as listed on The Bullion Desk on the day of sale.

• Who will buy gold? With the declining production of gold and its continuing rise in value, many investors are keen to buy gold, though no fitting offers had been put forward at the time of writing. The bullion is not expected to last long, with Europe, China and Russia perhaps more likely to buy gold since their currencies are considerably weakening.

• With the profits, Agrigolden intends to modernise their purchased mines in Africa, elevating local prosperity and improving quality of life for the villagers and for those working in the mines.

• Of course, they’ll also be upping their own cash flow and establishing strong relationships with experienced bullion investors who are keen to buy gold on a long term basis. Market trends suggest as more individuals and entities look to buy gold, prices may be set to increase significantly in 2012, despite the current debt crisis in Europe and other economic fluctuations around the globe.

Many Greek residents are having to use their savings to pay routine bills because the economy there is so terrible; they are also facing rising taxes and financial uncertainty. As a direct result, Greek banks are having to reduce their lending—thus worsening the recession in that country. Money in Greek savings accounts has decreased 30% in two years. And it’s a situation that could happen soon in Spain and Italy.

Financial and political leaders in Europe are seriously starting to consider printing money as one way to get out of the crisis. This would start once Italy, Spain, and other countries adopt austerity measures. While this will provide some much needed liquidity, it also poses the threat of inflation. And when there’s a serious threat of inflation, then it’s a good time to buy gold. Historically, gold has been one of the most effective ways to protect savings from inflation.

And there’s absolutely no guarantee that printing money will solve the crisis.

“When there’s concerted action by central banks, it’s definitely good,” Jens Sondergaard, senior European economist at Nomura International told Bloomberg. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

A further problem on the horizon is the potential downgrading of credit ratings for 15 out of the 17 Eurozone countries.

“We are therefore also placing the ‘AAA’ long-term rating on the EU on CreditWatch negative,” announced credit rating agency Standard and Poor’s.

And it’s understandable. Italy is precariously close to defaulting on its debt of 1.9 trillion Euros. If even one of the current Eurozone countries decides to stop using the Euro, this decision could create a financial catastrophe by triggering sovereign debt defaults across Europe. The choice is stark. Several European countries will have to accept Greek-style austerity measures or the European Central Bank will have to print Euros.

There’s a reason the United States is extremely worried about the Eurozone crisis: many U.S. banks guaranteed European sovereign debt; if there’s a default, then the U.S. government would have to bail out their banks again. To achieve this, the U.S. Federal Reserve would likely have to roll the printing presses and print more money. Again—this significantly raises the threat of inflation.

It’s a mess. And the crisis in Europe is one of the main reasons to buy gold. Right now, it looks like there will be two major problems in Europe: inflation and continued economic uncertainty. Both make buying gold attractive as gold thrives during times of uncertainty and when there’s inflation.

• Qatar has been buying more than a ton of gold every month for three years.
• Russia recently bought more than 15 tons of gold from its mines.
• The Reserve Bank of India bought 200 tons of gold the IMF sold.
• Even tiny Mauritius bought 2 tons of gold in November.
• And then China plans to buy gold: approximately 6,000 tons in five years.

It’s not easy to find this sheer quantity of gold. The supply of gold remains low. New mines are opening but it takes at least five years for a mine to produce at significant levels. With high demand, low supply, and a volatile global market, there’s a good reason that many commodities analysts are predicting significantly higher gold prices for 2012.

• UBS has forecast $2,075 an ounce.
• Barclays has forecast $2,000 an ounce ($35 an ounce for silver).
• Morgan Stanley predicts a range between $1,819 an ounce and $2,085 an ounce.
• HSBC predicts $2,025 an ounce.
• TD Securities predicts $1,975 an ounce.

With the price of gold hovering around the $1,700 an ounce mark for several weeks, it may be a good time to buy gold.

Five Factors Pushing Demand for Gold

1. The financial crisis in Europe over the Eurozone—which looks increasingly likely to lead to printing money…and inflation.
2. Central banks are buying gold as they move away from the dollar.
3. There’s strong demand for gold for jewellery in China, India, and the Middle East.
4. Institutional investors may start buying gold—especially if global equity markets remain stagnant.
5. The spectre of inflation—not just in Europe but all over the world.

With gold prices at approximately $200 an ounce below the high in September and many major financial institutions predicting prices over $2,000 an ounce in 2012, now could be a good time to buy gold.

In the short term, it will be extremely important for people who are considering buying gold to pay close attention to the news coming out of Europe.

“We expect gold prices to increase because of fear of a Eurozone implosion,” said Dennis Hynes, chief market strategist at R.W. Pressprich, told Bloomberg. “The only currency that’s stable in this type of situation is gold.”

The factors:

• Consistently strong demand for gold from India and China.
• A weak dollar.
• Continued uncertainty (and turmoil) in global equity markets.
• No resolution to debt woes in the United States.
• The Eurozone crisis.

If anything, the demand for gold from India and China has increased and the economic situations have worsened.

At the beginning of the year, certain ‘experts’ were optimistic about the economy. In front of the Senate Budget Committee, United States Federal Reserve Chairman, Ben Bernanke, said the U.S. economy was going to be “moderately stronger in 2011 than it was in 2010.” He went on to predict rampant growth between 3% and 4%. Obviously, a lot needs to happen in the month of December for Bernanke’s predictions to prove prescient.

Thankfully, the economists who help investors decide whether or not to buy gold have been more accurate in their assessment of the world economy—and the price of gold.

In December, CNBC mentioned Goldman Sachs:

“Goldman believes low U.S. interest rates will continue to underpin the rally in commodities like gold. The firm expects the precious metal futures to climb to $1,690 an ounce by the end of 2011 and continue to move higher.

The Bullion Research Desk of Commodity Online on December 22, 2010 said:

“Gold price to hover around $1500-$1600 range in 2011. Gold price will go up in 2011, driven by the fluctuations in US dollar and other currencies, dwindling productions, increasing mining problems and rising demand for jewellery and investment for the yellow metal. Gold price is definitely going to cross the $1500 mark per ounce in 2011 and it will remain in the range of $1500-$1600.”

And late last year, Bloomberg analyzed the gold price predictions of almost 30 investors, analysts, and traders. The ‘average’ prediction was $1,500 per ounce.

So…the ‘gold gurus’ were actually wrong—the price has exceeded their predictions. The factors influencing the price of gold have been more intense and are not going away as the headlines from the Eurozone crisis are proving.

So—is it a good time to buy gold? Remember…JP Morgan predicted a high of $2,500 per ounce by the end of 2011. Will they be correct? With the future of the Euro in serious doubt, gold could easily top $2,000 an ounce.

“The communication of disease from one person to another by close contact.”

In European countries, the disease is debt—specifically default. Greece is having difficulty repaying its debts and Italy and Spain are extremely close to being in the same situation. The disease is spreading to all the European countries that use the Euro as their currency—which is all the major European countries excluding the United Kingdom.

And even through the currency in England, Scotland, Wales, and Northern Ireland is Pound Sterling, the U.K. is being affected by this crisis. The Prime Minister, David Cameron, has been part of the negotiations, the discussions, the summits, and all the meetings. In many cases, he’s been more vocal about the truth about the situation than others, saying recently there was now a “big question mark over the future of the Eurozone.”

Until now, the net result has been uncertainty. And if there’s one thing equity markets hate, it’s uncertainty. And when equity markets are not happy, the price of gold typically rises and it can be a good time to buy gold during uncertainty.

The chickens are coming home to roost for the leaders (and the countries) who got Europe into this mess. Angela Merkel, the German chancellor, has been saying that it’s a good time to ‘allow’ certain countries to leave the Eurozone. That’s a polite way of telling certain countries get out. In Greece and now, Italy, the Prime Minster and President, respectively, have resigned. Both countries now face a difficult choice: pursue austerity measures or get kicked out of the Euro.

With the possibility of two of the larger countries in the Eurozone leaving, the possibility exists that the Euro will collapse entirely. This could be catastrophic for large swathes of the European economy. With Europe moving closer and closer to the precipice, the price of gold has been inching upwards toward its record price of $1,923.70 an ounce on September 5 but dropped to $1,623.97 by early October. The price was back up to $1,787 per ounce on November 11. If the European crisis continues—and it looks likely to keep going—then the price of gold is likely to rise and thus now is an excellent time to buy gold.

Either the Euro will collapse completely, the ‘offending’ countries will be booted out, or the Eurozone will follow David Cameron’s suggestion and print money to get out of trouble. The latter will make the currency worth a lot less and inflation could emerge as a threat—inflation makes the price of gold increase.

About five weeks ago, a British politician said the Eurozone had six weeks to resolve the crisis. That ticking sound? It’s a bomb about to explode. And this explosion, however fierce, will likely affect the price of gold.

Until September 6, the factors influencing the rise in the price of gold were clear and consistent:

• Global turmoil in equities markets leading to significant declines in share indexes.
• A weak dollar.
• Quantitative easing in the US (printing money).
• The Greek debt crisis and Eurozone trouble.
• Strong demand for gold from China and India.

These factors are still in place. So…what caused the precipitous drop? And is it time to sell gold or buy gold? To explain the drop, many financial analysts pointed to huge gold sell-offs from some of the larger investment funds. John Paulson, a hedge fund manager, sold bullion to cover September losses. Other fund managers were forced to imitate the move. There was also some profit taking. And investors who decided to buy gold while the market was toward the $1,900 an ounce mark have been waiting for the price of gold to show signs of increasing before they buy gold again.

There’s ample signs that upwards momentum for gold will start to build again. Last week, The Daily Telegraph in London broke the news that Qatar Holdings (the Qatari royal family) invested $1 billion in European Goldfields, a mining company that’s about to start mining gold in Greece. The Qataris are, according to the newspaper, actively looking for more opportunities in gold mining. Two of the more prominent banks, Credit Suisse and Lazard, advised Qatar Holdings and this shows long-term optimism about the price of gold among analysts – and this provides incentive to buy gold.

In previous blogs, we’ve stressed the strong link between the price of gold and the strength (or weakness) of the U.S. dollar. At the beginning of October, the dollar declined and gold experienced a bounce upwards. So for those investors looking to buy gold or sell gold, keeping an eye on the United States Federal Reserve is important: especially if ‘The Fed’ decides to initiate a third round of quantitative easing as this would devalue the dollar.

Despite a bad September for the price of gold, experts remain optimistic the price of gold will continue to increase. The factors that have influenced the 14% increase in the price of gold remain in place. Once investment managers have finished their brief sell-off to cover losses in risky investments, some downward pressure will have been removed. Credit Suisse believes gold will reach $1,850 by the beginning of 2012 and Morgan Stanley’s 2012 forecast for the price of gold is now up to a significant $2,200 per ounce.

Contact us at the Australian Bullion Company if you’d like to know more.

In the past 18 months, the price of gold has often increased when stocks have taken a pounding. However, this past week, the price of gold declined as investors decided to sell gold bullion. And if there’s a reason for the decline in the price of gold, the current crisis, or impending crisis, in the Euro is a possible reason. The dire financial situation in Greece, and the potential for what’s grimly being called ‘contagion’ means that financial ministers in Europe must make some major and potentially brutal decisions about Europe’s currency. Against this backdrop, the dollar has regained some strength. There was also an indication that some institutional investors were selling gold bullion to take profits—as their equity investments continued to show weakness.

Historically, there’s been a strong inverse relationship between gold and the price of the dollar. So, for those who are thinking it’s a good time to sell gold bullion, the key question is ‘what’s going to happen to the dollar?’

In the next several months, all eyes will be on two key global economic drivers.

1. The Federal Reserve
2. The Eurozone

With the economy in the United States continuing to sputter, despite two rounds of ‘quantitative easing’ and a massive stimulus package, the Federal Reserve is considering another round of quantitative easing to generate growth. As we’ve written in previous blogs, quantitative easing is code for printing money. And when the government prints money, it devalues its currency. And when a currency is worth less, inflation rears its ugly head and when inflation rears its ugly head, gold becomes more attractive.

In the United Kingdom, Chancellor George Osborne said that European Leaders only had six weeks to find a solution to the financial crisis with the Euro.

“Patience is running out in the international community,” Osborne said. “More needs to be done to avoid a disorderly outcome.” Ironically, U.S. Treasuries may be attractive as the uncertainty in the Euro continues; U.S. Treasuries set a new low yield of 1.7 p.c. as investors sought a safe haven. As the dollar strengthens, it may be a good time to sell gold bullion.

However, major problems linger in the United States economy and the global economic factors that led to the increase in the price of gold in the last two years remain. Yes—it may be a good time to sell gold bullion to take profits but there’s a strong chance the price of gold will reach the expectations of many analysts and hit $2,000 late this year or in early 2012. While there’s no way to predict the price of gold with total certainty, the next few weeks are likely to be volatile—with a capital ‘V.’

The rise in gold has attracted all the media attention. Silver is benefitting from the on gold’s ‘coattails’ and the overall rise in precious metals. Many investors who feel they have missed out on the rally in gold prices are buying silver: instead of taking a risk by shorting gold, they are looking to buy silver.

An Attractive Metal

Outside of jewellery, gold’s uses are few and far between. However, there’s a strong industrial demand for silver. The main reason: it conducts electricity. So technology companies buy silver. Industrial uses account for 40% of silver production. You’ll find silver in everything from plasma TVs to solar batteries and even water purification systems. Two countries that buy silver? India and China. Led by these two countries, total global industrial demand for silver will increase from 487 million ounces to 670 million ounces: an increase of 35%.

Were the Predictions Correct?

On April 12, 2011, Alex Steel of investment website The Street (www.TheStreet.com) canvassed several traders and asked them to predict the price of silver at the end of the year. Who is looking like they’re going to be correct?

Note: the price of silver on August 26, 2011 was $41.13/oz.

• The founder of Silver Investor, David Morgan, predicted silver at $45 an ounce.
• President of Tower Trading, Anthony Neglia, told The Street to expect $50.
• A senior strategist at Lind-Waldock, Phil Streible, predicted $42.
• Great Panther Silver CEO, Bob Archer, predicted $40.
• The CEO of First Majestic Silver, Keith Neumeyer, predicted $50 an ounce.
• Chairman of GFMS, Philip Klapwijk, also predicted $50 an ounce.

With four months left in 2011, the predictions are so far very close to being correct—albeit a little ahead of time. So is now a good time to buy silver?

Nobody can accurately predict the price of silver or any commodity. However, UBS, one of the largest and most prestigious banks in the world, predicted a significant increase. And many prominent silver traders and experts have so far been ‘in the ball park’ about the price of silver since their April predictions. So it’s certainly a good time for the serious investor to look to buy silver as part of their investment portfolio.

Adjusted for inflation, however, the real record would be closer to $2,300 an ounce, set after the 1970s oil crisis. So, in real terms, gold could increase in value significantly. In fact, JP Morgan announced it thought that gold prices may reach $2,500 an ounce by the end of this year, making now a potentially strong time to buy gold.

Why this staggering increase in gold prices? Right now, it’s one of very few safe harbours during this global economic storm. The major fall in bank stocks in the United States and in Europe signals the possibility of a double-dip recession. Just the threat of this will continue to see investors fleeing to gold.

The demand for gold remains extremely high. In the second quarter of 2011, demand globally was 919.8 tonnes or $44.5 billion. Much of this demand is coming from the growing economies of India and China. There’s an additional reason for demand in these countries: the threat of inflation. Again, gold provides a safe haven when inflation rears its ugly head. Combine this with currency devaluation and the chaos in stock markets and it’s easy to understand why investors are buying gold bullion.

The downgrade of U.S. debt by Standard and Poor’s also sent investors into gold. The downgrade made this harrowing statement: the world no longer sees government bonds as the ultimate ‘safe bet.’ Again, this type of massive change sends investors flocking to gold… and not just investors: the central banks in China and South Korea are also buying gold.

So is now a good time to buy gold—despite record highs? If current economic conditions persist, then it looks like investors will continue to buy gold. There will be some volatility day-to-day in gold prices but the conditions are currently in place to make the JP Morgan prediction of gold at $2,500 an ounce a strong possibility.

On August 14, the price of silver closed at $39.10 an ounce. That’s up from $30.53 in mid-February and up from $17.99 in mid-August 2010. In a year, silver investors have more than doubled their money. And all this despite a ‘blip’ in the price of silver when the price dropped in May from a high of $48.58 to under $35.

While the increase in gold has certainly helped investors who bought gold, the ‘stealth’ gain has come in silver. Is now a good time to buy silver bullion as part of your investment portfolio? Or is the price likely to decrease?

Let’s take a look at demand first. Silver is used extensively in jewellery, photography, silverware, and in coins. Some of the many uses:

• Water Purification
• Medical
• Mirrors
• Coatings
• Solar Energy
• Water Purification
• Batteries
• Bearings
• Catalysts
• Electronics

Consumer demand for silver is also strong—especially in emerging and developing markets like silver. This increases demand. And the same global economic factors affecting the price of gold are affecting the price of silver. These include economic uncertainty in Europe and prolonged lack of serious growth in the United States.

Silver is a scarce commodity—like gold. Supply never really catches up with demand. Especially now that silver is being used extensively in growing technologies like solar energy. The Silver Institute says that demand for silver from industry will increase 36% by 2015. And from 1990 to 2000, global consumption was over 2 billion ounces. In 2011-12, consumption in India could top 1,200 tons—based on government figures.

Looking at The Ratio

The historical ratio of the price of gold to the price of silver is 20:1. The ratio is currently 33:1 which means many experts believe silver is due to catch up–making it a good time to think about buying silver. If the ratio catches up, the price of silver could increase to over $100 and even climb to $175.

One country that’s going to continue to buy gold is China. In the past two years, China’s appetite for gold has been insatiable. The country has gone from being a net exporter (100 million ounces a year) to a net importer (150 million ounces a year). The Chinese are buying silver as a hedge against the decline of the U.S. Dollar and the threat of internal inflation.

So it’s an excellent time to think about buying silver to add to your portfolio. The reasons investors buy silver are clear—and motivating these investors to buy this valuable commodity.

The national debt in the United States stands at over $14.3 trillion. This debt comes from the cost of keeping entitlement promises to the elderly and poor. In this blog, we’re here to discuss buying gold and not make any political statements. However, the numbers are staggering:

• Medicaid, health care for the poor, cost American taxpayers $243 billion in 2010.
• 50.5 million Americans are on Medicaid.
• 46.5 million are on Medicare.
• 52 million are on Social Security.
• 44.6 million are on food stamps and other nutrition programs.

At the current rate of spending, the United States will have to issue up to $10 trillion in new debt by 2021. Why does this mean it’s a good time to buy gold?

To pay for this spending, the United States can raise taxes massively or cut welfare spending. It seems unlikely that either of these will take place in the near future. So America must borrow more AND it must generate more tax revenue by growing its economy. But the economy isn’t growing in the United States—growth rates are stagnant. To light a fire under the economy, the Federal Reserve has used two rounds of ‘Quantitative Easing’ which is another way of saying, ‘let’s print money.’ This decreases the value of the U.S. Dollar and introduces the spectre of inflation.

With inflation a probability and the value of U.S. debt decreasing, investors have been fleeing to gold to protect their assets and provide a hedge against inflation. The market is proving this. Gold is up 11% this year and we’ve seen record prices. Despite these record prices, we believe now is a good time to buy gold. The demand continues to rise while the supply cannot keep up.

With at least another month of global economic uncertainty ahead, the price of gold may experience some dips. However, we believe the upward trend will continue and a good time to buy gold would be in one of these dips.

Gold fund manager Adrian Ash recently told London’s Daily Telegraph, “Physical gold, indestructible and rare, will continue to appeal as the ultimate store of value for retained savings worldwide. Because, just like in the Eurozone, the U.S. debt cannot be settled in full. So it won’t be.”

While the media focuses on the U.S. debt ceiling, significant financial problems will continue to plague America as long as the country continues its current entitlement programs. These problems make it a good time to buy gold.

We believe there were three factors influencing this record rise.

ONE…The Federal Reserve in the United States released the official minutes from the last meeting of the Federal Reserve Board and the minutes pointed toward more of what the Federal Reserve calls ‘quantitative easing’ or QE. Don’t be fooled by the phrase or its abbreviation: QE is code for printing money to stimulate the economy. Unfortunately, QE means an increased risk of rising prices and investors use gold as a hedge against inflation.

TWO…Moody’s, the investment information service, downgraded Ireland’s debt to ‘junk’ status. When a major EU country like Ireland is close to defaulting on its debt, alarm bells start ringing, investors become worried about the European economy and when they’re worried, they buy gold.

THREE…A meeting of EU leaders was scheduled for Friday, July 15, to discuss the default of Greek debt. It seems it’s not a case of ‘if’ but ‘when’ or ‘how.’ Again, investors buy gold when there’s a risk of credit default and/or massive currency devaluation.

The rise in the price of gold on July 13 was the eighth straight day the price of gold rose. This had not happened since October, 1996. Michael Widmer, a Bank of America Merrill Lynch analyst told London’s Daily Telegraph:

“Gold will keep rising for the next five years, even if it has some crests and troughs. Those holding gold should hold on to it, while others should probably get their hands on it as it is going to be on an upward trend.”

Gold is up 11% in 2011. So is now a good time to buy gold? It’s certainly a mistake to buy gold or any commodity based on its daily or monthly performance. But the record price on July 13 is proof the analysts who follow gold are getting it right. These analysts have looked at the global economy and predicted increased demand. Couple this with tight supply and the price of gold continues to rise-and set records.

Let’s not forget-in 2008, gold analysts were labelled as slightly insane for predicting a gold price over $1,000 an ounce. It was trading at around $750 an ounce in July 2008. So gold has doubled since 2008 and it’s proved the analysts correct.

Nobody can predict the future and there’s always the possibility that investors who buy gold will lose money. However, for at least the last three years, analysts who follow gold have been right and buying gold has been a profitable decision.

But there’s more to the increase in the price of gold than demand: there’s a supply problem. If you live anywhere near a jewellery store, you’ve probably noticed it’s no longer just a store selling watches, rings, pendants, and the like. It seems that every jewellery store has a massive ‘Buy Gold’ sign outside and newspapers are full of ‘We Buy Gold’ advertising. There’s even a social trend: gold parties. The host or hostess gathers some friends, tells them to bring some ‘spare’ gold and a local company provides champagne—then buys gold. Proceeds go to the host or hostess, the people at the party, and/or a charity.

Even with this ‘retail’ supply increasing, there’s not enough gold in the world to meet demand. And because gold is difficult to mine and the demand continues to increase, serious investors have been paying extremely close attention to gold mining companies. And with good reason.

• Mining company Rio Tinto has provided investors with an average return on equity of 22.2% over the past three years.
• Freeport-McMoRan Copper and Gold has major interests in gold mining and its stock price has climbed from US$28.30 to today’s price of US$53.50.
• The Motley Fool’s website cited Newmont Mining as a ‘Dividend Standout’ as Newmont raised its dividend by 33%.
• One of the most watched investors is Paulson and Company’s John Paulson whose hedge fund benefited massively from the 2007 U.S. mortgage crisis. Paulson recently increased its share holdings in gold mining company Barrick Gold by 125%.

Finding ‘fresh gold’ is expensive and arduous. A mining company has to find the gold, mine it, process it, then ship it. Mines are usually subject to strict environmental controls and can be remote. The costs to mine and process gold are extremely high. Gold mining companies would only be investing billions in existing and new mines if they felt confident the price of gold was going to remain steady—and increase.

Investors are increasingly confident that gold mining companies are making the correct decisions and investing wisely—again based on investor’s confidence in the stability of the gold price. The interest in gold mining stocks provides further proof that gold demand is likely to remain consistently strong for the next several years, making it an excellent time to buy gold to add to your portfolio.