I recently attended John Mauldin’s Strategic Investor Conference, where I heard some of the world’s brightest minds in finance and economics. From Paul McCully to Mohamed El-Erian, David Rosenberg to Noriel Roubini, the best of the best were on stage pontificating on the future.
And now I know exactly what the next five years will bring. Without a doubt, the next five years are sure to bring inflation. Perhaps double-digit inflation. Unless, of course, we have a sustained period of deflation. At the risk of being too cute, I’ll just say that there was no consensus among the economists, investors, and attendees. And how could there be, really? I heard well-reasoned and convincing arguments for both sides of just about every major question facing investors today. The arguments for inflation and deflation were equally compelling.
One statement I did not hear was, “Everything is going to be fine.” There were, however, three common themes that should be of interest to precious metals investors.
1. The Expansion of Quantitative Easing in the Developed World
Japan is taking QE to new levels. They make the U.S. Fed’s quantitative easing look almost laissez faire by comparison. Japan’s commitment to generating 2 percent inflation will come through an almost doubling of its monetary supply. The goal? To make Japanese companies more competitive in global markets through the devaluation of the Japanese yen, thereby stimulating growth and breaking their decades-long bout of deflation.
But Japan does not operate in a vacuum. Its actions will force other nations — think South Korea — to respond in kind. Samsung (SSNLF.PK) and Kia have made great strides over the past 10 years in the global marketplace. South Korea will not let Sony (NYSE:SNE) and Toyota (NYSE:TM) compete on price without a fight. Which leads me directly into the second common theme discussed.
2. Currency Wars
The EU, the U.K., and the U.S. are all continuing their easy-money policies. Mohamed El-Erian described the unfolding stress among the G20 nations as “currency tension.” Less polite investors would call this the beginning of a currency war, and on a scale never seen before. I don’t see this ending well. It’s another compelling reason to own precious metals.
3. Precious Metals On Sale
The third common theme was the agreement that precious metals have been put on sale. Not surprisingly, there was no true consensus to explain the price volatility we’ve seen in the metals market over the past several weeks. So what did cause the dramatic price drop? A better question might be, “Will we ever know what caused the dramatic price drop?”; and I’m reasonably confident the answer to my last question is No. I like this analysis of JP Morgan’s explanation from the folks at Zero Hedge.
The last couple of months in review
Rather than rehash what you’ve undoubtedly heard in the past few weeks, let’s evaluate what happened after the price drop.
- Dealers large and small across North America ran out of inventory and had to wait days or weeks for their stocks to be replenished. The Hard Assets Alliance saw an unprecedented level of buying immediately after the price drop — and we were not alone. This phenomenal level of buying was matched the world over. Precious metal went on sale, and purchasers flocked to take advantage of the discount.
- The Chinese continue to increase their precious metals purchases. Joe Yasinski from Gold Bullion International shared an interesting statistic with me. This year, the Shanghai Gold Exchange has taken delivery of over 1,030 tonnes of gold — just shy of all the gold mined this year.
- Overseas demand for physical precious metal remains as robust as ever. And while premiums for gold coins in the U.S. have not kept pace with premiums for silver coins, they shot up dramatically overseas. Friends in Asia reported premiums on gold Maple Leafs of 25 percent at local dealers.
Enquiring minds want to know
I’ve fielded numerous questions since the correction. I answer almost every question with a question — frustrating, I know, but necessary. The first question I ask all investors interested in precious metals is, “What are your investment goals?”
As a tool for traders, physical metal is not ideal. You are likely better served investing in an ETF. Speculation is a big contributor to price volatility. Large investors with leveraged positions are forced to redeem when their margin calls are triggered. Those of us in the business of selling physical metal are hopeful that the speculators have been chased out of the metals market with this latest correction. Once you’ve determined that there is a place for physical precious metals in your portfolio, the next question you’ll likely ask is, “Is now the right time to buy?”
The bottom line for precious metals investors
The best way to invest in precious metals is to take advantage of price drops, average into your position, and don’t stress over the daily price. The financial experts at John Mauldin’s Strategic Investor Conference agree that precious metals have been put on sale. Could prices go lower from here? Of course; but remember, you are investing in precious metals to bring stability to an unstable world. Owning precious metals is an insurance policy for your wealth.
Grant Williams of Things that Make You Go Hmmm… may have said it best when he wrote, “I am a seller of gold. Just not yet — and certainly not anywhere close to this price.”
Originally written for the website of the Hard Assets Alliance, an industry association of trusted economic and investment research firms that fosters a better understanding of prevailing economic trends and offers investing advice. Open a SmartMetals™ investing account from Hard Assets Alliance here.