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While gold has pulled back from its +$1,400 its bull market is far from over… Corrections are a normal and necessary part of any bull market, and man, do I see this pullback as a golden opportunity — a chance to buy great gold and silver stocks that we missed the first time around! Words: 1350
So says Sean Brodrick (www.uncommonwisdomdaily.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited […] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.)
Brodrick goes on to say:
Meanwhile, silver is outperforming gold percentage-wise. Take a look at this chart:
Quite a move, eh? Now, the U.S. dollar is rallying and both gold and silver are pulling back. Many people are waiting for silver to pull back to $20 to buy it again, just as they waited for gold to pull back to $1,000 but don’t hold your breath, and don’t waste the opportunity. Many people missed that last $400 move as gold charged from $1,000 to $1,400. Don’t miss the next leg of gold’s big rally.
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Let me show you six reasons why this pullback may not be a big one and why gold is going much higher, and probably sooner than many on Wall Street believe possible.
Reason #1: Europe’s Debt Problems Haven’t Gone Away
The United States isn’t the only country with a debt crisis. The euro zone has had its own government debt/banking crisis which nearly sank the euro mere months ago, as Portugal, Ireland, Italy, Greece and Spain [the PIIGS] teetered on the brink of insolvency.
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Europe was able to paper over the problem for a while but now Ireland’s 10-year spreads have moved to 5% and Greece’s spreads to 9%. Investors are starting to bet those governments will bust their budgets.
As a result worried Europeans are (again!) moving into the safety of the hard currencies — gold and silver.
Reason #2: The Debt Crisis Is Global
The 15 most advanced nations of the world, including the United States, will have to borrow a whopping $10.2 trillion in 2011. The money is needed to repay maturing bonds and finance budget deficits.
Source: The Wall Street Journal
Looking at the chart, you can see that Japan is in worse financial shape than the United States but we are giving the Japanese a run for their money – the Federal Reserve has just committed to buy an additional $600 billion in U.S. government debt over the next eight months. The International Monetary Fund (IMF) warns that the chances that investors will balk at lending to governments “remains high for advanced economies.”
If the risk of government default is rising, where do you hide out? Gold and silver are a good place to start!
Reason #3: Central Banks Continue to Buy Gold
You know who is not worried about the high price of gold? Central banks. They continue to snap up the yellow metal. Obviously, they are banking on higher prices.
There are two parts to the central bank/gold equation: buying and selling. On the sell side, central banks and the IMF sold about 94.5 metric tons of gold in the year that ended last month. Most of this was IMF gold and the total was down a whopping 40% from a year earlier!
On the buy side, we know that countries including Russia, Venezuela and India are buying a lot of gold. In fact, Russia has been steadily building its stockpile of gold all year, buying it every month. It started with 16.7 million ounces in January and they just added another 500,000 ounces in October to hit 19.5 million ounces.
Even developed nations are buying gold — France’s gold as a percentage of its reserves rose from 42.5% to 63.3% and Portugal’s jumped from 39.9% to 83.7% in 2009. China is probably buying a lot of gold, though we won’t know until long after the fact.
Reason #4: Investors Are Piling Into Gold
Central banks aren’t the only ones not deterred by higher gold prices. Investors large and small aren’t blinking either. The World Gold Council estimated late last month that gold holdings in ETFs hit a new record in the third quarter. What’s more, a new gold ETF just made its debut in Hong Kong. The Value Gold ETF will hold its gold locally, and offers Asians unnerved by the global currency and debt crises a new way to hedge their portfolios.
Here in the United States another new fund was launched — the ETFS Precious Metals Basket (GLTR on the NYSE) – which holds a basket of gold, silver, platinum and palladium in differing weights with the gold and silver underlying the ETF held in London and the platinum and palladium held in either London or Zurich. It’s one more shiny lure for investors hungry for precious metals, and I think we could see a lot more funds of varying components debut before the big bull run is over.
Reason #5: The World Starts to Shift Away from the U.S. Dollar
The storm clouds gathering over the U.S. dollar are ominous. French President Nicolas Sarkozy recently emerged from a meeting with China’s leader Hu Jintao, and called for a new global monetary system. Since the current system is based on the U.S. dollar as the reserve currency, this move is a direct assault on the dollar’s primacy and since gold is priced in dollars, if the dollar is going down, gold will go up.
World Bank chief Robert Zoellick [has gone further…maintaining] that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of a bigger reform of the global financial system. Such a move would be an end to the current global regime which is based on the dollar as the world’s reserve currency and that would cut the hamstrings on the U.S. dollar.
So ask yourself, how can both the euro go lower and the U.S. dollar go lower? The answer is that both are going to go lower against hard currencies — gold and silver.
Reason #6: Gold Is Running Rings Around the S&P 500
The S&P 500 is up nearly 9% so far this year, which seems pretty good but that’s only because the S&P 500 is priced in dollars and the U.S. dollar’s big trend is lower. What happens if you price the S&P 500 in gold or silver? The results [below] may surprise you.
As you can see, priced in gold, the S&P 500′s 9% gain turns into a 14.85% LOSS and valuing the S&P 500 in silver the S&P 500 has lost more than 33% of its value in silver terms! To be sure, past performance is no guarantee of future results but if these trends stay in place — and I think they should — gold and silver should continue to outperform the S&P 500.
All This and Silver Too
I think silver will continue to outperform gold going forward, at least in the short term. It is an industrial metal as well as a precious metal, and the global economy is firing on all cylinders even as the U.S. economy continues to sputter. Investment demand for silver is rip-roaring, and it got a shot in the arm from the $575 million debut of the new Sprott Physical Silver Trust (PSLV on the NYSE, PHS.U on the TSX) in Canada.
My intermediate-term target of $31.39 on silver that I gave in October now seems too conservative. Longer-term, I think silver is going to $50 an ounce. We’ll see just how fast we get there.
*http://www.uncommonwisdomdaily.com/6-reasons-why-gold-and-silver-are-going-higher-10609