By: Alex Stanczyk, with commentary by John Fisher
A couple of days ago we reviewed a graph depicting a classic bull market, including a “Bear Trap” that will cause many gold and silver investors to give up their positions. Click here to see yesterdays article: “Don’t Take Your Eye Off the Ball – Part 1”
Now is one of those times in this bull market that we need to come back to the fundamentals of why we came to embrace precious metals in the first place. Ask yourself if the following components are still in place? Have they materially changed?
Q1. Is mining supply increasing or decreasing?
A: Supply is flat, if oil prices continue to rise it will increase costs of extraction
Q2. Are sales to Central Banks increasing or are they buying?
A: Central Banks are buying precious metals
Q3. Are China and other developing nations buying more gold or selling?
A: China and other developing nations are buying more gold
Q4. Are western nations of the world suddenly fiscally responsible?
A: Not by anyone’s wildest imaginations
Q5. Have western nations of the world figured out a solution to the debt problem aside from more money creation that will devalue all paper money and thus create more demand for gold?
A: It doesn’t appear so
Q6. Have western nations figured out a solution to the unfunded liabilities problem, such as the US liabilities exceeding $100 Trillion?
A: There have been many solutions presented; however there is currently a lack of will amongst both government and citizens to pull it off.
Q7. Has there been a solution to deal with the $600 Trillion dollars of OTC derivatives currently sitting on the balance sheets of the world’s banks? Will these time bombs waiting to go off trigger additional bail-outs, financial instability and currency printing?
A: Yes. Each time these blow up, Central Banks print more money to bail out the balance sheets. This of course raises the price of gold, and commodities as well.
Q8. Are we seeing more or less riots over price increases in food globally?
A: Food price is driven globally in part by the oil price (and very expensive ethanol production). More Quantitative Easing = Higher Oil. Higher Oil = Higher cost of food. Higher cost of food = increased riots globally.
Q9. Are the bond markets of the world getting better, or are they getting worse?
A: Bond markets on both sides of the Atlantic are in dire trouble, and getting progressively worse.
Q10. Is the population rising, or falling? Will increased numbers of affluent Chinese and Indian citizens create more demand or less?
A: There are a substantial number of Chinese and Indians with substantial disposable income, which is only projected to grow. India and China are the two largest importers of gold in the world, driven in large part to the fact that gold is considered an excellent tool for storing wealth by the cultures of these nations. Western citizens would often rather have credit cards, auto loans, and mortgages.
Q11. Is oil production rising or falling? Will the cost of oil affect extraction costs of gold causing an increase in price or a decrease?
A: Oil prices in general will trend higher as production declines. Unless oil shale and natural gas combined with technological advances in horizontal drilling can be brought online quickly and in quantity, energy prices will force all commodities higher, which would be a perfect long term fundamental driver for a rising price of gold.
All Things Considered – John’s Commentary:
Action to take: Stay the course. Don’t allow yourself to be shaken out, as many will. Remember, it is not until everyone wants in, that we should even consider getting out.
What to buy: It is best to call, as inventories are shifting rapidly with new deals coming on line regularly.
Quote of the day: “The price of gold may need to reach $15,000 in order for it to function as a reserve currency.” – Robert Mundell – father of the Euro currency
