By: Jim Rogers, February 2, 2011
Hopes of economic recovery swept stocks higher in New York yesterday and this confidence spread to Asian equity markets. European stocks are tentatively higher as concerns about Egypt and geopolitical risk may be hampering gains. Oil prices remain near recent record highs (brent rose above $102 a barrel) and there are hopes that geopolitical tensions will subside, markets will remain calm and there will not be panic buying of oil and a new oil crisis.
Silver in Nominal USD – 1978 to Date (Weekly)
Gold and silver are marginally lower today in all currencies, but recent action suggests we may have seen capitulation and are in the process of bottoming out. Physical demand remains robust and both jewelers and investors are using the sell off as an opportunity to buy on the dip.
Demand for US Silver Eagles exceeded the record of monthly sales in 1986 by nearly 50% with 6,422,000 one ounce silver bullion coins sold. Yesterday alone saw another 50,000 Silver Eagles sold showing that physical demand for silver remains very robust. Reports of shortages of 100 ounce silver bars are overstated at this stage but there is certainly a degree of tightness developing in the market that we have heretofore not experienced.
Premiums for gold bars in Hong Kong and Singapore remain at the highest level since 2004. While Chinese New Year demand has ebbed, wedding season in India is next month and Indians will accumulate on the dip as they always do. Gold imports in India, the world’s largest consumer of the precious metal, already rose 18 percent in January to 40 tons. Indians buy gold, and increasingly silver, jewelry at religious celebrations and weddings and use it as a store of value.
Legendary investor Jim Rogers speaking to investors in Amsterdam this morning, said that gold is still far from being a bubble and investors should sell bonds and buy precious metals. The chairman of Rogers Holdings, who predicted the start of the global commodities rally in 1999, said that “gold should have a rest but it’s far from being a bubble yet.”
“Gold will have reached an unbelievable price before it starts falling,” Rogers said, who owns gold but prefers silver due to it remaining cheap relative to gold and cheap on a historical basis.
Rogers recently said “silver is going up, but silver is 40% below its all time [nominal] high. Yes, commodities have been going up recently, but they are still extremely depressed on a historic basis.”
Rogers is referring to the fact that while some commodities, such as copper and cotton, have risen to record nominal highs recently, many remain close to and not far above average prices seen back in the 1970s. Since that time there has been significant inflation and therefore adjusted for inflation, which is always crucial to do, many commodities remain well below their inflation adjusted highs of more than 30 years ago.
Since then, the global population has nearly doubled to more than 6.5 billion people, and there has been the emergence of huge middle classes and rising consumption in most of the world; especially in India, China and the rest of Asia.
One example of a commodity that is only marginally above its average nominal price from the 1970s is cotton. World cotton prices have risen to nominal highs in recent days due to robust demand, very low world stocks of cotton, limited supply and a depreciation of the US dollar.
The silver, sugar and cotton charts above show that despite their recent price gains, many commodities remain well below their inflation adjusted prices of more than 30 years ago. This is also the case with gold and silver as their record adjusted for inflation highs from 1980 are $2,300/oz and $130/oz.
This suggests that the recent price gains in commodities and rise in inflation may not be another short term speculative price rise and may be something more sustainable. It may even herald the continuation of the “commodity supercycle”.
Having said that, another bout of deflation and a double dip recession and depression in the US and global economy could see another sell off in commodities – at least in the short term.
Due to safe haven investment and store of value demand, gold and silver would perform well as they did in the deflation of the 1930s and during the recent bout of deflation in the current and ongoing global financial and economic crisis.
