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Monday, 4 July 2016

Precious metals are BACK

Aussie gold medal

I must confess I know very little about gold, although I did work in the resources industry for some time, including for a company which mined copper/silver/gold deposits. 

From discussions with my ol' mate Jordan Eliseo at ABC Bullion I understand that the total supply of demand is relatively fixed.

Logically, therefore, he explained to me (probably several times) sentiment and demand are the true drivers of prices - and such demand can rise at times of uncertainty.

Of course, there has been a fair share of that uncertainty around recently!

The gold price has surged of late to above US$1,340/oz.

This is well down from the 2011 peak of above $1,900/oz - so why the excitement?

Locally at least, the main reason is that when priced in Aussie dollar terms, the weakening of our currency has seen the gold price bolt to all-time highs!

The below chart is plotted on a monthly average basis, but we can expect to see further gains in the month ahead.


As a point of interest I also indexed the gold price against a number of key currencies back to 1969.

If my chart is correct - by no means a given due to my lack of knowledge in this area! - it shows that gold has been an excellent hedge against inflation in countries such as England, where there have been some periods of rampant inflation. 

The same has been true in the United States, which has run up large government debts and experienced prolonged periods of inflation.


There has also been a big resurgence in the price of silver lately, passing its $21 threshold for the first time since July 2014 after a protracted lull. 

The precious metals are back!

Whether or not you hold precious metals in your portfolio, this is excellent news for Australia's trade balance, which is due to be reported later in the week.

In fact, gold is Australia's fifth most valuable export commodity, while there have also been sizable gains across a number of other commodities markets, as traders anticipate further stimulus.