Commodities Blog
Inflation
The monster is out of the box - but for how long?
It's easy to look on the down side right now just ask Mervyn King.
"There is a feeling of chill in the economic air" remarked the Bank of England Governor in a press conference yesterday.
The air is likely to get distinctly chillier as we look ahead towards the autumn.
If inflation alone was the only problem in the economy, this could easily be rectified by simply raising the base rate a few basis points to keep the unpredictable menace in its box. But what happens when the lid is jammed open by something equally damaging like the credit crunch?
This is a continuing dilemma for the Bank of England and UK citizens anxious about jobs as well as rising fuel and energy costs. Ominously the tone of the inflation report paints a gloomy picture of more pain to come. Britain and most of the rest of the world are sailing into uncharted waters on the anniversary of the official start of the credit crunch - an unhappy milestone no one is celebrating.
Since last year we have become all too familiar with words like "sub-prime", "house price crash" credit squeeze etc... to add to the return of the old 70s favourite - "stagflation". The torrent of bad news has continued as newspaper headlines predict even more gloom to come in 2009 with a recession looming menacingly on the horizon. Yet the accepted wisdom is we are not technically in a recession until two consecutive quarters of negative growth- but it certainly feels like one.
Everywhere you look the system appears to be unraveling alarmingly, banks have continued to announce heavy losses - a record £700 million in the case of RBS. The UK property market is being held in the vice like grip of a negative feedback mechanism, held down by tight lending conditions on one side and a slowing economy held back by rising inflation on the other.
This week also revealed unemployment figures surging higher in July than at any time since 1993; worryingly around the time of the last recession. The official unemployment rate now stands at 5.4% and no matter where you look, all sectors of the economy appear to be being sucked down the plug hole of a deep recession.
A chill in the air there may be, but inflation has become too hot to handle for the Bank of England, who have no choice but to keep rates on hold at 5% seemingly indefinitely. The value of sterling has plummeted as a result, falling to a 2 year low of $1.90 this week.
All this of course means less money in our pockets, surging energy and food bills and the money we do manage to hold onto steadily being eroded away. With these factors in mind, it is no surprise there is less to spend on property. First time buyers initially thought to be the main beneficiaries of a falling property market have virtually been frozen out altogether by the huge deposits required by banks for mortgages.
Freezing stamp duty is unlikely to improve the situation either, why not wait and see house prices become even more affordable and mortgage deals improve?
The death of the 100% mortgage as a result of the sub-prime crisis also marked the start of an accelerating slump in the property market which has yet to reach rock bottom. The situation has been compounded by the governments' dithering over suspending stamp duty, which has brought the ailing housing market to its knees this month.
So is there any good news to find amidst all of this?
Yes indeed there are if we look beyond the current turmoil. There are a few glimmers of hope to be found as the smoke clouding the future begins to clear.
Firstly we have seen a dramatic decline in the price of oil from its peak of $147 a barrel in July at the height of the tension in the Middle East triggered by Iran's missile testing. Oil fell as low as $113 this month, a fall of 23% even though threats to global supplies have actually increased, notably this week with Georgia's short-lived war with Russia.
Despite the Russia's invasion of South Ossettia and the threat to Georgia's oil pipelines, the oil price continued to decline providing a clear indication that it has already passed its peak. Even so the shock news came this week that UK inflation now stands at 4.4% with this month's inflation report hinting that we are likely to see a further rise to more than 5% in the coming months - a figure that would push inflation above the base rate for the first time since 1981.
While less than ideal, the bank of England's gloomy response is a predictably more an honest reaction to the situation we are in right now. Alastair Darling as he has done all year would at least play on some of the more optimistic signals emerging. For instance the inflation figure relates to July when oil surged to $147 a barrel, therefore inflationary pressure will almost certainly ease in August.
Further news from China this week painted an equally gloomy scenario of China's economy with Chinese government holding a meeting in July to discuss slowing growth, rising inflation and a serious decline in exports to the US and European markets. Demand for oil will almost certainly fall as a result, which will see prices fall even further in the coming months.
This will combine with a slowdown in the UK as the economy slowly grinds to a halt, this will unfortunately push unemployment even higher through 2009. While this will compound the misery for many, a slowing economy will eventually bring inflation back under control allowing the Bank of England to cut the base rate to stimulate growth long term.
There was even some more positive news arising from the housing market this week with the RICS monthly survey finding a small decrease in the number of its members reporting lower house prices - down from 86.9% to 83.9%.
A crumbs of comfort maybe, but in these troubled times good news is hard to find.
The end of the gold rush in sight
Yesterday the chairman of the Federal Reserve, Ben Bernanke, said risks to the US economy "have diminished". This was followed by Henry Paulson's comments also yesterday that he would "never" rule out currency intervention to prop up the dollar.
While trust in governments and central banks is at an all time low, any news positive or negative continues to have a major impact on sentiment. Yesterday's comments have had the desired effect in strengthening the US dollar against other major currencies. The dollar rose to 106.84 against the Yen, its highest since February. The dollar also rose against the euro and the strong Australian dollar.
Not surprisingly gold fell back to $890 on this news despite oil remaining close to the $135 mark. Oil is still reeling from comments from the Israeli transport minister Shaul Mofaz that an attack on Iran was "unavoidable". The Israeli leadership have since distanced themselves from these comments but the effects will remain for some months with investors pouring in money in the hope that oil will hit the magic $200 mark.
An attack on Iran this year is highly unlikely with the US consumer already feeling the pinch. The likely scenario over the next few months will be a tightening of monetary policy in the US and Europe as the emphasis will turn to fighting inflation rather than further wars in the Middle East.
The resulting slowdown in demand for oil and a strengthening dollar will see the price of gold fall back by late summer.
Gold and oil - A close marriage amidst economic turmoil
With the price of oil rising to record levels the only way is up for gold.
For better or for worse gold and its sticky partner oil are inextricably linked together, trading within a well-defined range of eachother since the Second World War. As the price of oil rises, invariably the price of gold follows suit.
As with all marriages there will inevitably be ups and downs. The undeniable symmetry of gold and oil prices is interrupted occasionally, but the recent bull-run on these commodities provides a hint at the future direction of gold, widely regarded as the ultimate safe haven investment in times of economic uncertainty.
Gold, the most precious of precious metals has a long history as a store of value stretching back many thousands of years.
Oil, meanwhile, has become one of the world's most important commodities since techniques to refine crude oil were first developed in the mid 1850s. If you take biological processes out of the equation, virtually everything tangible that moves is powered by oil, and demand for it is rising.
As more expensive oil pushes up the price of energy, money also flows to the safety of gold as a hedge against inflation. It is fitting then, that their importance to civilization has pushed this beauty and the beast partnership even closer together in the 21st century. The closer correlation between the rising price of gold and oil provides the answer to the future direction of the gold price.
Inflation is the single biggest threat lurking in the shadows of the global economy replacing the credit crunch as the most serious threat to economic stability. Inflation or more worryingly, 1970s style stagflation is threatening to derail a recovery in the economies of the UK the US and Europe and governments seem powerless to stop it.
From close marriages to uneasy partnerships, The economies of the emerging markets and those of the rest of the world are moving in opposite directions. The blame for the current high price of oil has been placed on the emerging economies of India and China - both racing ahead while Europe and the USA are flatlining . The voracious appetite for oil to fuel growth in these countries is blamed for pushing up prices with global supply of oil stretched beyond its capacity to deliver - or at least this is the accepted view. The truth is altogether more complex.
Oil has recently surged beyond $130 a barrel - unthinkable as recently as 2007. Yet demand should be cooling as global growth slows. Let's look again at China and India. Back in 2004 demand for oil in these countries was equally high leading to projections that it would rise indefinitely. Back then, oil was comparatively cheap at around the $38 a barrel mark. Now, in 2008, the same argument is being pushed out yet the idea that emerging economies are somehow guzzling up the global supply of oil doesn't stack up.
China's economy has certainly experienced rapid growth in recent years, rocketing to 10.4 percent GDP in 2006. This level of growth has slowed in the past year with the World Bank predicting a fall to 8.7 percent GDP in 2008. China's economy remains perilously close to overheating with inflation predicted to reach 10 percent this year and the government are tightening fiscal policy as a result.
India, too, is facing the same inflationary pressures with the central bank already tightening monetary policy. GDP is predicted to slow from 8.5% to 8% this year as global demand for its exports softens.
The economies of India and China are still growing fast, but not as fast as they were. It is safe to assume, therefore, that the supply of oil will be adequate to meet current demand in the two Asian powerhouses. While growth in these emerging markets is a factor it is by no means the only factor.
Rising inflation has cut consumer demand for gold in India by half as consumers wait for the price to fall to more affordable levels. This was part of a trend which has seen consumer demand for gold fall globally, yet the price of a troy ounce rose to record levels in March. So with plenty of gold and oil already in the system, why are prices rising if real demand is falling?
Speculative demand for oil and gold goes some way to explaining this year's hike in prices. But this isn't the only factor, a perfect storm of political and economic factors are threatening to plunge the world into an oil crisis, the like of which hasn't been seen since the 1970s. Firstly there is the threat to supply. Attention has been focused on events in Africa with investors seizing opportunities when the supply of oil and gold is threatened. For gold it is South Africa's problems with supplying power to its gold mines, while in West Africa, attacks by militants on pipelines in Nigeria has intermittently fuelled surges in oil this year.
Another factor is the increasing tension developing between the US and Iran and, more recently, Venezuela. The two countries are major thorns in the side by the United state government. The leaders of both OPEC countries are blaming the US dollar for rising oil prices. Venezuelan president Hugo Chavez even went as far as blaming "the fall of the American empire". While President Bush was busy negotiating with the less hostile regime in Saudi Arabia in the hope of boosting oil production, Iran and Venezuela were declaring that supply was adequate. This may well be true with news that as Saudi Arabia upped its production, Iran currently has 20 tankers full of oil floating in storage and this number is likely to increase.
With the possibility of hostilities between the US and Iran erupting into armed conflict, the chances of oil rising further this year are high. This would be seriously bad news at the pumps with the price of petrol and diesel rocketing as a result.
More expensive energy will act to slow growth worldwide as inflation rises and governments tighten fiscal policies in the hope of controlling inflationary pressures. Hope may yet come from the election of democrat candidate Barak Obama and a likely softening of the hardline policy pursued by the Bush administration. Until this happens, expect to see gold and oil continue to break records this year with the nightmare scenario of $200 a barrel looking increasingly more likely. If this happens, gold as a hedge against ensuing inflation will also be pulled upwards to record highs.
The long term average gold to oil ratio is 15 barrels of oil to one ounce of gold. An ounce of gold at current prices will buy you around 7 barrels of oil. With oil moving relentlessly towards $140 a barrel this week, this makes a powerful case for investing in gold right now.
By Brett Tudor
Commodities this week
After making a significant comeback to reach new heights a week ago, gold has recovered to a new base of $880 following a surge yesterday (May 15th ). This is causing excitement among investors who are betting on a return to $1000 by June, we shall see...
Gold's recovery has been aided somewhat by a weakening dollar vs. euro, which helped boost its appeal as an inflation hedge. This also triggered a rise in other precious metals including platinum (2%), silver and palladium.
Confidence has yet to return to the markets with oil prices remaining at high levels raising the spectre of global inflation with double-digit wage growth in emerging markets. This week the UK and Europe were rocked by higher than forecast inflation with UK CPI at 3% - well above the 2% target, but still lower than the EU average of 3.7%.
Last week the Bank of England and the European Central Bank voted to hold their base rates at 5% and 4 % this week in an attempt to ease inflationary pressures, however it remains to be seen whether or not the US follows suit later this month.
The rising cost of oil is a concern for the Fed and a swift change in policy is being muted though this would bring a swift halt to recovery. For those long on gold there are to things to consider - will a change of policy raise the value of the dollar? Or will oil remain close to 40-year high against gold? How these two opposing scenarios play themselves out in the coming months will be key to long term positions on gold.
Credit Crunch Confusion
Where do I invest my cash in 2008?
Anyone lucky enough to have a lump sum of cash to invest this year will be forgiven for wondering where to put it. Should it be stuffed safely under the mattress? Far too risky, you might get burgled and like organic matter your cash doesn't stand still, the longer it stays under the mattress the more it's eroded by time as it declines in value.
How about gold? Should you join those rushing to the comfort and safety of the precious metal?
There is also the high risk and potentially high rewards offered by stocks and shares. Depending on the lump sum, property could also be considered as a place watch an investment mature nicely.
After all, you can't go wrong with property, it always rises in value and it's as safe as houses isn't it? This used to be the case, but now many property markets globally appear to be imploding, while the risk of exposure to the credit crunch in emerging locations like India and Brazil is unclear.
Property aside, wherever you look there are advocates for every form of investment. Those with vested interests will inevitably spread misleading interpretations of the direction a market is heading, breeding either positive or negative sentiment. This creates uncertainty, inevitably leading to the kind of panic we are seeing now among investors. We are led to believe that house prices are crashing, gold has never been a safer bet and it would be financial suicide to invest in stocks and shares as we enter one of the stormiest global markets seen in more than a quarter of a century.
Gold spiked in 1980 only to crash to a bear market lasting until 2001. House prices crashed in the recession of the early nineties plunging unfortunate mortgage holders into negative equity. The stock market took a big hit from the dotcom bubble in 2000 resulting in ruin for many. The stock markets, gold and property have all recovered, reaching record highs in the process.
The latest global financial panic caused by the credit crunch, with accompanying apocalyptic talk of another Great Depression has now trickled into mainstream thinking.
If all this leaves you wondering where to invest your money while all this panic is taking place it is worth keeping a cool head. Capitalism is characterised by cycles of boom and bust, which act as a vital safety valve for market economies. What goes up must inevitably come down at some point. Falling house prices are blamed for the current malaise in banking sector, yet surely no one in their right minds believed that house prices would rise indefinitely. House prices in the UK and the US are at their least sustainable levels since 1989. In the UK a correction was inevitable and overdue with house price to income ratios at an all time high.
Experts in the field now advise us that it is a bad idea to invest money in a market unlikely to recover for years to come. The credit crunch will supposedly compound the situation by causing a crash of anything up to 30% in the UK's housing market.
But as Dad's Army's Corporal Jones would say, "don't panic!" A housing correction is still unlikely to last more than four years and historically property is an asset which has consistently outperformed gold in the long term. People will always need somewhere to live - rent or buy - and demand for housing hasn't gone away.
Investing should usually be considered as a long-term commitment of at least ten years and naturally you should expect some peaks and troughs along the way. Of course, there is always the problem of predicting when the market will reach the bottom - the best time to invest - something even the experts are finding hard to predict.
The key to finding the best property investments is to gain access to good local knowledge which will help secure genuine deals at prices below market value. So with property requiring specialist knowledge and stuffing money under the mattress out of the question, let's look at the case for gold.
In the long term gold is a real asset like property, but with the added bonus of being liquid. Sure, it costs you money to store, but it is always marketable at the same time. There is also the current economic malaise to consider, food prices and oil have risen to record highs fuelling inflationary pressures on governments around the world. Some are predicting that oil will soon hit a previously unthinkable $200 a barrel. There is also the suggestion among doomsayers that confidence in fiat paper currency may be breaking down.
Apart from providing the essential raw material for jewellery, the mere mention of gold triggers great excitement among gold enthusiasts. They religiously track its progress through complex charts interpreting its peaks and troughs by the day, hour or week or month looking for evidence to support their view that gold is where you should be investing your money.
On the face of it, they have a strong argument.
Governments across the world are frantically trying to stimulate growth in their economies by slashing base rates, the resulting devaluation of currencies and inflation makes conditions perfect for gold to rise. Gold is a hedge against inflation providing some stability in an unstable global market place. As any advocate of the yellow metal will tell you, when all else fails, gold always holds value, as history has proved.
Where once the main topic of conversation over dinner was property, people are increasingly talking about gold. Gold is the new property. If you bought gold for $600 an ounce in January 2007 it would now be worth between $800 and $900. A good return by any measure, a sure thing...
So is there a downside?
Again this depends on whether you view gold in the short or longer term. In the short term the gold price is volatile, after peaking to a record $1000 a troy ounce in March it is now hovering around the $850 mark. This is hardly a crash, but demonstrates how the market is driven by speculative investment when times are bad for the economy. When economies were roaring along property and shares were the fashionable place to put your cash, therefore what happens when the good times are back? Can we rely on all those investors staying put while the big returns are made elsewhere?
The point is that gold is good for the risk averse, but it would be wrong to invest all your cash in it because it is little more than a store of value. You can't leverage gold and it doesn't produce yields.
So, if we ignore other commodities and label them 'handle with care', this leaves us with stocks and funds. Investors familiar with the stock market will tell you that in the long term equities outperform every other asset class. Buying the right shares can mean big returns depending on how profitable a company is in the future, however as with anything which relies on future performance, this can also be a risky strategy. You could also opt for funds, but avoid choosing a fund just because it has done spectacularly well in the past. Any decision to invest in funds needs to be considered carefully, ask anyone who invested their money in some property funds recently - an area having its toughest time for 20 years.
Before you even consider where to invest your cash, there is one question you should ask yourself, how much risk am I prepared to take? Depending on your appetite for risk you might consider any or all of the options mentioned earlier. There is no easy answer and even the experts get it wrong, so the sensible strategy is to spread your risk. Develop a broad portfolio which contains an element of gold. A broad portfolio will greatly increase your chances of weathering the financial storm.
The alternative? Invest your money in a high interest savings account and wait for the storm to pass, but beware, base interest rates are falling and this will reduce your returns.
And you may also ask yourself - are banks a safer bet than under your mattress these days anyway?
By Brett Tudor
Editor
Future gold price looking more uncertain by the day
Just 47% of users polled on Goldpricecrash.com believe now is the time to buy gold
Money has been pouring money into gold in recent months as panic has gripped investors in the face of a global economic slowdown. Gold hit a record high of 1030.80 a troy ounce on March 17th sparking a wave of gold buying fever among investors and consumers seeking a hedge against inflation.
Gold is traditionally viewed as a safe place to invest money when the dollar is weak and with the recent credit crunch threatening to trigger a global depression this year, the metal has rarely looked safer - until now that is.
The last time the gold price reached current levels was in 1980 when it rose to a spot price of $850. Experts are predicting a further high in the coming month, arguing that after adjusting the previous 1980 high for inflation, the price would be double what it is now at $2,200.
Despite these confident predictions just 47% of users polled on goldpricecrash.com believe now is the time to buy gold.
This reflects a general decline in confidence as the yellow metal is currently struggles to record a price above $900.
The US dollar is strengthening and the Federal Reserve is meeting on the 30th April to decide whether or not to continue on its base rate reduction campaign. Rumour has it the Fed will opt to hold rates to keep to reduce inflationary pressures brought by high oil prices nudging $120 a barrel.
The parallels between now and 1980 are uncanny; the US economy is threatened by high energy prices, a resulting rise in inflation and rising unemployment. Afghanistan is again attracting the world's attention, as it was in 1980 with the Soviet invasion and assassination of the president. This week's attack by the Taliban on a military parade attended by the president was equally embarrassing for the United States government.
Following its record high in 1980 the price of gold soon crashed triggering a 22 year bear market. Fast forward to 2007 and with prices failing to break the $1000 mark since March, investors are starting to get edgy. How long can they hold their nerve?
By Brett Tudor
Editor
Gold needs a rally
After the frenzied investor activity in gold there are signs of negative sentiment entering the market with Dennis Gartman announcing that he is "abandoning ship" on his positive gold outlook. Gartman, editor of the daily Gartman letter has had a positive outlook on gold for the past 3 years, so why the change?
After hitting record highs a month ago, gold has struggled around the $920 mark with a fall to $910 only last Friday. While this is not necessarily cause for alarm there is a sense that the market for gold has gone eerily quiet.
Gartman suggested in an interview for Bloomberg that he expects governments to step in to stop the rise in grain prices. Commodity market magazine suggests that there is a "worrisome de-coupling taking shape between the dollar and oil. In the same article global CIO of the Swiss bank Banque de Commerce et de Placements advised that it is "never a good idea to be contrarian to a national bank" referring to the decision by the Swiss National Bank to sell off their gold.
Maybe it's a little early to call an end to the bull run on gold, but the future is looking a little less certain today than it was yesterday, gold needs a rally and it needs one soon...
What do you think? Have your say
How commodity prices influence global exchange rates
Exchange rates across the world can be affected by a number of factors, including interest and unemployment rates, politics and economic strength. However, there are lesser-known, but equally influential factors and among these are commodities.
For an investor, being aware of a country's relationship - or correlation - with a particular commodity can place them at a huge advantage.
But, while the connection between interest and exchange rates is clear, that between currency and commodities can be overlooked.
In a nutshell, a number of countries rely on commodities - such as gold, oil, rice and wheat - to boost their economies by buying or selling them. A nation that exports huge amounts of gold for example will benefit if the price of gold goes up. This will lead to more money being pumped into its economy and this, in turn, will appreciate its currency. The more a nation relies on a particular commodity, the stronger the correlation between its price and the exchange rate is likely to be. Nations with moderate supplies of a commodity will not have their currency affected as greatly.
In 2005, a number of events, including the devastation of New Orleans by Hurricane Katrina, showed the influence a particular commodity can have on a nation's exchange rates.
At the time, Canada had one of the world's largest oil reserves - second only to Saudi Arabia - and had become a major exporter of crude oil. As a result the Canadian dollar was heavily affected by the cost of oil, as higher prices meant more money coming into the country, boosting its economy and driving up currency value.
Peak oil prices in 2005 were nearly 70% higher than they were at the beginning of the year, sparked by the Katrina disaster, but tailed off in November and December before settling at around 40% above their original mark.
This rapid volatility in oil price caused the Canadian dollar's value to climb and fall accordingly, demonstrating the correlation between the two. An investor aware of the Canadian dollar's relationship - correlation - with oil prices would have been at an advantage in 2005.
But commodity price shifts will not affect all nations, or their currencies, in the same manner.
Japan is one of the world's largest importers of crude oil and, as a result, its economy is heavily dependant on oil prices. When oil prices rocket Japan has to pay more to buy it in, which affects the amount it can spend on other resources, which puts pressure on its economy and weakens its currency. Again, an investor aware of the relationship between Japan and oil, the opposite of that of Canada, would have a better idea of possible exchange rate movements.
Gold is another commodity that is not only closely correlated to a number of world economies, such as that of Australia, but also enjoys a number of price shifts. Again in 2005, demand far exceeded supply, so the price of gold went up. As Australia is the third-largest producer of gold, its economy and currency are also affected. Therefore, gold price increases almost always strengthen the Australian dollar while decreases weaken it relative to most other economies, which are less correlated to gold.
Other nations are equally affected by their correlation with certain commodities. Gold prices can also strengthen or weaken the USD and the South African Rand. In Eastern Europe, Polish Zloty can be affected by the price of soya beans, a major import of Poland. There are countless examples.
It is possible to predict currency rates based upon commodity price shifts, therefore it is important to understand which nation's currencies are vulnerable to commodity prices - and how - in order to take advantage when exchanging currency.
By Nigel Hodges www.currencysolutions.com
What do you think? Have your say
Inexorable shift to commodities
Another day, another fall in the US dollar. It's hard to be optimistic about the future of the global economy when your daily diet is filled with news gathered from harbingers of doom.
Investors are terrified and rightly so, as they seek the comfort and safety, not just of gold, but also other commodities like oil, which continues to hold its position well above the $100 barrier.
The flight to commodities is driven by more than the credit crunch however; there are signs that the current high prices of rice, oil, copper and other commodities may continue on a long term upward trend. It is now a real possibility that commodities will continue to outpace equities, bonds and other financial instruments.
Oil, corn rice and gold have all reached record highs this year as the greenback has plummeted against the world's other major currencies. Historical parallels are often drawn by analysts aiming to predict how this current crisis will play itself out, but what happens if this time, history doesn't repeat itself?
Much of what is occurring around the globe right now is unprecedented. The pace of development in Asian economies has been nothing short of spectacular and this has meant a greater consumption of raw materials and the commodities required to fuel that growth. China's economy grew by 10% in the first quarter of 2008 and the increasing demand for oil is partly responsible for the recent hike in oil prices.
Rising populations in the developing world coupled with rising energy prices has also put pressure on the price of food to such an extent, that the prices of basic staples like wheat corn and rice have risen 50% in the last six months. Those countries most at risk from food shortages include North Korea, Iraq, Moldova and Afghanistan. Global warming has also hit food production hard as it continues to disrupt established weather patterns.
News today that Russia has already reached its peak production of oil is likely to drive oil prices beyond this week's record high of $114.5. This will drive inflation in Europe and the US as economies struggle to cope with the fallout from the credit crunch. Governments will be faced with the dilemma of trying to stimulate their economies while at the same time trying to keep inflation down. Current policy is to cut interest rates in the US and the UK and this can only weaken the dollar and sterling further.
In the current climate investors will continue move towards the safe haven of tangible commodities. Gold and other metals are also holding firm and are as yet showing little sign of any consistent fall in prices. A gold price crash will be good news when it happens but when that is likely to occur is becoming increasingly unclear.
What do you think? Have your say
A Tale of Two Metals
While all the attention has been on gold this year, the recent spikes in these precious metals has been overlooked, so let's look at the long term viability of these PGMs in more detail.
Visit your local jewellery store today and it is highly likely you will find an abundance of Palladium on display. Palladium is being heavily pushed by jewellers struggling to sell more expensive items produced from gold or platinum. Virtually unheard of on the high street prior to 2007, palladium is rapidly becoming the precious metal of choice for those seeking a bargain. The average price of a ring for example is less than half the equivalent in white gold and a quarter of the price of the equivalent ring made from platinum as I discovered recently.
As a result of low prices and its naturally white properties, similar to both white gold (palladium is used to produce this alloy) and platinum, Palladium is becoming popular as a poor man's alternative. The metal is lighter than platinum, therefore it is more comfortable to wear, however its relative cheapness betrays the fact that like platinum it is several times rarer than gold. Platinum and palladium are also found together in the same ores. This is not the only similarity between the two metals, like platinum, palladium can be used in catalytic converters and electronic components therefore demand is strong in these industry sectors.
The interesting thing about platinum and palladium is that both of them are rising in price with the former reaching record levels this year. The reasons for this lie in global production and more specifically in South Africa and Russia and to a lesser extent, the current weakness of the US dollar. South Africa and Russia are the two primary producers of both these precious metals by some distance and stock levels are directly affected by supply issues in these two countries.
The key drivers of the recent spike primarily in platinum and palladium has resulted from Russia holding on to its stocks and the unpredictable supply of electricity to South African mines.
Platinum is hovering at around $2000/ oz and ounce which puts the current gold spike into perspective! while palladium surged 46% in just one month this year reaching a high of $568/oz before falling back slightly.
So do these metals offer a safe haven for investors?
In order to be a safe haven if one exists (just take a look at the long term performance gold that other precious metal regarded as a safe haven) a home for your cash needs to provide stability in the longer term. It is a fundamental fact that most, if not all commodities will rise with a weak dollar as investors hedge against its weakness. The US dollar is weak therefore it is no coincidence that money is pouring into precious metals yet in the long term it is unlikely that prices will be sustained at current levels when the dollar recovers.
Is this current surge in platinum and palladium underpinned by a weak dollar?
Well this may be true to a certain extent, but if you look at the long term trends of PGMs compared to gold there is a greater tendency for price levels to surge in PGMs and this is as a direct consequence of the level of supply. Production over the years has played a much bigger role in the value of PGMs than gold.
While the market for PGMs is less speculative than gold there are signs that investor interest is growing amongst a small number of hedge funds. However, in the long term price levels are far too volatile for all but the most serious investors prepared to watch the market carefully.
The price of these metals like gold is likely to fall as the US dollar recovers though not as dramatically. The immediate future of these precious metals is heavily reliant on Eskom, South Africa's state run power company and whether or not they will deliver the consistently high level of power required to mine the metals. With every increase in the level of power to the mines, the price of platinum and to a lesser extent palladium plummets.
What do you think? Have your say.
Should you put your money into gold? You'd be a fool to do so. Here's why...
This week has been one of most eventful weeks of the year for the global economy. The credit crunch is now firmly a credit crisis leading George Bush to declare "we're in challenging times". Meanwhile gold hit a record $1,000 dollar a troy ounce.
It was no coincidence that the US dollar, already plummeting in value against the euro has plunged to a 12 year low against the Yen. One thing we can always be sure of in these uncertain times is a falling dollar means the price of gold rises.
The sub-prime crisis now reaching fever pitch in the US following the news that the fifth largest bank in the US, Bear Stearns has collapsed . This again, was due to the bank's exposure to the risks of sub-prime lending. Conditions are perfect for the biggest surge in gold prices in more than a decade as investors lose their heads and chaos rules.
Investors are understandably nervous about putting their money anywhere else right now, other than perhaps oil, which has also risen in value to $110 a barrel this week.
So why is gold widely regarded as a safe haven for investors?
Primarily because gold is regarded as a hedge against inflation, a currency of last resort when the US dollar is weak.
The price of gold has risen 55% in the past year on the way to hitting the $1000 a troy ounce milestone. It is also widely anticipated that we could see further increases in the coming year, particularly with successive cuts in US base rates, which weaken the dollar's appeal and boost the attraction of the precious metal.
Right now, with panic spreading fast in global stock markets and a media frenzy, many investors have lost sight of long term investment performance.
South Africa, one of the world's major gold producing countries, is suffering from power shortages. This has resulted in a scaling back of mining activities and the country is optimistic that planned job cuts the industry will be avoided now that the price of the metal is rising. This however could well be misplaced optimism.
Demand for gold is expected to increase in India and China, the world's biggest consumers, as their economies continue to perform strongly.
Investors are now flocking to what they see as the safe haven of gold when all other investment options look shaky.
The primary reason why there is a bull run on gold is the weakness of the US dollar -and the currency just keeps getting weaker as financial turmoil grips the American economy, and threatens to spread around the world.
There is little sign of an end to this situation, with each prediction that the crisis is coming to an end there is another that the worst extent of the crisis has yet to be fully realised. The media are even making increasing references to the Great Depression.
All good news for gold then? Well no, not really...
Yes, if you take a short term view and follow the herd,
But and this is a big BUT...
If you believe in buying low and selling high, the warning signs appear to be already there. The price of gold according to analysts is at a "mature phase" - therefore the opportunity for real profits has already passed.
A famous John Kennedy quip prior to the Wall Street crash of 1929 was "you know it's time to sell stocks when even the shoe shine boy tries to give you stock tips".
One of the major signs of an overly inflated market is when it is widely reported that it has reached "new highs" - and that is exactly what is happening with gold. We also have the majority of investors talking optimistically about further rises - so investors are still flocking to the perceived safety of gold in large numbers.
Look more closely at the reporting and you will notice a growing sense of underlying negativity.
We read that the "underlying physical demand has been struggling". While gold may still be in demand in countries like India, demand globally remains constant and in a global recession we can reasonably expect demand for jewellery to fall.
The current increase is driven by nothing more than speculation with nothing to underpin prices.
This rather shaky foundation is a big danger signal - who will buy the gold when confidence returns?
In 1980, just ten days after hitting a record $850 a troy ounce, the price of gold fell to $700.
And, you know what - Once we factor in inflation, today's $1000 dollar an ounce is not that significant compared to the price in 1980.
That is because, historically, gold underperforms virtually every other asset class.
Let's look at the long term trend in gold prices since 1979 below:
Gold Prices 1979-2008
gold price graph
There has been only two major peaks in the last 30 years, the one in 1980 and the one this year.
Otherwise the price has remained fairly constant if we take inflation into account.
Prices would need to top $2,000 a troy ounce to repeat the same spectacular rise last seen in 1980.
Take the short term snapshot over the previous five years and gold looks a pretty good bet. But look at those steep declines in the eighties and this paints a very different picture.
It is also true that the price of gold could well rise further depending on how long the economic uncertainty continues and fear stalks the stock markets.
However, apocalyptic talk of past economic meltdowns and the next major casualty in the banking industry are normally signs that the crisis is near the bottom, which could mean the current window of opportunity will close at any time.
Of course, any prediction of the future is uncertain, and especially so now with such a volatile global economic situation. But what is a safe bet is that this crisis, like all others, will pass.
Gold is not an asset with the qualities to do well in positive investment climates.
When the market rallies the price of gold can fall just as rapidly as it has risen, which means this latest spike is little more than a flash in the pan. Any bets on a sharp fall to $800 soon?
