Silver coins

Silver is an investment that will do well in both good and poor economic climates, but right now the perfect circumstances are in place for a meteoric rise in the metal’s value over the next few years.  Silver acts similarly to gold as a hedge, but it also has a tremendous number of industrial purposes which means it’s supply is ever dwindling.

You may not be able to name uses for silver beyond jewelry, silverware, and photography, but silver is an integral component of both the technology and auto industries. Silver zinc batteries fuel smart cars, and as the US and China each look for ways to decrease dependence on foreign oil the demand for these will explode. Dr. Wolfgang Bernhart, an expert analyst of the auto industry, predicts that half of Chinese automobiles will be electric or hybrid by the year 2020.  The population of China is currently 1.3 billion, which means a lot of drivers. Silver also is used to make LCD/plasma tvs and solar panels, two products that are also entering mainstream use in the US.

As economies worldwide rebound, there will be an even higher demand for silver than we’re seeing now.

Chinese officials have warned that the US Federal Reserve is encouraging “speculative investments” and placing the global economy at further risk through its loose monetary policy. The chief banking regulator of China, Liu Mingkang has identified a “huge carry trade” with US dollars that is having a “massive impact on global asset prices.”

He’s right. The Fed is hoping to stimulate some recovery to gain more jobs by keeping interest rates low. However, all they are succeeding at doing is weakening the dollar further which is resulting in a carry trade. Investors are borrowing cheap dollars and investing it in higher yielding currencies. A carry trade can have dangerous repercussions, just look at Iceland. That was one of the main contributing factors to the economic collapse of the country, which nearly resulted in a national declaration of bankruptcy. As it is, the nation’s citizens had to deal with rampant inflation (hopefully some were prudent enough to buy gold) and are still mired in a severe recession.

Hopefully, our leaders will wise up and avoid history repeating itself instead of continuing their current actions which are “boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets.”

The results are in! The US government announced that October, the first month of the new fiscal year, produced a record-high budget deficit of $176.4 billion. Should we keep this up, we can expect a record breaking year end deficit of $2.11 trillion. Despite pleas for a rational approach to the budget, the administration is reportedly lobbying Congress to raise the debt ceiling again, possibly by as much as another $1 trillion. I doubt my bank would raise my credit limits if I had the kind of debt the government has amassed.

Even Chinese officials are begging the US to keep its deficit “an appropriate size” and essentially announced worries that this money printing may be little more than the US’s attempt to inflate away its debts. “I hope that as the largest economy in the world and an issuing country of a major reserve currency the United States will effectively discharge its responsibilities,” said Chinese Premier Wen Jiabao.

By the way, have you noticed another record breaker lately? Gold reached new highs last week and through the weekend. The metal has reached a high so far this morning of $1,139 per troy ounce.

The question on everyone’s mind is “where are gold prices headed in November 2009 – and beyond?” This time of year typically sees a run on gold prices, and 2009, despite a dismal year for the United States’ economy, is proving this maxim true. Then again, let me rephrase that – gold is at record highs this November possibly BECAUSE the U.S. economy is doing so bad. The dollar as a whole is down, gold is way up, and although there are whispers of a recovery, everyone living IN the country knows that recovery is all just rumor, speculation, or the media trying to drum up good will and spending during the holidays. In reality everyone is scared, and little if anything has really changed.

Gloom and doom aside, gold is at record highs. As of today we broke $1090 for an ounce. I remember less than 2 months ago, people saying it WOULD NEVER BREAK $1000. But, gold quickly did break $1000, and it’s now nearly 10% over. This time last year, just shortly after the big burst, and the bust of the stock market, gold was hovering around $720. If you would have invested, you would have made over 50% on your money by now. Gold has performed exceptionally well, again despite (or perhaps because of) the overall economy. And the fundamentals haven’t changed – in fact they are getting worse. We are still in debt… we have still yet to see the complete ramifications of the doubling of the money supply, interest rates have not been raised… gold will most likely rise unless someone steps in and changes things. We are at record high unemployment rates, and we have not seen the bottom of real estate prices. We haven’t seen the bottom? That’s crazy! I know, but locally prices continue to drop, and yet there simply isn’t anyone to buy.

Gold was on a meteoric rise early this month, so I don’t know if it will break through uncharted territory again, but it should hover steadily at or around the $1100 mark. As the holidays approach and other countries, including The U.S., China, and India, consume vast amounts of gold, not just for investing purposes, but for jewelry and other reasons, the price may soar to even higher numbers.

Jewelry sales are climbing to double digit profits in China according to gold company Hong Kong Resources Holdings, Ltd. The Chinese middle class is driving the shopping spree. The nation’s economy grew 8.9% in the third quarter alone, and these real, actualized profits are allowing the middle class to grow larger than ever when most countries are losing their middle class and seeing huge wage gaps between the very rich and the very poor.

Every year, 10 million couples marry in China, and analysts are expecting even more jewelry purchases in the fourth quarter because it coincides with the wedding season. Jewelers have been speaking to the press about expanding their retail store presence by the hundreds in mainland China. Gold and silver jewelry sails in China have gained 16% already this year, despite record highs for the price of bullion.

China’s demand for gold will be unabated for the next five years, according to the Dow Jones Wire Service. Currently, Chinese mines produce more gold than any other nation, and China still imported an additional 112 tons of gold last year.

Most financial advisors will tell you that at least 10% if not up to 35% of your portfolio should be invested in precious metals to provide stability for your wealth. Many Central Banks follow this logic and have at least 10% of their holdings in gold. China is the sixth largest holder of gold in the world, but their $38.65 billion gold reserve value only makes up less than 2% of the nation’s foreign reserves. This could explain the aggressive stance China is taking to purchase as much gold as possible.

Chinese citizens are demanding gold as much as their Central Bank!

This year there has been a 21% growth in the demand for jewelry and a whopping 176% growth in gold investment demand. This could be fueled by reports we have heard of ads on state owned TV encouraging citizens to buy gold bullion. Analysts are forecasting that China’s gold rush will continue and may even surpass India’s demand. India currently imports more gold than any other country.

After hush hush talks to ditch the dollar for a basket of currencies between Russia, China, France, and the Arab states was reported in the Independent a few weeks ago, and subsequently denied by representatives of some of those governments, the Tehran Times is reporting that Iran’s wishes are no secret. The Trade Promotion Organization of Iran (TPOI) announced last week that it will drop the dollar from then nation’s foreign exchange reserves. TPOI also encouraged Japan to follow their lead with the dollar, beginning by purchasing their oil with yen instead of dollars. TPOI reports that in the last two years Iran has sold 85% of oil to currencies that are not the dollar, and they plan to not use the dollar for the remaining 15% either. Historically gold’s performance is tied to the value of the dollar. News like this will only reinforce the record climbs gold has made the last several years.

We’ve talked about how the debasement of the dollar is one driving factor in gold’s rapid rise. American consumers aren’t the only ones concerned by this development. Eastern central banks are rolling in dollars and can’t seem to buy gold bullion fast enough to hedge their wealth. What measures are they taking that will affect the value of gold?

• Taiwan announced today that they are looking into increasing their gold reserves. Currently, Taiwan’s central bank holds 13.62 million troy ounces of gold. Their foreign-exchange reserves have actually grown in the last month by several billion dollars. Central bank Governor Perng Fai-nan is prudently seeking an alternative to the dollar to store this wealth. Credit Suisse reported that the announcement was enough to already help boost the price of bullion.
• This year, the Democratic Party of Japan won the countries election, defeating the Liberal Democratic Party that held office for 15 years. This past May, the finance chief of the Democratic Party has already warned the nation off dollar-based US Treasury bonds and recommended that all buying of such bonds cease. Now that his political party has gained more steam, further actions may be taken to avoid US government investments and the dollar.
• Barclays Capital reported that “emerging market central banks are increasingly reluctant to accumulate dollars, appearing more aggressive than in the past in shifting out of the U.S. dollar into other G10 currencies.”
• Hong Kong has been in the process this year of moving its physical gold reserves out of London and into local high-security vaults. The country is also inviting other central banks in Asia to use their vaults for bullion storage. London has historically been the hub of precious metals trading, and this shift marks a big change in the role Asia plans to play in the precious metals market. The Hong Kong Monetary Authority is planning to use the gold bullion in the new vault to target a new ETF, which would withdraw a substantial amount of physical supply from the market.
• Our previous posts on China have highlighted the huge efforts the country is taking to increase both their central bank’s and private citizens’ stores of gold.

Leaders in commodity investing have observed the huge increases in demand all these countries pose and are predicting gold prices will continue to accelerate to new record highs.

Reports are in that China’s state owned television channel is running ads urging citizens to buy gold! The ICBC, China’s largest bank, is even in the process of setting up a designated precious metals department that will service investors with four different sized gold and silver bullion bars.

In the last six months, China has doubled its gold holdings and is now the sixth-largest gold holder in the world. And yet, gold only makes up about 1.9% of China’s foreign-currency reserves. China is heavily involved as a major player in the gold market and is one element driving gold’s rally.

China, the world’s biggest metal consumer and third-largest economy, is in the market to buy more gold. Here are three reasons their gold buying streak will continue:

-The yuan (China’s currency) has been pegged to the US dollar since the 1980s. This means that when the dollar isn’t doing so well, neither is the yuan. The recent US monetary policy that has caused the dollar to drop is irritating to the Chinese government, as is the 25% tariff imposed on Chinese tires. Historically, these kinds of trade hindrances often result in an equally destructive reaction. Some analysts say that China will react by dumping US Treasury bills and bonds and using that money to increase their supply of tangible commodities, like gold bullion and other precious metals. We think that sounds pretty likely, considering that China has increased its gold reserves by 75% in the last five years! As we previously wrote, China is likely to be one of the main buyers of the IMF’s gold. The Chinese Central Bank already agreed in early September to buy the first 50 billion dollars worth.

-Private citizens can invest in gold! Not only has the Chinese government done an about face with their policy that forbid citizens to own gold, they are now encouraging it! Many coin dealers and banks in China will be increasing their supply to hold an inventory of gold for average citizens to purchase as they choose.

-The Wall Street Journal reported today that China is situating its futures markets to be influential leaders in determining world prices for metals, energy, and farm commodities. Chinese officials are hopeful that having large futures markets will “essentially advertise what the world’s biggest customer for some commodities considers a fair price.” Already Chinese futures in copper drive that metal’s price. The move is an attempt to leverage that influence in other commodities, including gold.