Gold And Silver remain the Ultimate Inflation Hedge

The basic Demand and Supply fundamentals of the commodity markets, do not seem to apply anymore. It is this logic that leads to price discovery: Higher the Physical demand = Higher the Price and vice versa. Lately there have also been split movements where one of the two is seen rising while the other is declining – one offsetting the other. These weird developments make one wonder whether there is any truth in the Futures Market price weakness, or is the scene some kind of Manufactured Illusion? Price manipulation by powerful vested interests is not new to the speculative markets, but this one seems like the mother-of-all manipulations, and may eventually also lead to the mother-of-all reactions by the markets when the time comes. The market reaction to the manipulative actions by the so-called “Too Big to Fail” (or Fall) as one may put it may soon prove to be “Too Big to Cover-Up.” There is a belief that the world economy is improving, so the fast money is moving out of Gold.

Unemployment in the US fell to a four-year low of 7.7% last month, as job growth surged from automakers to builders to retailers – whether that continues is a different angle altogether. About $6.6 trillion was added to the value of global equities since November, as China accelerated for the first time in two years. In a February 25 report, Morgan Stanley stated that Central bank asset buying won’t end any time soon, and concern about currency debasement combined with rising expectations for inflation will spurdemand for Gold. The fact is that a tsunami of money printing by so many central banks was sure to bring the markets in a “Risk On” mode, but at the same time, the need for a safe haven investment also goes up as rising Inflation needs to be kept in check which has a major booster in form of the endless QE. Just because it feels that the economy is improving does not necessarily mean that is actually happening. But in such a scenario, Silver is bound to outperform Gold which is generally looked upon as a “Crisis Insurance.”

Gold Holdings shift Investor base:
Gold Market Investors sold 106.2 metric tons valued at $5.4 billion from Gold ETPs in February, the most since their creation in 2003, data compiled by Bloomberg show. Another 26.1 tons was cut since then. Combined ETP holdings stand at 2,484.1 tons, from a peak of 2,632.5 tons in December. Gold Prices are within 4% of a bear market after the longest run of monthly losses since 1997. CFTC data shows speculators held a net-long position of 39,631 futures and options in the week ended March 5, the fewest since July 2007. Hedge funds are now their least bullish since 2007, as economies accelerate and Federal Reserve policy makers review stimulus & 84% less bullish on Gold than they were the month before prices reached a record in September 2011.

But Gold Bullion isn’t declining for all investors, amid mounting rhetoric over currency wars. Gold priced in yen rose 4.5% this year, and in British pounds advanced 2.8%. According to the London-based World Gold Council, Central banks added 534.6 tons to reserves last year, the most since 1964, in part to diversify their currency holdings. Barclays forecasts 300 tons of buying in 2013 and the same for 2014. Lower prices and improving economies may boost jewelry purchases, the biggest source of demand, with the bank predicting a 3.2% gain this year from an 8.2% drop in 2012. Chinese Gold imports from Hong Kong rose to 51 metric tons in January versus 33 tons in January 2012, a record high. 114 tons of Gold was bought in December as merchants typically restock gold two months ahead of Chinese New Year.

Expect a Higher Violent Reaction in Silver rather than Gold in a Price Rally:
The great bull feature that emerged over recent trading days has been how very strong physical Gold Buying in Asia, and India has been in the $1,550 area. Goldman Sachs says it is shifting to a near-term “overweight” position in commodities on a view that a recent sell-off was overdone. However, the bank says it retains a 12-month neutral recommendation. Gold and Silver have been consolidating at lower levels of $1550 and $28 respectively, poised to move higher awaiting a potential catalyst. Once Gold and Silver begin their next move higher, Silver will move a lot faster and the Gold to Silver ratio will collapse. That ratio may plunge to 10/1 from the current 54/1. In that case, as Gold Prices go up from here, just think how high Silver Prices are going to shoot up to. The combination of the industrial and medical uses, in combination with Silver’s monetary attributes, is going to lead to the demand rise overwhelming high. Covering up of the Massive short positions by JPMorgan in Silver will trigger very violent movements to the upside once Silver Prices start a determined up move. The kind of upside volatility expected may have never been witnessed ever before. That’s the reason why Gold/Silver ratio will swiftly decline. Technical indicators point out towards an eruption of a major Price Rally in the coming months.

Gold and Silver remain the Ultimate Inflation Hedge:
The Dow finished at 14253.77, topping the previous record set in October 2007 and is already up 8.8% for the year. But it has just gotten back to where it was in October 2007, and many investors are still struggling to make up their losses after the credit crisis that erased $37 trillion from global equity values. When the housing bubble burst in 2008, the DOW plunged 34% in 2008 for the worst performance in 77 years. The Fed’s expansive monetary policy to prop up the economy has kept stocks climbing higher despite a less than glowing global economy. By pumping trillions into the financial system, the Fed has convinced investors it will provide a safety net for future shocks. In addition, by keeping interest rates extremely low, the Fed is forcing investors to seek higher returns in the stock market. Once we factor in inflation over the past few years, the all-time high looks less convincing. With consumer-price increases removed, the Dow has not been in real record territory in over 13 years. A Wall Street Journal article contends that the last real, or inflation-adjusted, Dow record was on January 14, 2000. Since then it looks like the Dow has risen 22% if you don’t take inflation into account. But if you do, Tuesday’s high is still more than 10% below that record. Inflation is definitely something to take into account when investing to meet future needs. Central bankers can print all the fiat currency they like, but they can’t manufacture gold. Its supply is more or less fixed (discoveries are made, but you can’t suddenly increase gold production by 500% and you can do that in case of fiat currencies). It cannot be inflated by central banks, which is why it is considered an inflation hedge and the ultimate alternative currency.

Influencing factors for Gold and Silver:
Surprisingly OECD, the Organization for Economic Cooperation and Development issued a report that said the European Union will see improving economic conditions in the near future. However, the OECD projected weaker economic growth in China, Canada and India in the coming months. Italian bond yields rose after the Fitch ratings agency late Friday downgraded the country’s credit rating. That news helped to pressure European stock markets Monday, and may have prompted some scant fresh safe-haven demand for Gold. Industrial production and retail sales data for China were weaker than expected, along with stronger consumer inflation data. The Chinese week long New Year holidays in February may have skewed the economic data results. Chinese demand for Base Metals will rise during Q2 of 2013, both seasonally and on the back of continued growth in construction completions from the previous construction boom, property sales and power infrastructure-related demand. Seasonal re-stocking of Copper in China may provide a lift in Copper Prices. The recent sell-off in Base Metals may have been overdone, and a recovery for the same may be on the cards soon. WTI Crude Oil Prices also are expected to move upside with the oncoming summer traveling season. With the illusion of an improvising economy strongly embedded in the minds, consumer spending on rejoices is also expected to rise exponentially. With prices of raw commodities on the rise, higher Inflation may be lurking just around the corner. Moreover, central banks from Japan to Europe and England are looking forward to see higher Inflation as the same would remove deflation fears.

Gold and Silver technically speaking:
For the near term, Comex Gold Futures below $1572.4 could weaken further towards $1550.8 and $1540, while a momentum based move above $1585 could lead up to $1606.6. As alerted earlier also, Comex Silver till below $29.20 will remain weak and has the potential to fall to $27.50 and then $25 also, whereas a confirmed momentum above $29.35 will lead to $30.70 and then $32.50. MCX Gold Prices for June Futures have a strong support around Rs. 29,710 and MCX Silver Prices for July Futures have a reasonable support around Rs. 55,000.