Money Flows into Base Metals Will Lead Inflation Higher

Bullion gained six fold in the 12-year rally through last year, but down 17% this year through yesterday, the worst start since 1981. It’s down in 2013 as the US Economic recovery gained momentum and some Federal Reserve policy makers signaled that stimulus may be scaled back, curbing demand for Gold and Silver as a haven. Investors are dumping gold funds at the fastest pace in two years in favor of equities, compounding a slump that has wiped $560 billion from the value of central bank reserves. The two-day, 14% plunge in Bullions, the biggest since January 1980, was a “panic event” and “out of perspective” because inflation may soon accelerate. But when economy is booming, the fear of Inflation is rarely in focus for the traders. The biggest drop in Gold Prices since 1980 has also divided views by central banks on whether the yellow metal is cheap enough to increase investment. Central banks are among the biggest losers because they own 31,694.8 metric tons. Central banks own about 19% of all the Gold ever mined, and last year boosted their holdings by the most since 1964, according to the London-based World Gold Council. Some central banks view the decline in Gold Prices as an opportunity to improve on their Gold Holdings.

The U.S. and Germany are the biggest holders, with the metal accounting for over 70% of their total reserves. Russia, the seventh-biggest holder with 976.9 tons, boosted buying in the past seven years. About $773 billion was wiped from the value of all gold holdings globally on April 15, to about $7.5 trillion from $8.3 trillion last week, based on futures and a 2011 estimate by the World Gold Council that 171,300 tons of the metal has been mined. The amount erased is greater than the market capitalization of all the stocks trading in Singapore, according to data compiled by Bloomberg. Gold Futures trading volumes on Monday rose to record 751,058 contracts, topping the previous record of 486,315 on Nov. 28, Chicago-based CME Group Inc. said.

Gold and Silver Market V/s the Steroid supported Stock Market:
U.S. equities reached a record this month. Gold funds suffered net outflows of $11.2 billion this year through April 10, the most since 2011, while global and U.S. equity funds had net inflows of $21.25 billion, according to Cambridge, Massachusetts-based EPFR Global. The S&P 500 has more than doubled from its 12-year low in 2009, helped by the Federal Reserve’s unprecedented bond purchases, record-low interest rates and three straight years of profit growth. U.S home prices have continued to rebound. Although partially boosted by a drop in workforce participation, the unemployment rate has tumbled to 7.7%. Since the opportunity cost to hold Gold was very high, people seem to have moved to the more remunerative assets like equities and cash. From Washington and Brussels to Tokyo and Zurich, central bankers around the world have united to take extraordinarily aggressive action aimed at boosting demand for risky assets, staving off financial collapses and encouraging full employment. “Never in human history have so many of them been so obsessed with their ‘mandates’ all at the same time.

Central bankers have gone wild,” Ed Yardeni, president of investment advisory Yardeni Research, wrote. While economists and investors hotly debate the merits and side effects of these efforts, there is little doubt the role of central bankers in the financial markets has never been greater. the Federal Reserve’s balance sheet has swelled to $3 trillion through Ben Bernanke’s controversial quantitative easing program, which has helped drive equities to all-time highs. Interest rates are so low that it forces people to search for yield. It is difficult thinking of a market that’s not manipulated by central banks at this point. “The major central banks of the world remain committed to doing whatever it takes to avert a Lehman-style financial meltdown in Europe, to lower the unemployment rate in the U.S., to stop deflation in Japan, to offset fiscal austerity in the U.K., to put a lid on the Swiss franc in Switzerland and to manage a slow appreciation of the yuan in China,” said Yardeni, as reported by Fox Business. The Bank of Japan doubled down on QE, revealing plans to ramp up its purchase of government bonds to $75.5 billion a month in an effort to end 15 years of deflation. “The BOJ is so obsessed with its domestic mandate that the consequences of its actions around the world are of no concern at all,” Yardeni said.

Fleeting Central-Bank magic will create Asset Bubbles:
The U.S. Stock Markets till now have greatly been supported and ascended to new highs as the Fed continues printing money and suppressing alternatives such as savings due to zero percent interest rates. But actually, all you’re getting is Asset Bubbles — and they will pop sooner than later. As of now, the US Stock Markets also appear in highly over bought conditions & the US Dollar seems set for a decline. The Gold and Silver Markets having been hammered viciously will now see selling at most price rallies. At the same time, the US Fed’s Quantitative Easing will continue. So where does money flow into now?

The raw commodities like Base Metals and Agro Commodities which have been on the sidelines until now can expect to benefit the most from current conditions. Traders generally invest in Gold and Silver as a hedge against a decline in the U.S. Dollar in adverse market conditions. With current conditions and continued QE by the U.S. Fed favoring an up-tick in the U.S. Housing Market, traders would prefer to invest in Base Metals as the demand for these is bound to rise in such a background. Base Metal Prices can be expected to rise sharply, triggering Inflation higher, on the way to unsustainable highs.

Inflation will make Silver Investment necessary more than Gold:
Adjusted for Inflation, Gold’s 1980 peak of $850 would be equal to $2,413 today, data compiled by the Federal Reserve Bank of Minneapolis indicates. That’s still 26% more than the record set in September 2011, and 76% higher than today’s price. Gold typically doesn’t pay interest or generate profits on its own, but traditionally becomes more popular when investors are concerned that values of other assets will be eroded by inflation. Gold and Silver will gain popularity again when Inflation sets in, triggering a massive need for a hedge against rising living costs. Inflation is not going to be avoided at any cost, as central bankers around the globe keep printing and pumping massive amounts of money.

Currency devaluations will bring about the sudden rise in Gold Prices one day, but Silver Prices will start gaining upside momentum earlier. With already high Inflation, there will be pretty little left to invest in safe haven Gold and that gap will then be filled by the shiny Silver.

I expect Inflation based crisis to start showing signs & co-lateral effects around or soon after the third week of June 2013. So eventually Bullion & especially Silver should do well & rise beyond all imaginations.