This week we watched the usual summer slack in gold prices end early and dramatically with a jump from the $1,580 an ounce price range to the historically comfortable $1,620 range.
Gold ended the trading week at $1,623.11 and silver at $27.72 with the week-ending silver/gold ratio right at 58.5.
Whether this is truly the end of the summer doldrums in precious metals or merely a ride along with the irrational exuberance emanating from Europe remains to be seen. Demand has been healthy and gold prices have held up well against the headwinds of a strengthening dollar.
In the broader global economy there is a huge amount of free cash sloshing around in the system. There is so much cash that some investors are actually paying the government to hold on to some of it for them. It’s inevitable that some of that free cash would end up being converted to hard assets.
I was surprised to read commentaries by other gold analysts that suggest that the Fed is somehow artificially depressing interest rates in order to sabotage gold prices. It’s absolute nonsense that doesn’t even make sense. If anything, responsible currency policy is one of the few ways the Fed could undermine gold prices. Second, the Fed doesn’t need to manipulate interest rates with investors bidding against one another to loan the government money.
All the same the risk of massive amounts of free cash in the global economy is inflation, specifically in commodities. Another parabolic upward surge in gold prices, like we experienced last year, could push gold and silver prices to jaw-dropping price levels. How high prices go depends on the buying trigger. If the buying trigger is inflation paranoia, then expect the run up to be huge.
The risk for the small investor is that parabolic upward swings in prices can freeze them out of the market and it’s painful to even try bidding against people with massive amounts of cash at their disposal. Like the old saying goes, when the elephants are dancing, don’t cut in.
The time to lock in prices for small investors was earlier this month. If you missed that window, then I might wait another couple weeks to see if profit-taking kicks in a current levels. The risk with waiting is if prices continue higher from here, the more likely possibility. On a long time horizon, the difference between $40 an ounce higher and $60 an ounce higher is annoying but not all that significant on a time scale measured in decades.
Those are the calculations you weigh when buying precious metals.