Gold Higher On China Optimism

Commodities were higher Thursday on expectations of increasing demand from China as the global economy lurches to an uneven recovery.

Gold was up $7.77 in early trading to $1,663.87 and silver was up $0.19 to $30.51 for a silver/gold ratio of 54.5. Industrial commodities are higher almost across the board with crude oil, platinum, palladium and copper all outpacing gains by overseas currencies against the dollar.

Once gold fell out of the media spotlight, it immediately reversed a long price slide and started gaining ground for the week. The rise for silver has been more steady and sustained because silver is not only a precious metal it’s also an industrial metal with ever expanding uses in the medical and pharmaceutical industries. It would be no surprise then that when gold is showing price weakness that the silver/gold ratio would tend to increase over time.

While gold has few industrial uses, it has industrial grade buyers in the form of central banks and financial institutions looking to beef up their balance sheets. That’s one point Wall Street TV analysts dismissing “goldbugs”, a term I despise, consistently fail to address. If gold has no intrinsic value, why do central banks, the people whose business is money, use gold as a hedge? Why aren’t banks using an actual industrial metal like platinum?

The reasons Wall Street doesn’t like gold are pretty obvious. When you buy gold, you’re normally doing so with cash. That principle of exchange goes back a long way in the gold business. Except for options trading and deals between large customers, like central banks and governments, most physical gold trades are settled in cash. When you pay cash for anything Wall Street doesn’t get a cut and that’s real root of the “evil” of goldbugs from their perspective.

The other reason Wall Street doesn’t like you putting precious metals in your safe is that they can’t trade on it. When you keep stock in a 401(k) or investment account the broker can trade on the shares in your account without you knowing anything about it and most brokers usually do. They can “loan” your shares out to short sellers and collect commissions on both sides of the transaction. Isn’t big finance fun?!

But the gold in your safe is out of reach from your broker; they can’t loan it out, borrow against it, or find new ways to add fees. It’s a deal that sucks for them but it’s pretty good for you and now you know why the talking heads on financial TV treat gold and silver investors with the same wrinkled nose attitude that they usually reserve for their teenage daughter bringing home a member of a grunge band.

So, when you’re making investment decisions, make sure you always take into account whose interests on the line when you get advice.