Are Investors Getting Physical With Gold and Silver?

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The final months of 2011 were unkind to gold and silver.  Both precious metals started to decline sharply in September. In the last four months of the year, gold fell 18 percent to finish 2011 at $1,566 per ounce, while silver fell more than 30 percent to close out the year at $27.92 per ounce.  The decline caused a stir in the media, as gold was once again called a bubble.  Since then, gold and silver prices have stabilized near $1,600 and $29, respectively.  Although it is a new year, the same monetary problems still plague the globe.  As a result, prudent investors are sticking with gold and silver.

The Federal Reserve has not officially announced another major monetary easing policy since ZIRP, QE1, QE2, Operation Twist and favorable swap lines, but it continues to show its concern and frustration.  Earlier this week, the Fed announced it will make public its forecast for short-term interest rates.  Furthermore, the Fed called for more aggressive action from Congress and other policy makers to aid the housing sector.  If the Fed is not satisfied with Congress, will they step in with QE3?  Morgan Stanley believes the economy will slow down further this year, and prompt another round of easing from the Fed.  Morgan Stanley explains, “Eventually though, we believe that a package of Treasury and MBS purchases of US$500-$750 billion will arrive some time between March and June.”

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Robert Prince, co-chief investment officer at Bridgewater, the world’s largest hedge fund firm, is preparing for many years of slow growth and high unemployment for developed economies.  Due to their mountain of debt, Mr. Prince calls the U.S. and Europe “zombies.”  He goes on to explain, “What you have is a picture of broken economic systems that are operating on life support.  We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”  In the meantime, gold prices should continue their bull market as central banks around the world continue to print money.

Investors are becoming more interested in physical silver.  According to data from the U.S. Mint, American Silver Eagle sales reached a new record of 39.8 million last year.  The dramatic shift in physical silver demand is magnified when compared to U.S. silver production data.  SilverDoctors explains, “U.S. silver production has declined 50 percent since its high of 70 million ounces in 1997.  In 1997 American Silver Eagle sales were 3.6 million, which accounted for only 5 percent of domestic silver production.  Contrasted to today, Silver Eagle sales are estimated to reach 40 million while domestic mine supply will decline to 35 million ounces in 2011.  Thus, American Silver Eagle sales will be 114 percent of the total U.S. silver supply in 2011, what a difference in 14 years.”

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The demand for physical gold and silver is also appearing in certain stocks.  Over the past two days, shares of the SPDR Gold Trust have closed 1.19 percent higher, while shares of the Sprott Physical Gold Trust have jumped 1.90 percent.  The difference in silver is even greater.  In the same time period, shares of the iShares Silver Trust have declined 1.11 percent, but shares of the Sprott Physical Silver Trust have surged 2.71 percent.  The Sprott funds are managed by billionaire precious metal investor Eric Sprott, a strong advocate of physical bullion investments.

Rising mountain debt loads and central bank balance sheets will continue to weigh on the confidence levels of investors.  Zero Hedge recently reported that the “top three central banks (ECB, Fed and BOJ) account for up to 25 percent of developed world GDP.”  As central banks continue to provide monetary easing, investors will continue to demand physical gold and silver as a protection plan, and a storage of wealth.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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