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Is the Local Top in Precious Metals Behind Us?


There are signals that it's getting close.

"Inside the Global Gold Frenzy" is the title of an article that appeared last week in The New York Times. It seems the mainstream media has finally caught on to what we've known for a long time – we're in the midst of an honest-to-goodness gold rush. The article pointed out some interesting facts.

Starting out in a part of Switzerland, where about one-third of the world's gold is refined into bars and ingots, the reporter tells us that every day truckloads of gold jewelry arrive from all over the world to be melted down.

"Business is booming," he reports. Demand for bars weighing 100 ounces or less for individual investors is up 80%, according to a Geneva company that owns the Swiss gold refining company.

Europe and the United States are the new emerging markets for inflows of old gold jewelry and individual investor sales, whereas in the past, hoarding gold as an investment was much more popular in the Middle East and Asia.

Moving on to London, the reporter tells us that Harrods, the 160-year-old London department store, last month began selling gold coins and gold bullion ranging from tiny one-gram ingots to the hefty, 12.5-kilogram, 400-Troy-ounce bricks, the kind that are stocked in the Fort Knox vaults. The public's response has been "astounding," with bars being more popular than coins.

This is a good indication of just how slow the mainstream media can be. Because we've been following the precious metals, India's huge gold purchase didn't catch us by surprise.

Does all this "gold frenzy" suggest a bubble? It will at some point, but we're far from it. Please remember that gold is only above its 1980 high in nominal terms. Adjusting it for the inflation gives us the price of gold much above $2,000, and that's by applying the official inflation statistics, which are generally not reliable in my view because the way inflation is measured has been changing over the years. In other words – it's likely that inflation is underreported.

There are a few more things that I'd like to cover before moving on to the technical part of this essay. Recently, I've been asked about the correlation between the general stock market and precious metal stocks -- can it ever be broken and what may cause this to take place, so I'd like to take this opportunity to comment.

Generally, I expect the correlation with the general stock market and preciou metals to weaken significantly in the future (months, but how many remains unknown, somewhere between one and 24).

I expect investors to gradually wake up to the fact that precious metals have much more favorable fundamentals than the whole economy (the general stock market), and won't close their positions (yes, also hedge funds) as eagerly as they did before (during the 2008 plunge), should the main stock indices tank again.
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No positions in stocks mentioned.
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