The precious metals market performed consistently over the last decade and there is every reason to believe that they will continue to fare well in the coming years.
Throughout history, precious metals like gold, silver, platinum and palladium have acted as safe havens for investors during times of economic uncertainty. Since economies always move in cycles moving from high to low points, smart investors have always had at least some precious metal holdings to act as “insurance” against downturns.
While other markets suffered greatly after the economic meltdown that commenced in 2007, precious metals bucked the trend and performed superbly. Investors purchasing bullion and rare coins were able to make solid gains when just about everything else plummeted in value.
The outlook for precious metals
While gold and silver tumbled in 2012, many experts see this as only a temporary decline. The overall picture for gold and silver along with other precious metals looks very good over the near future for a number of reasons.
The bull stock market is attracting many small investors but experts like former labor secretary Robert Reich believe that a bubble may be forming. The current value of the Dow, for example, is not supportable when one looks at the overall fundamentals. Reich believes that small investors may end up high and dry when the bigger players feel the market has “topped out.”
Should the stock market bubble burst, many smart investors will move toward precious metals, the traditional refuge during such shocks.
Currency fluctuations also favorable
The recent fall in dollar values accompanied by the strengthening of the Euro may also bode well for precious metals. Investors become very wary when the dollar looks unstable.
A number of experts believe that the U.S. currency will continue to move lower over the medium term and possibly also the long term. What this will mean, if traditional correlations hold, is that precious metals like gold, silver and platinum should rise at the same time.
Long-term prospects look good
While precious metals topped off in 2012, the long-term charts still show that this sector remains on an upward trend.
More than anything else, the weak picture for the world economy is reason for optimism in the precious metals market. Investors will continue to look for ways to hedge their bets against other options that could plummet with bad economic news.
The situation in Europe is bleak and while the United States is improving somewhat, there are still many problems for this economy down the road. Even Asia, which managed to avoid much damage from the “Great Recession,” is showing signs of slowing growth.
U.S. economy is key indicator
The direction of the U.S. economy may end up being the most important factor in determining the direction of the world economy.
While Asia remains the growth engine, it will be hard for things to return to normal if America sinks back into another recession. There is too much money invested in the country, in the equity markets and in treasuries, and too much dependence on the dollar, to allow much growth without a stable U.S. economy.
However, things currently look very uncertain with the U.S. still showing many signs of weakness. For example, the gross domestic product (GDP) declined slightly in the fourth quarter of 2012. While this still is not enough to predict a double-dip recession, it does indicate some serious softness in the recovery.
The fact of the matter is that banks continue to hold on tightly to their assets making financing difficult for everyone from ordinary consumers to big corporations. The reason for their reticence, simply, is that they are still holding on to many toxic assets left over from the big housing meltdown and the resulting economic chaos.
Most financial analysts acknowledge that the financing problems could go on indefinitely without any major worldwide action by national governments. Today, both small and big businesses are finding that they must resort to alternative sources including venture capitalists, accounts receivable financing, bridge financing and secure loans to maintain cash flow.
Difficulties in the capital market will likely translate into continued worries over the future of the economy, which traditionally tends to favor the precious metals market.
U.S. budget worries
Another reason for concern in the United States is the situation regarding the federal budget and the proposed spending cuts.
Almost everyone agrees that cuts will have a short to medium term negative impact on growth. The federal government, for example, will need to slice defense spending that alone accounts for large numbers of private sector jobs.
Hefty budget cuts will also mean that many public sectors workers will join the rolls of the unemployed. Not only will these job cuts hit at the federal level, but they will also hurt state and local governments.
With the stimulus package ending, federal assistance that is keeping state and local governments from default may dry up. Currently, there appears to be significant resistance from conservatives to renew this funding, which is helping smaller governments maintain their current spending levels.
Should the funds stop, then state and local employees could also end up in the unemployment lines.
Job losses will be a huge push toward another downturn or at least toward stagnation and that could drive a flight toward the safety of precious metals.
Europe even worse
If the American economy looks questionable, then the situation in Europe is even more worrying. The economies are still struggling with the burden of crushing debt and annual deficits.
Austerity in countries like Greece, Spain, Portugal, Italy and the United Kingdom is having a devastating effect on jobs. Many of these countries are in double-dip or triple-dip recessions if they ever recovered at all from the big meltdown of 2007.
Many experts believe that the austerity approach is the wrong plan for the future. By cutting so deeply into government spending, the economies of Europe will have no engine to restart overall growth. Not a few analysts argue that the government should be in the lead in refueling national economies.
Despite the dismal performance registered over the last few years, Europe appears entrenched in pursuing austerity. For example, the talk at the annual World Economic Forum in Davos showed no signs of Europeans giving an inch on cutting government spending.
Billionaire George Soros reacted at Davos by saying that the austerity program is directly fueling the current recession that is plaguing most European nations
Gold as part of monetary reform?
Another element that is fueling optimism for the precious metals market is the continued talk about central banks using gold as part of monetary reform plans. However, this does not mean a return to the gold standard although some people in high places are even mentioning such a possibility.
For example, recently the German Central Bank began repatriating some of its gold held in the New York Federal Reserve Bank and all of its gold holdings in Banque de France. The bank plans to move around half of its total holdings to Frankfurt by 2020.
Germany’s strategy is baffling many international financial experts. However, some economists, especially those of the Austrian school of thinking, see the nation’s move as a way of hedging against possible future downturns.
While there may be no current intention of returning to a gold standard, having the metal in country may make this easier to do if future conditions warrant such a move. In the mean time, having gold provides a safe haven against the crushing debt that is weighing down on the world economy. Additionally, gold can act as a hedge against inflation at a time when nations like the United States are printing money.
Should the U.S. Federal Reserve go ahead with its qualitative easing policy (QE3), many experts fear that inflation could rise dramatically.
Despite the recent downturns in gold and silver prices, the overall long-term prospects for precious metals still look bullish.
Investors are likely to continue to seek precious metal investments from providers like Monex.
While the picture for the short-term is more speculative, mid to long-term prospects look good for a wide range of reasons. The overall world economy does not look set for any sustained growth and indeed Europe is already declining.
With the Asia-Pacific region slowing, everyone is looking to the United States for leadership. However, America is dealing with a trap of its own with so many voices calling for European-like austerity measures. If U.S. budget cuts are as deep as some think they may be, then the country could head into another recession
The current stock market bubble would likely burst, if it does not pop earlier, and this would mean investors will head toward safe havens like gold, silver and other precious metals. The solution to the current economic woes rests in solving huge and deeply entrenched debt problems.
Almost everyone thinks this will take time and that will bode well for precious metals as they will continue to provide insurance against economic turbulence.