Precious metals are back. Having trodden water for much of 2012, silver burst through the $30 level last week, and is now probing $34. Gold is back into the $1,700s. And as for my gold miners exchange-traded fund (ETF) – it was up 10% last week alone.
What’s it all about? As if you don’t know…
It’s money printing of course. It’s the central banks bailing out reckless banks by minting a load of new money.
Today I want to show you the direct relationship between gold’s price and the escapades of central bankers. And why I expect gold’s ascent to continue from here.
The most important chart on gold
For most investors the biggest problem with gold is that you can’t value it. Many therefore make the grave mistake of ignoring it.
Those investors ought to take a look at the following chart which was published on ZeroHedge last week. The black line represents the size of the US Fed and European Central Bank’s (ECB) balance sheets put together.
Chart: Bloomberg and Morgan Stanley
The clear implication is that there’s a relationship between the value of gold and money printing by the central banks. I would suggest that gold’s 2010 and 2011 surges were down to anticipated money printing... you see how gold got a little ahead of itself?
But sure enough, the printing came. The black line has grown consistently throughout the post-crisis period. And with gold’s lacklustre 2012, the black line has now caught up to the gold price.
But, if you look carefully, you’ll see that gold has recently taken off. Once again old yella seems to be anticipating imminent money creation.
Draghi has solemnly promised to do “whatever it takes” to keep euroland together, suggesting he’ll be back to expanding the ECB's balance sheet pretty soon. As we all know, eurozone banks are still in dire trouble. And the banks are so big, they threaten to bring down sovereign states. And we can’t have that.
So Draghi has promised to take assets (dodgy bank loans) from the banks and give the banks a load of fresh cash in return. The idea is that the banks then deposit this newly minted cash straight back with the ECB... and then, to complete the Ponzi circle, the ECB will use the cash to buy dodgy Spanish and Italian debt in market.
Surely this is the perfect crime?
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The gold market can see what’s coming
Last week’s action in precious metals might just be the start of a new up-wave in this 12-year bull market. If the relationship between money printing and the gold price is anything like the chart suggests, then we could be in for some very interesting times.
As I said, the gold price tends to break-out in anticipation of money printing. No surprise there. That’s how financial markets are supposed to work. They discount the value of what’s going to happen back to a market price today.
To my mind, the money printing has only just started. Quite why Mario Draghi felt he had to come out and say that he’ll do whatever it takes is beyond me. The central bankers always do whatever it takes to keep the banking sector in business. And what it takes is money – lots of it in the case of Europe.
I expect gold to continue to move up. I expect the black line to reaccelerate upwards too. This process can go on for a long time. The only thing that I see bringing this process to a halt is when investors finally lose confidence in fiat currency.
That point in time is not easy to predict. Economics is not a natural science like physics or chemistry – a point Tim Price made very well in his entertaining attack on central bankers. With those disciplines you don’t have to account for the human condition. Faith, confidence, fear – that is what we’re dealing with here.
But for the moment, the gold price looks pretty well correlated to the growth of central bank balance sheets. And central bank growth looks like a pretty good bet to me.
How to buy gold
It’s onwards and upwards for gold and silver. And I’ll be telling you a little more about how to profit over the next week. There’s the physical stuff of course. I recommend holding 5-10% of your wealth in gold.
But I also think now is a great time to look at precious metal miners. Gold miners have really been hurting in the last year. But it’s remarkable how cheap you can buy a really good quality gold miner right now.
In fact I’ve been on the hunt for some cheap gold miners recently. And that leads me to Simon Popple, who has been writing about some serious gold mining opportunities for MoneyWeek of late. Simon tells me he has close to 50% of his savings in precious metals right now. And he is expecting to double his money in the next year on a clutch of cheap gold miners. That caught my attention!
Have a read of Simon’s recent cover story: Gold still looks good – but miners look even better. It’s well worth it.
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