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The hard truth

Published January 2014 in the magazine: Macau Business


It might be time to sell U.S. equities and get into heavy metal – try physical silver instead

The Hard Truth

by André Ribeiro


The United States stock market has risen considerably in recent months, while the prices of gold and silver have dropped. But some forecasts hint that these trends will reverse this year, perhaps meaning a multi-year rally in the prices of the precious metals, which could propel them to new record heights.
Last year’s stock market rally in the U.S. was strong, the Dow Jones Industrial Average passing the 16,000 mark and the S&P 500 index rising above 1,800 for the first time. The charts of the weekly performance of the S&P 500 index and the Dow Jones from 1990 until the beginning of this year show the formation of what is called in technical analysis a “broadening top” pattern – a phenomenon this column has touched on before.
A broadening top, also known as a megaphone pattern, frequently occurs towards the end of an over-extended bull market. It comprises three peaks, each higher than the one before, sandwiching two troughs, the second lower than the first. A broadening top ends with a long, steep drop after the third – final – peak.
The current broadening top trend seems to be close to the end of its final climb in the plots for both the Dow Jones and the S&P 500. It may reach its peak in the next couple of months. When it does, stock prices will plunge and stay low for some time.
Massive injections of liquidity by central banks and low interest rates have been an important cause of the increases in stock prices since 2009. But the effects of this sort of policy are fading. This means precious metals are now a great investment option, being likely to climb steeply in value in the years to come as investors seek out safe havens.
Official data shows that the mainland’s imports of gold from Hong Kong increased to 148 tonnes in October. Demand for gold in the mainland reached record heights last year as the price of the metal dropped.


Paper Piles

Mainland China has imported 2,380 tonnes of gold since September 2011. Mainland buyers are taking advantage of lower prices to buy the metal in its physical form. The mainland’s explicit strategy is to hoard physical gold. It is a secretive exercise, since the mainland publishes no gold trade data.
The prices of gold and silver have been swayed by activity in the markets for paper financial assets for decades. Paper gold or silver can be traded through unallocated accounts, futures, exchange-traded funds and mutual funds. But do not expect physical gold or silver to lie behind the amounts on the ledgers. The amounts traded may be purely paper bullion, or may be backed only fractionally by physical gold and silver.
In a properly functioning market, paper gold and silver prices would be equivalent to the prices of physical gold and silver. But there is more paper bullion in the market than there is physical gold and silver to back it. The price is therefore higher for physical gold and silver.
Silver in particular is poised to perform well in the next couple of years. It will probably outperform gold. After hitting almost US$50 (MOP400) an ounce in April 2011, the price of silver has been on a downward trend. By the middle of last month it was trading below US$20, meaning it has great potential for a steep rebound.
A number of factors are important to consider when investing in silver. First, it is important to remember to take physical delivery of silver.
Mounds of Metal
The price of physical silver is the baseline price for silver coins, but silver coins command a higher price. Silver coins carry a premium because of the cost of melting the metal they contain, minting and certifying them.
The most common silver coins that are legal tender are Silver Eagles from the U.S., which are the most popular silver coins in the world. Silver Maple Leafs from Canada are also quite tradable. Vienna Philharmonic silver coins are among the forms of physical silver most used in Europe.
When investing and trading in physical silver, it is important to select well-known products that can easily be identified and traded. Silver bars and silver coins from reputable sources are good options.
It is also important to make the right choice between bars or coins. Small quantities of the metal, such as coins, carry a premium when shortages occur. Coins can be sold individually, and the spread between the bid and offer prices is narrower for coins than for bars.
It would be interesting to see at least part of the wealth the Macau government is accumulating kept in the form of silver coins. This would allow the government to reap the gains that silver is poised to deliver, improving the return on its surpluses.

The hard truth It might be time to sell U.S. equities and get into heavy metal – try physical silver instead.

The views expressed here are those of the author and are not investment calls by Macau Business


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