What? I say - WHAT!? In two months, Gold has risen more than $US 50 ($US 316.80 to $US 368.40). When was the last time it did THAT? Its rise hasn't been as big in terms of most other major currencies (Euro, Yen, Pound, $C, $A, etc) but it is certainly up nicely. Since it bottomed in April 2001 at $US 255, Gold is up a whopping $US 113, that's getting close to 50% - 44.3% actually. Even a US stock market investor of the late 1990s would be happy with a performance like that. Gold has been going up for nearly two years, and going up FAST for nearly two months.
All of this is irrefutable, and a growing number of people know that Gold is doing very well and has been doing well for quite a long time now. But most investors face a number of problems in dealing with Gold. They don't know anything about the history of Gold in its role as money. If they phone up their broker or financial advisor and ask him to buy them some Gold, after suffering through either a shocked silence or a vehement attempt at dissuasion, they quickly find out that it's not like buying stocks.
By "buying Gold", we mean just that, buying PHYSICAL Gold. Physical Gold has a high unit cost, most people are not used to paying almost $US 370 for "one share". On top of that, transaction costs are quite a bit higher than they are used to paying through a discount stockbroker. That makes "trading" physical Gold a rather expensive prospect. Physical Gold isn't exactly suitable for day trading. And who ever heard of actually taking possession of an investment, instead of having it reside in electronic form in the database of your broker. What most Gold "neophytes" quickly discover is that buying Gold is a "hassle". If they take it further, they discover that the "best" way to own Gold is to have it in one's personal private possession. That's even more of a "hassle", and besides, it could be dangerous. What if it gets stolen?
So, most people don't buy Gold, not physical Gold anyway. The more adventurous ones try and trade Gold futures, and most of them get handed their heads. Many others opt for Gold stocks, after all, they are used to stocks. And others look around for something else which isn't as big a "hassle" as Gold but which can be expected to perform as well as, or even better than, Gold. These people have an obvious replacement "the poor man's Gold" - SILVER.
An ounce of Gold is $US 368.40 (as of Jan 24). An ounce of Silver is $US 4.88. Now THAT'S more like it. Instead of buying one ounce of Gold, I can buy 75.5 ounces of Silver. I can have 75 times the exposure (leverage, if you will) for the same outlay. If I use $US 10,000 to buy Gold, a $10.00 rise in the Gold price would increase my position by $US 271.44. If I buy Silver, a $US 1.00 rise in the Silver price would increase my position by $US 2049.18. It's a "no brainer". Gold and Silver always go up together, right?
Usually. But not, so far, this time. Here are some comparisons:
By ALL these measures Gold is outperforming Silver. In fact, the further back you go in the above examples, the bigger the outperformance. Silver has actually LOST ground in $US terms since the Dow topped out just over three years ago. In fact, Silver's best comparative performance is the most recent one, since the Gold price began to accelerate upwards at the end of November last year. It's still trailing Gold, though.
There are two things that are discouraging precious metals investors, and would-be precious metals investors. First, the metal that they can get the most bang for the buck for, Silver, is badly underperforming Gold. Second, Gold stocks, which are also universally seen to have MUCH more leverage than Gold, have been lagging the Gold price badly over the past seven, eight months.
For someone who understands Gold, and therefore understands the mechanics of the modern financial system, there is no substitute for Gold as a vehicle for capital preservation. But few people have such an understanding, and even many who do want to get more for their "money" than a mere investment in physical Gold can give them. They would rather buy physical Silver and/or Gold stocks. Both Silver and Gold stocks are underperforming Gold. That is not supposed to happen, but it is.
The fact that physical Gold is doing so well is a very telling measure of the seriousness of the present US financial situation. But take that comparison further. The fact is that the performance of Gold ever since its last bull market topped out in February 1996 has been a very telling measure of the seriousness of the US financial situation. Don't forget, Gold fell below $US 300 in November 1997 as the Asian financial crisis was reaching the first of its several climaxes. It was held below $US 300 until early 2002, when the final bubble of all the bubbles of the late 1990s, the US Dollar bubble, finally burst.
Gold is reacting to the present situation. Silver is not - yet. Gold stocks, while they are much higher than they were when Gold bottomed, are still below their levels of May/June last year. We repeat, most investors, especially investors who have no familiarity with precious metals, would far rather invest in physical silver and/or Gold stocks than they would in physical Gold. If they have done so, they have been discouraged. If you want to gauge the extent of their discouragement, follow any of the major Gold chat sites on the net.
Gold has been manipulated by the financial powers that be for decades. And of course, if Gold is manipulated, Silver must be manipulated too. As for Gold stocks, the best example of the anathema of the financial powers that be towards them is the simple fact that in early 2002, just as Gold stocks all over the world were breaking loose, most world Gold stocks indexes on major markets (Australia, Canada, South Africa) were DISCONTINUED.
The Australian Stock Market, for example, discontinued its Gold Stock index in April 2002. Can you imagine, for example, the US "discontinuing" the Nasdaq index just as the hi-tech boom was hitting high gear? We can't either. Yet they did it to Gold stocks. It is MUCH harder to evaluate stocks when there is NO stock index comprising those stocks available. Portfolio managers are NOT likely to add stocks to their portfolio when they have no stock index through which to assess the performance of those stocks.
Against historical precedents, both Silver and Gold stocks are lagging the increase in the Gold price quite badly. The financial powers that be have not given up, not yet. We continue to advocate possession of physical Gold as the MOST important component of any precious metals investment. Physical Silver and Gold stocks have their place too, and the financial powers that be know it. That's why Silver is lagging Gold. And that's why the only official "Gold indexes" which still exist are in the US, all others have long since bitten the dust.