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Investors Take a Shine to Precious Metals

29 January 2015 in Trading Ideas

At this point last year, the price of gold was bouncing off a multiyear low on its way to a rally of nearly 20%.

Unfortunately for those investing in gold, however, the end of that rally marked the 2014 high point for the yellow metal: the following eight-and-a-half months saw gold give up all of that 20% gain and then some.

Now, however, precious metals are back, this time with an assist from the European Central Bank.

As the Wall Street Journal reported last week, the ECB provided the latest incentive for gold and silver investors by unveiling a bigger-than-expected bond-buying program amid continued worries about Europe’s economy. Gold futures ended above $1,300 an ounce for the first time since August, while silver climbed nearly 20%, according to the Journal.1

Other precious-metal investments have also shimmered. The Precious Metals motif has gained 25% in the past month. In that same time, the S&P 500 has lost 1.3%.

Over the past 12 months, the motif has fallen 14.6%; the S&P 500 is up 15.7%.

The Journal maintained that gold and silver are drawing buyers of all types, a sign that fears about a worsening economic outlook run deep in financial markets. The metals are popular havens for nervous investors but had fallen out of favor after setting price records in 2011 as the US recovery gained speed, the Journal said.

Now gold and silver are luring back some money managers, as collapsing oil prices, fears of a recession in Europe and volatility in currency markets shake their faith in stocks and other investments, the Journal said.

Both metals remain far below their peaks, and the newspaper pointed out that many investors are skeptical that economic conditions are dire enough to sustain recent gains.

However, others see gold and silver as more promising than stocks, which are at or near record highs in many markets, or government bonds, where yields are near zero across the developed world.

Other investors also are embracing metals as a store of value in case policies like those announced by the ECB spur inflation, the Journal said.

The amount of gold held by exchange-traded funds has surged 1.2 million ounces this month, the biggest monthly increase since August 2012, the Journal said. Meanwhile, bullish bets on gold futures and options, mostly reflecting wagers by large investors, are at a five-month high. Sales of silver coins, popular with individual buyers, also are up, according to US Mint data cited by the Journal.

The ECB’s move follows in the footsteps of the US and Japan, which undertook similar measures to lower interest rates broadly and spur growth. The result: a weaker currency, especially in Japan, which makes domestic wares cheaper to overseas buyers.

“There’s competitive currency devaluation occurring… gold is your natural hedge against that,” said Michael Tiedemann, who oversees $9.5 billion as chief investment officer of Tiedemann Wealth Management.

For now, that argument seems to hold sufficient weight for many precious-metal investors.

1Tatyana Shumsky, “Buyers Take a Shine to Gold, Silver Again,” wsj.com Jan. 22, 2015.

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