Precious Metals: Why the Bull-Market Is Not Over

                                                                          digitalmoneyworld

The start of 2013 has shown some interesting market dynamics. The equity markets have risen, and precious metals prices have fallen. There is mixed data about house prices, and expectations as to where the markets will go this calendar year. This week we look at Precious Metals start to the year, and why we believe investors should still consider this as an asset class in a well-diversified portfolio.

Gold is currently trading around USD $1575, a fall of around 5% in 30 days. Whilst the fall has been disappointing for investors in precious metals, there remains no fundamental reason to believe the bull-market in precious markets is over.

The fall in price for Gold has been attributed to a handful of arguments, including:

• Gold has gone up for 12 years in a row, so the bull market ‘must be over’.
• The World economy is improving hence there is no need for people to own ‘safe-haven’ assets like gold.
• The Federal Reserve has said it ‘might stop printing money’.

Whilst sentiment and short term market moves are being influenced by this thinking, we would point out the following.

The point about Gold going up for many years is correct, but it doesn't prove in any way that the bull market is over. Bull markets in any asset class don’t function to a strict timeline, but rather tend to end only when the fundamental factors driving that bull market are over-stretched, and valuations are extreme. This was the case with gold all the way back in 1980, but it’s far from the case when it comes to precious metals today.

Secondly, the world economy is not improving significantly. In Q4 of 2012, the GDP figures for the Eurozone and the United States were negative, despite the deficits being run to stimulate growth. Last week Wal-Mart was in the news in the US after February sales figures were internally reported as a ‘total disaster’. It's hard to believe the economy is improving if a company like Wal-Mart is experiencing its worst sales figures in nearly a decade.

The final argument, that the Federal Reserve might stop printing money and that this will cause gold to fall also needs to be addressed. It was only in December 2012 that the Fed decided to more than double the amount of money it was printing (from $40 billion a month to $85 billion). Since then, economic data has deteriorated, so it’s hard to see why they would stop printing money any time soon, especially with continued threats of tax rises and/or spending cuts from Washington.

We believe strongly that the Fed, and indeed all major central banks around the globe will maintain negative real interest rates (i.e. where the inflation rate is above the cash-rate), and continue printing money to prop up their economies for many years to come. Despite what they might say to the media, they know any attempt to stop the printing, or to raise interest rates will lead to a huge fall in economic activity.

These key factors are why we believe that the price of precious metals will increase steadily over the following decade. Prices may move into negative territory at some points in the cycle, but until there is a shift in the debt crisis and key economic indicators (such as higher real interest rates). Precious metals will remain a part of the LJ Financial Investment philosophy.