New Flashpoints

October 21 2014

Once upon a time there was a world where financial markets were paralysed by the central banks that pumped billions of dollars, pounds and euros into the financial system. A world where economies were struggling to pick up the slack - while the markets were climbing to record highs. And as the rich got richer, and the poor fell victim to the rising tensions with the almighty oil and gas producer,

New Flashpoints

Once upon a time there was a world where financial markets were paralysed by the central banks that pumped billions of dollars, pounds and euros into the financial system. A world where economies were struggling to pick up the slack - while the markets were climbing to record highs. And as the rich got richer, and the poor fell victim to the rising tensions with the almighty oil and gas producer, Russia, the markets barely reacted. ISIS infiltrated the Middle East, and the gold, oil, bond and stock markets barely reacted...

Until last Wednesday. All markets turned a deep shade of red.

Concerns about Southern European countries flared up again and rolled like a violent tidal wave across the markets. Eurostat's announcement that inflation in the eurozone had dipped to a five-year low of 0.3% in September created a major shock. But the biggest flashpoint this time is really the Southern European government bonds, where the massive buying frenzy earlier this year has clearly turned into a selling frenzy. Last week, the yield on ten-year Greek government bonds soared to 6.6%, and then to 8.9% this week. A huge difference in just one week.

Should we be worried that another crisis is around the corner?

Not really, a lot has to happen before another crisis befalls us. But this week has seen a turnaround in the financial markets' reaction to geopolitical tensions, unrest created by ISIS and lack of economic growth and budget deficits. Markets did not react positively to the very positive data out of the US. Industrial production experienced its strongest growth in September after two straight years of decline and new applications for unemployment benefits fell to levels that haven't been seen in 14 years... Both indicators that should, in fact, point to an improving economy. But the disappointing consumer spending data reported last Wednesday tells an entirely different story, making it impossible to draw any firm conclusions.

But how will we solve these problems? Economic growth is the only true pathway out of the crisis we are in - it helps drive down debt and keep pensions affordable. Especially now that we have clung to Germany for far too long and its economy is going off the rails.

Gold back in business?

For the first time in years, gold hit a record high last week as its price shot up to $1250/oz. Is there finally light at the end of the tunnel? Even though gold could not hold steady at $1250/oz., the precious metal is expected to reach new highs in the coming week, but long-term prospects are not as promising. Commodity Exchange Traded Funds announced that it reported a 60% outflow in Q3 of this year, indicating an increasingly bearish sentiment among investors. Notably, silver saw the largest inflows; a very strong indicator of the potential investors see in the metal. Very notable, since silver is down 23.6% this year, making it the worst-performing precious metal of 2014.

Silver is still the better investment

Why do investors risk investing in silver? Unlike gold, relatively higher returns are expected to come from investments in silver. Not in the least because the price of silver is highly undervalued. In addition, the industry's high demand for the precious metal also serves as an important guarantee. Between 60% to 70% of silver is used industrially whereas 'only' 10% of gold is similarly used. Solar panel manufacturers are currently the largest consumers of silver. Thus, based on the above, we can also conclude that unlike the majority of gold investors, silver investors are not driven by momentum, but by growth forecasts. Growth forecasts due to the rising demand for industrial applications.

Why is the silver price so low?

According to a recent report by Thomson Reuters Silver Institute, the demand for silver in China and India has soared to unprecedented levels. But why are silver prices so low then? Unfortunately, that can also be explained here by the fact that the price of silver - and gold - is set in the futures market. Because large global investment funds holding physical silver, such as Sprott Physical Silver Trust, Central Fund of Canada, Züricher Kantonalbank, not to mention Silver ETF, do not hold much physical silver at this time, there is no movement in the market.

When will the market move? The report is very clear on that. Yes, the prices are low right now, but even asset managers are beginning to see the growth potential provided by low prices at this time. Everyone is sitting quietly on the sidelines until the lowest point is reached. Which could happen before you know it. Then, an institutional investor's move to make tentative buys opens the floodgates for other buyers - and they take advantage of the opportunity, after all, nobody wants to miss the boat and maybe one party has important information relating to rising prices. Or one party aggressively sells positions to test the market-bottom price - the Rothschilds were famous for doing this. It only takes one party to use the same tactic - i.e. sell everything you want to buy yourself so as to drive down the prices to the lowest possible level and quickly step back in at the right time.

Silver has a lot of growth potential

Either way - whatever the trigger may be for higher silver prices - one thing is certain: that time will come. Silver is ideal vehicle, precisely because it is presently so undervalued and can yield very high returns in a bull market.

And that is something that keeps us all busy. Whether you opt to take more risks as investor, also in terms of the higher potential returns, or you opt for more security and thus for gold - and you find it important to protect a portion of your assets in case the financial markets collapse, the answer lies entirely in your risk profile. Because despite the fact that gold has yet to get the green light, it is and remains the most sensible investment choice in today's challenging economic and geopolitical climate.

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