Investments Shift To Equities

Posted: Mar 19, 2012 12:01 AM

Gold fell hard last week as investors shifted out of precious metals and moved their money into the stock market.  Prices for gold and silver crashed through both the 50 and 200 day moving averages before starting to recover later in the week. 

It’s encouraging that gold found support in the mid-$1,600s and silver above $32.  The silver/gold ratio stayed flat last week, hovering near 50, indicating there’s no reason to favor one metal over the other right now. 

Down times are an invitation to buy for holders of physical gold and silver, which is really what separates precious metals from stocks and bonds. 

In the old days when you bought stock, you were actually getting a piece of the company.  Stockholders loaned the company money which the company used to finance capital expansion.  Seems almost funny now, doesn’t it?  A quaint, old-fashioned vision of investing that we all got as kids from 16mm black and white movies in school running on big, square projectors that were even older than some of the films. 

Today the stock market is basically a giant casino rigged in favor of a few big players at the top.  Most of the upper tier players don’t buy stock at all, preferring to trade derivative instruments of one type or another.  Companies don’t really need your money for capital investment and banks don’t need your deposits because they can borrow it from the government at near-zero interest rates. 

For a long time commodities traded apart from all but the occasional speculator, but that’s not true anymore.  Today speculators trade derivative instruments based on commodities which are mostly settled in cash, which brings stock market style volatility to formerly sedate markets like gold and silver.  The good news with gold and silver is that, unlike stocks, you can opt out of playing the derivative game by actually taking physical delivery. 

As I’ve mentioned before, the spot price for gold is not based on actual physical delivery, it’s based on a formula applied to the trading of futures contracts.  While the spot price is generally accepted as a benchmark for gold and silver prices, the physical delivery market tends to operate at a slower pace.  The whipsaw gyrations of the spot price then work in your favor over a long period of time. 

The bonus with physical delivery is that, at some point in the future, it all comes crashing down, you still have something to trade, quite unlike what would be left of the stocks in your brokerage account.

Chris Poindexter, Senior Writer, National Gold Group, Inc