Deflation Weighs On Commodities

Posted: Jul 13, 2012 12:01 AM

Concerns related to demand kept downward pressure on commodities yesterday, including gold and silver, which were down, though still holding up better than other asset classes. 

In early trading gold was down $13.41 to $1,583.37 and silver was off $0.46 to $26.66, for a silver/gold ratio of 59.4, the highest reading this year. 

I realize it may be depressing to watch gold and silver prices follow oil, copper, platinum and palladium lower, but we’re in the midst of a global fire sale and dealers are slashing prices on everything. 

Besides, what are the investment alternatives?  How’s your 401(k) working for you lately?  Real estate has picked up a little, though one could argue it’s marginally better than pitch black. Buyers are still driving hard bargains and prices are not recovering in many areas. 

Taken in context with what’s going on in the rest of the economy, precious metals have held up surprisingly well.  All the same skepticism is recommended when you see headlines about gold reaching $8,500 an ounce by 2015. It’s funny they use the gold spike of 1980 to make their case.  If you bought gold in 1980, you were underwater on that investment until roughly 2006. 

So this is where I remind you that gold is not a tremendously good speculative investment; it’s supposed to be the 5 to 10 percent of your wealth that you want to have in hard assets that will hold value relative to currency.  The time to accumulate is when prices are depressed by an excess of sellers and a shortage of buyers.  In other words, times like right now. 

Now is the time to be buying silver.  That’s not because prices are particularly low, but because the price of silver is attractive relative to gold.  I would still split my regular buys between gold and silver, but now I’d weight the purchases even more heavily toward silver.  I’d keep doing that until the silver/gold ratio drops below 55. 

One of the ironies of investing is that the best bargains are frequently available when you’re the least inclined to part with your cash.  It can also be depressing to accumulate at times like this because it’s quite likely we could see prices move even lower. 

Deflation is surging because global demand is dropping, manufacturing is slowing down and there’s no driver for growth on the horizon.  This would seem to be a bad time to buy anything and that’s exactly why you should be out shopping right now. 

Chris Poindexter, Senior Writer, National Gold Group, Inc