Gold And Silver Prices Won't Plummet Unless Two Conditions Are Met
Broadcast 07/20/2012 on WILS-1320 AM
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Welcome to another edition of Things You “Know” That Just Aren’t So, And Important News You Need To Know presented by Patrick A. Heller, owner of Liberty Coin Service in Lansing. Take it away Pat.
Good morning. As I told you last week, with the Hulbert Newsletter Gold Index at negative levels, there is little room for investor sentiment to fall further. On that basis alone, this Index is a sign that the price of gold is unlikely to fall much further.
However, there are still many who proclaim that the price of gold is in a “bubble” and destined to drop soon and fall sharply.
There are two other strong indicators that the price of gold is nowhere near its peak. First, if the price of gold was in a bubble and near a peak, the price/earnings ratio of gold mining companies would be at record high levels. High price/earnings ratios would indicate that investors are extremely enthusiastic about the price of gold going higher in the future.
When you look at the current price/earnings ratios, the truth is almost the direct opposite. For instance, the current market capitalization of Anglogold Ashanti, one of the world’s largest gold mining companies, is less than the company’s 2011 earnings! Barrick Gold, another of the world’s largest gold mining companies, has a current PE ratio below 8. These figures are poor when compared to the current Standard & Poors 500 PE ratio above 15. Instead of being at record levels, it is difficult to imagine how the PEs of gold mining companies could fall any lower.
Second, one of the reasons for higher demand for physical gold is that the interest rates are too low. The current yield on short-term US Treasury debt is virtually zero. At the same time the Bureau of Labor Statistics reports that the Consumer Price Index, on an unadjusted basis, rose 1.7% from June 2011 through June 2012. Thus, you can see that investors have an incentive to move out of paper assets and into tangible assets such as gold.
Frank Holmes, CEO and Chief Investment Officer of US Global Investors does not expect a dip in gold demand until, and unless, the interest rates that investors can safely earn is at least two percentage points higher than the current CPI increase.
The US government is now boxed into a corner where it cannot allow interest rates to rise. A higher interest rate would devastate the federal budget and lead to huge losses on US Treasury debt held by the Federal Reserve.
As you can see from these indicators, those who wishfully hope that the price of gold could drop significantly from current levels are bound to be disappointed. On the other hand, those who own gold and also silver are likely down the road to be glad they were in the market at today’s price levels.
That’s it for today. Tune in again Wednesdays and Fridays for more “Things you ‘know’ that just aren’t so, and important news you need to know.” I’m Patrick A. Heller of Liberty Coin Service in Lansing. Thank you for listening.