Gold and Silver

Why would gold and silver increase in value in 2011?

Timing is essential with any investment.

It is impossible to call the top and the bottom, but provided the price of our chosen investment is higher when we come to sell compared with when we bought we are all happy little bears.

Back in 2001 I predicted that the dollar would fall massively and that it was time for gold to re-assert itself as a store of value. Sell the dollar – buy gold. At that time an ounce of gold would have cost you £200.

Gold is priced in dollars, so for UK investors they have to watch both the price of gold and the exchange rate. Over the last 8 years the price of gold has risen from massively against all currencies but this is how it has affected UK investors:

As you can see my timing wasn't perfect, but one could reasonably claim that a low price during the “acquisition phase” is a good thing not a bad one. Either way the price of gold has leapt massively against the pound and investors now will be asking themselves have I missed the boat.

The answer to that, in my opinion, is an emphatic NO. I believe that both gold and silver remain very strong buys in 2011, and here's why:

1. Governments around the world continue to print paper money at an alarming rate. America leads the way but since all other currencies are competing with the dollar, the money supply around the world is running at a startling level. Here in the UK it is currently around 13%. All paper currencies are eventually devalued until they are worthless. Gold is the obvious choice as a means to protect your wealth. I used to argue that gold was a way of making sure you never became poor, rather than a way of making you rich but times have changes. The Federal Reserve is determined to reduce the value of the dollar (and hence its massive debts) by pumping huge amounts of money into the system. The so-called reserve currency of the world is now completely unregulated and accountable to no one.
   
   
2. There may be a credit squeeze over here in the West, but not so in the East where the true effects of globalisation and capitalism are creating a new order. In China and India a new wealthy middle class is emerging. The Chinese cherish gold and see it, as they have always seen it, as a great store of wealth. A similar view is held in India where gold is the de-facto wedding present. No toasters and fondue sets over there. The Indian gold market is the biggest in the world and in the first nine months of 2007 alone, demand in India exceeded 500 tons.
   
   
3. If demand amongst the average man on the street is on the increase in these two countries what about the governments themselves who find they are sitting on trillion dollar assets which they watch with anguish as they devalue by the minute. If China's central bank were to move even a fraction of its dollar reserves into gold the impact on this extremely small market would be massive. Consider this; the Chinese have only 1% of their reserves in gold whereas the Americans (if we can believe the figures) have 70%.
   
   
4. In the West, the average guy in the street is not yet aware of the importance of gold to his investment strategy. Gold, despite the recent increases, still remains off the radar for most people. It is ignored by the press and television simply because for the last 20 years it has been positioned as a “barbarous relic”. Something that does not fit comfortably in a world of fiat currencies and credit cards. That is all changing. Once gold gets into the common domain the price will rocket.

So, how far will gold go and is it a good investment in 2011?

Of course, there isn't a sinner on the planet who knows the answer to that one but here is my forecast.

I expect to see $1,600 before the end of 2011

I expect to see $2,000 gold by Spring 2012 - and that is a pessimistic forecast. $2,000 gold come come in 2011 if governments around the world continue to print money as if it were paper (sic).

And silver? Well I have $40 silver as my end of year target and $70 silver within 3 years.

Fanciful?

I don't think so.

Here's the thing. Gold has been making us double digit profits for years but the big increases will come when the general public finally wake up to the fact that gold and silver are their only means of escaping the devaluation of paper currencies. When they finally start to swap their dollars, pounds and Euros for gold, the price will shoot up 10% a day. You have to make sure you are stocked up before this happens.

Finally for those of you who worry about buying or indeed managing your gold, read this from Richard Russell, editor and publisher of the Dow Theory letters:

"Quotes are great if you own stock in a public company in a big bull market. But the great majority of amateur investors make more money holding their homes over the years than they ever make in the stock market. And the reason is that if they own a home over the years, and that home is sensibly financed, they aren’t scared out their home by those damnable quotes during bear markets.

Holders of gold might mull over the same concept. Sure gold is quoted every hour of the day around the world. Long-term holders of gold might do well to ignore the quotes. If gold doubles in price, so what? - are you going to swap your gold for paper? If gold drops by a third, so what? – are you going to dump your gold for paper?

Why not just relax and hold your gold? Hold your gold - why? The reason is that gold is the only true money, it's the only money that remains wealth no matter what happens in the world. Gold is wealth during the biggest boom and gold remains wealth during the worst depression. So why dwell on the daily dollar price, even though gold is quoted everywhere every hour of the day? Forget the bloody quotes, just accumulate gold. It's a good thing to have in today's unstable world."

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