Precious Metals Comment

It has been a tough slog for precious metals over the last several months. Despite this period, gold still ended the year up about 10%. 2011 marked the 11 th consecutive year for gains in gold. Closing prices at year ends are shown in the following table:

2000 — $273.60

2001 — $279.00

2002 — $348.20

2003 — $416.10

2004 — $438.40

2005 — $518.90

2006 — $638.00

2007 — $838.00

2008 — $889.00

2009 — $1096.50

2010 — $1421.40

2011 — $1566.80

Where prices will head from here is anyone’s guess. A pattern like the one above cannot continue forever. After all, “trees don’t grow to the sky…”, etc.

In my opinion gold prices will continue to outperform financial assets for the next few years. That opinion is based on two major factors:

1. The economic and debt problems faced by most sovereigns around the world.
2. The expectation that sovereigns will sacrifice their currency in an attempt to solve their economic and debt problems by printing money. (PS, it won’t work.)

Chris Mack has a nice summary piece which those interested in PM’s should read. He concludes his piece with sentiments close to mine:

While the timing can’t be predicted, confidence in the global financial system continues to wane. Guaranteed negative interest rates for at least the next two years, also guarantees positive fundamentals for precious metals. Gold and silver are clearly in multi-month consolidations, which is natural given that they were the best performing assets of 2010. The inevitable further devaluation of global currencies will continue to facilitate a bullish environment for the metals. Investors with a long-term outlook have an excellent opportunity to accumulate gold, silver, and especially profitable dividend paying gold and silver producers that must increase by multiples to fulfill their potential value

These are dangerous times. Markets will continue to be highly volatile. Fortunes are going to be made and lost over the next few years. We may see “flash crashes” in the stock market as well as other markets. Be careful regardless of what you choose to do.

The winners will be those who come through this crisis with the purchasing powers of their portfolios intact. Don’t use nominal dollars to judge your performance because we are likely entering a period where the the dollar becomes meaningless as a proper measuring tool. If you have 25% nominal gains while inflation has stolen 50% of your purchasing power, you lost money.