There are three main reasons why an investment in gold and silver would make sense at this time.
The first reason to invest would be the coming inflation that will be caused by the decline in the value of the American dollar. As the worlds only reserve currency many commodities especially the all important oil market is factored in U.S. dollars. As the dollar becomes inflated the price of commodities internationally will need to increase just to stay even in actual value. Gold and silver will be among them.
The rise in the price of energy will be felt throughout the world economy because it is a needed input for all industrial and manufacturing activity. Oil itself is an absolute necessity to the critical transportation sector. There is also the individual consumer demand for heating, cooking and transportation. This will also put an upward pressure on prices including gold and silver.
The second reason is the demand for gold and silver is increasing. Not only from individuals and corporations but from countries as well. China for example, is reported to have bought 245 tons of gold in 2010 and 490 tons in 2011.
China as of 2012 is the 5th largest holder of gold in the world up from the 7th largest in 2011. The Chinese it seems would rather hold more gold and silver than purchase more American debt. This is from a nation that is the world’s largest producer of gold. It shows that Chinese investors are expecting turbulent times at the minimum.
World demand in gold was 3,812.2 tons in 2010, 4,067.1 tons in 2011, 4,415.8 in 2012 and 3,756.1 in 2013. China and India alone were responsible for half of the purchases world wide in 2012 and 2013.
Shanghai China
In 2013 consumer demand for gold in China alone totaled 1,065.8 metric tons, surpassing India for the first time. India came in at 974.8 metric tons, the third highest total ever and this was in the face of stringent government restrictions of gold imports.
In 2013 overall world supply slipped 1.7%. A 14% reduction of recycled gold was somewhat balanced by the 5% increase in mine production. Somewhat lower prices in gold lead to even larger purchases by China.
Also supporting strong demand of gold were purchases by central banks. The total for 2013 was 368.6 metric tons down 32% from the 50-year high set in 2012 but still a very large purchase. The big buyers here were Russia with 77 tons, Azerbaijan and Korea with 20 metric tons each.
Although the United States and Germany the top two national holders of gold have not purchased additional gold in recent years their citizens certainly have. The United States government is said to own 8,965.6 tons and Germany 3,743.7 tons.
The other major state owners of gold that own less then 3,000 tons are the IMF, Italy, France, SPDR Gold ETF (GLD), China, Switzerland, Russia, Japan, The Netherlands, India, the European Central Bank, Taiwan, and Portugal.
Presidential Palace New Delhi India
The third reason will be the possible interruption of the supply of certain commodities. The most important being once again the all important petroleum exports from the Middle East. The most essential area being the Persian Gulf.
It is no secret that 35% of all seaborne traded oil in the world moves through the Strait of Hormuz. This represents 20% of all the oil traded worldwide. More than 85 percent of these exports go to markets in Asia. The most important customers for this oil are the nations of China, India, Japan and South Korea.
This waterway is one of the most important trading routes in the entire world. Through this narrow channel goes the giant ocean-going tankers (on average about 14 daily) from Saudi Arabia, Iraq, Bahrain, Iran, Kuwait, Qatar and the Unites Arab Emirates.
The Strait of Hormuz is bordered by Iran to the North and the South by Oman and the United Arab Emirates. The Strait itself is 21 miles wide at its narrowest point and more crucially the shipping lanes in either direction are only 2 miles wide.
Oil Tanker in the Persian Gulf
Through the passage 23 million barrels of oil transverse daily. This is in comparison to the nearly 76 million barrels produced worldwide. Collectively these nations supposedly hold more than 50% of the world’s total oil reserves.
In addition Qatar exports about 2 trillion cubic feet per year of liquefied natural gas (LNG) through the Strait of Hormuz. This accounts for about 20% of the world LNG trade.
Considering the significance to world commerce that the Strait of Hormuz has, and its close proximity to Iran should concern everyone. Its small geographic size at its narrowest point shows how easily this waterway can be sabotaged.
Strait of Hormuz
Historically, Iran has threatened to close the Strait in 1984,1997 and again in 2012-13. The Iranian government has made it clear that any military action to forestall its nuclear program by force would result in the closure of the passage.
Oil is the single most important commodity in the world economy. Given the dependence of the energy markets on this area of the world interruptions in supply (if only temporary) would have major economic and political consequences. A disruption of shipping in this area will result in dramatic increases in the price of oil and LNG as supply dwindles and more importantly the panic among commodity traders and investors set in. The fear of a cutoff in supply will allow prices to soar.
As emotion grips the futures market in energy the price of precious metals like gold and silver will correspondingly increase as well. The run up will surpass previous highs on both of these commodities.
Crisis and upheaval in the Middle East especially in the Persian Gulf region is not a matter of if it is more like when? Despite border disputes among the nations of this area the most important issue at this time is the Iranian nuclear program.
Iranian Nuclear Facility at Arak
The official American policy is to disallow a nuclear program for Iran in military terms. Statements and policy initiatives by Iran towards its neighbors especially Israel makes war in this region all the more likely. Israel has made it quite clear that they will not permit Iran to acquire a nuclear bomb.
The “buying of time” by the present 6 month international agreement which is due to expire in July 2014 does not resolve the coming confrontation between Iran and the nations of the world that want to deny nuclear capability to the regime.
The 6 power talks in Vienna at this very moment seem very positive but others may feel the Iranians are just stringing the world along until they are actually able to finish the process of creating nuclear bombs. No matter what the Iranians agree to without real international inspections of all atomic facilities any accord will not bring peace nor satisfy countries like Israel who are in real peril. Regardless, the world will find out in 2014-15 whether Iran is able to stage a breakout and join the nuclear club.
Orange Revolution in Ukraine
Even if there is no immediate war when this happens there will be a corresponding arms race in the region adding to increasing instability and danger of an all out war. This will put increasing price pressure on commodities like gold and silver. They will do even better in a world of more disorder and risk of conflict. One only has to observe what is going on in Ukraine, Syria, Afghanistan,Pakistan,Thailand and more importantly Iraq and Venezuela (because they are major oil exporters) to understand that higher prices for precious metals are assured in the long term.