Do gold and silver still hold their luster?

Doug Horn

Precious metals such as gold and silver have increased in value in recent years. Based upon their current values, the questions becomes “Is there room for their price per ounce to continue to increase and if so, to what future value?”

To be able to speculate on their future prices, it is necessary to understand what is driving their current values. Both gold and silver have significant commercial uses. Thus, perhaps as the global economies recover from the current recession, commercial demand may increase and continue to push the price to even higher values. There is also the development of third world countries. Commercial consumption may see improved demand as these countries such as Indonesian, India, China, and others improve their standard of living.

Besides the commercial demands, gold also satisfies other needs. It is often used as a hedge against inflation as well as a protection investment. The U.S. has not seen significant inflation for a number of years, but there are those who anticipate inflation to return in the future and thus have added gold to their portfolios. This is due in part to the expectation the price of gold will also keep pace with the rising costs associated with inflation.

With the world’s economies recovering from the worst recession since the Great Depression, many investors sought the safety of purchasing gold and other precious metals. Clearly this has caused the price of gold and other metals to increase in value. Whether these purchases were to hedge inflation or for portfolio protection, the action increased the demand for metals which caused the price to head higher.

There is yet another reason the price of gold has increased in recent years, and this is due to the decline in the value of the U.S. currency against other currencies around the world. Gold, oil, and a few other commodities trade around the world in U.S. dollars. But, as our currency changes its value against other currencies, there can be a significant impact on the price of an item trading in U.S. dollars. The table reflects how many Euros one U.S. dollar would purchase on April 30th since 1999. Eliminating other reasons for a price change, gold’s value in 1999 was approximately $286 per oz. Since the dollar converts to fewer Euros today than in 1999, the price of gold would have to increase 44 percent to $413 per oz just for the change in currency.

With gold and silver trading at or near record values, our question of whether they can continue higher is still unknown. Most likely, their value based upon commercial use and demand will hold and perhaps continue to increase. But, the value of these metals is also based upon buyers hedging against inflation, the demand from those seeking safety or protection due to world and economic concerns, as well as the decline in U.S. currency value against other currencies.

These metals also have holding expenses such as storage and insurance. They do not pay interest or dividends and someone has to store the metal; so instead of providing some income for the owner, there is actually an expense to own the metal. If possession is taken, in most cases prior to being able to sell the holding, the metal has to be assayed to confirm its purity and content.

As interest rates and economies recover, will those who purchased metals as a portfolio protection tool continue to hold gold or will they move back into other securities? If significant inflation is avoided or passes will those holding gold turn loose of their positions in favor of other options? Lastly, the value of the U.S. dollar over its history has had periods of strength as well as weakness. If the dollar’s value moves back to the early 2000 period, gold could lose as much as one third of its value solely on the change in currency.

Before anyone acts on speculation that gold is going to $2,000 or silver to $100, an understanding of what is supporting their current prices and what may drive them higher is necessary. While we believe the price of metals could increase in the near term, there are significant opportunities for the price to weaken and perhaps fall as the dollar recovers and there is less fear in the market.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

© 2011 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

  • Discuss
  • Print

Comments » 0

Be the first to post a comment!