When investing in any asset class whether they be paper assets like bonds and equities or tangible assets like property and precious metals, an investor should do their own 'due diligence' or extensive study and research and have a basic understanding of both the fundamental and technical analysis of the investment.
Fundamental analysis is as its name suggests an analysis of the basic factors influencing the future price movement of an investment. Supply and demand factors are the key determinants along with other economic data such as total debt to GDP ratios, currency movements and weaknesses, relative interest rates, relative rates of inflation, relative economic growth rates, unemployment statistics, corporate earnings, trade deficits, budget deficits, geopolitical factors and money supply factors. The intention of this approach is to arrive at an estimate of the intrinsic value of an asset thus determining whether it is fairly, under or over valued.
The fundamental reasons for owning gold and silver in the last 5 years have not changed indeed most of them have become stronger:
• Demand Factors
- Record & Unprecedented US trade, budget & current account deficits.
- Rising oil & energy prices and peak oil.
- Overvalued and plateauing property markets.
- Rising interest rates in the US and globally.
- Record consumer, mortgage and national debt levels in the US & much of the western world.
- Increasing pensions difficulties with underfunded pensions and the 'Demographic Time bomb'.
- Growing realisation of the long term impacts that global warming will have on all societies and economies as clearly outlined in the Stern Report
- Geopolitical Instability and 'The War on Terror'.
- A depreciating and declining US dollar - the global reserve currency;
Increasing global investor demand for safe haven assets & Central Bank demand for gold in order to maintain full faith and provide stability to unstable currencies and monetary reserves.
• Supply Factors
- It is estimated that all of the above ground stocks of gold could fit into a 20 meter high cube and is thus very finite.
- Gold production is stagnating and gold output in the leading gold producing countries continues to fall year on year despite higher gold prices leading geologists to wonder whether we have reached the point of peak gold production.
- It takes 10 - 15 years to take a mine to production and many mines .
- High energy prices making mining an expensive proposition.
- Environmental legislation stymies mine development.
- Many mines are in unstable countries and regions such as South America, Africa, the Middle East and Russia.
- Central banks sales have slowed and in some cases reversed; the South African, Russian and Chinese central banks are two of the more significant buyers of gold in recent months .
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