While there was a brief sell-off earlier this year, precious metals have resumed their upward climb, moving past old records and approaching historic valuations. Now, the question is how much higher can they go?
"Looking at commodities in general, last year we had a very good recovery in global GDP growth. That’s why most commodities have done so well recently," says Tom Winmill, portfolio manager at Midas Funds. "Some people are looking over their shoulders at 2006-2008 and wondering if we’re at the high end."
Moving forward, analysts expect precious and base metals to look to different factors and even different parts of the world to guide them through the rest of 2011. Unlike many other sectors, metals face different fundamentals with gold in particular acting as a currency.
It is easy to tell how much "gold fever" has gripped the nation; just look at the increase in the number of "Cash for Gold" advertisements you see. The latest gold frenzy is easy to understand considering gold’s recent top over $1,500 an ounce compared to its historical average.
"If you look at annualized prices, even during the crisis period, there was an average gold price of $759. Even in 2009, the annual average gold price was only $972," says Jon Nadler, senior analyst at Kitco Metals Inc., North America. "The window in which we’ve had four-digit gold prices has only been a year plus a few months. Take the entire decade of the bull market and the annualized price of gold was only $540."
Gold opened 2010 at $1,099 an ounce and closed the year at $1,421, nearly a 30% gain. It is no surprise that some of the top performing managed funds last year were those that allocated to gold, such as the Superfund Gold Series B-1, up 53.53%, managed by Superfund Capital Management. That fund is a testament to the popularity of gold as it offers access to a traditional diversified trend-following program priced in gold.
Not surprisingly, gold scrap supplies helped flood the market last year, too. Nadler says gold scrap was up 27% in 2009 and it was up another 22.5% year-on-year in the second half of 2010. "Scrap [gold] supply is very elastic. The higher prices go, the more scrap comes back into the market," Winmill says. "Demand for jewelry production also is very elastic, meaning as gold price goes up, people decide they don’t need that gold bracelet."
But supply and demand factors based on gold as a commodity aren’t moving the markets as much as gold’s traditional role as money. "It’s really the money flows created by the fiscal and monetary policies of the United States," Winmill says.