Gold and Silver Snips

As gold trades above US$1,000 (HK$7,800) an ounce once again, it has been attracting renewed investor interest.

Many are wondering whether it is too late to enter the fray, or if it's still a good time to gain exposure.

In our view the latter is the case, since the perfect storm of bullish factors for precious metals is just only starting to come together.

It should be reiterated that there appears to be no end in sight for the "quantitative easing" (money-printing) policies of the United States and Europe. (Quantitative easing obviously benefits gold, as it usually foreshadows much higher future inflation.) This is in good part due to the unsustainable budget deficits in most Western countries.

Moreover, the banking crisis is nowhere near fixed - in fact the United States has witnessed 92 bank failures so far this year, compared with only 25 for the whole of 2008.

The Federal Deposit Insurance Corporation's "problem list" of banks that are at risk of failing in the near future jumped to a 15-year high of 416 banks at the end of June from 305 in the first quarter.

European banks likewise do not appear in much better shape.

Locally, Hong Kong recalling its gold reserves from London and opening a new bullion depository at the Hong Kong International Airport should be seen as another bullish factor for gold.

Clearly, the precious metal's demand from both the mainland's central bank and Chinese private individuals is increasing and mainlanders have become the world's largest gold buyers.

But the strongest indications yet of gold/precious metals prices likely moving much higher are issues not that much talked about.

One is the fact that, while gold prices have more than tripled since 2001, production has actually fallen by approximately 5 percent during the same period.

This is interesting because under normal circumstances a strong increase in the price of any commodity would trigger production increases.

The fact that this has not happened implies that new gold supplies are very hard to come by.

Also Toronto-based Barrick Gold Corp has announced its plan to eliminate all gold hedges by raising up to US$4 billion in a share offering.

Since Barrick holds the largest hedge book of all gold miners, this means that it may even have to become a net buyer of gold in order to be able to eliminate its massive gold short positions.

It seems rather clear that a position in precious metals would most likely be beneficial to any investor's portfolio.

But one should be very careful as to how one gains exposure, because there is approximately 78 times more "paper- gold" being held by investors than physical gold in existence on this planet that has ever been mined, according to the World Gold Council.

As this clearly implies that un- backed "paper-gold" accounts may be subject to the risk of default, investors should stay clear of buying paper-metal accounts from banks and make sure that any precious metal investment vehicle used does actually store the metals in a fully unencumbered, "un-leased" and physical form.

Martin Hennecke