Euro Zone and Gold get hit Hard, yet Losses are Minimal

Despite naysayers crawling out of the woodworks against gold, we might need some long term viewpoints to put things into proper perspective...

The electoral loss of French President Nicolas Sarkozy sent the euro into a dreadful tailspin on Sunday evening, which in turn helped the U.S. dollar push aggressively towards the 80.00 level on the trade-weighted index. With the euro breaking through the $1.30 level (to a 3 month low) against the greenback, the opening quotes in precious metals fell into the red zone fairly quickly.

Spot gold bullion traded at lows near the $1,635 level Sunday night as the news from Paris also led to bid-side quotes at around $29.90 for silver. Yes yes this is bad for precious metals, but we have to consider the fact that the second largest economy in the euro zone has just been handed over to Socialist control for the first time in 17 years. Also taking into account the fact that the advent of Mr. Hollande’s tenure is likely to encourage deeper rifts with previously stated German economic and budget deficit policies, the damage to the euro (and hence gold) was actually relatively contained.

Proof of this 'containment' can be seen in how the metals markets opened on Monday morning to the downside for both gold and silver, but included modest advances for platinum and palladium. Even despite the dollar's surge the night before, the greenback immediately declined after its brief touch with the resistance level at $80.

On the platinum side, speculators built up hefty new long positions, but their move was still being countered by a relatively sizeable short position being held by similar opposite players. Palladium long positioning continues to improve but the longs still have some ways to go before convincing more players to jump on the wagon. Most analysts agree that certain car markets, despite being slower than they were last year, continue to consume large amounts of the noble metal and with a new car hitting the road in China every 2.3 seconds, palladium remains in rather strong demand.

As for the non-speculative (not related to buying gold futures or options, etc.) physical side of gold, we have some pretty encouraging news hitting the wires recently with the Indian government removing the excise tax of 0.6% on non-branded jewelry that had gone into effect back in March 16, which caused a massive strike amongst that country’s bauble sellers. In retaliation, Finance Minister Mukherjee left a proposal on the table to double the import tax on gold to 4%.

Despite this good news, however, one has to keep in mind that Indian buyers already have to deal with a record near-30,000 rupees per 10 grams of local gold. And there is still a long way to go for gold buyers there seeing as how gold demand in Mumbai is currently running at around 250 kilograms per day - as opposed to the one metric ton per day being consumed a year ago.

Boy when it rains, it sure pours! Recently both Warren Buffet and Charles Munger spoke rather...unkindly towards gold. Now I don't mean to speak against the 'oracle' of stock investing, nor do I even pretend to have remotely half the investing know-how of either of them, but one thing I DO know is that statistics speak for themselves. Warren is a proud proponent of long term investing. Right? Okay, well let's take a look at some 'long term' performances from January 2000. Specifically, let's take someone who splits his investments four ways into the following four holdings:

1) Berkshire Hathaway class A stock
2) Berkshire Hathaway class B stock
3) Gold
4) Silver

Just how well would this type of portfolio have performed from the beginning of the millennium?

1) Berkshire Hathaway class A stock started at $54,800.00/share and closed on April 30, 2012 at $120,800.00 for a total percentage gain of 120.44%. Not bad.

2) Berkshire Hathaway class B stock started at $35.40/share and closed on April 30, 2012 at $80.45 for a total percentage gain of 127.90%. Slightly better (and of course we are also taking into account stock splits).

3) Gold started January 2000 at $282.05 (Kitco.com closing price 1/4/2000) and closed on April 30, 2012 at $1,651.25 for a total percentage gain of 485%....hmmm...

4) Silver started January 2000 at $5.30 (Kitco.com closing price 1/4/2000) and closed on April 30, 2012 at $31.20 for a total percentage gain of 488%...

I think I'll rest my case at this juncture.

Be safe, be wealthy and above all else, be happy.

- Mitch

Sponsored by Leland National Gold Exchange

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