2011 certainly has proven to be an interesting year. As we see the last of our troops come home from Iraq the future is anything but certain. Peace remains elusive. Instability in the East continues to threaten the region. And as our leaders continue kicking the can down the road, the economic prospects for America become more and more certain; there will be a day of reckoning.
As we look back at the past year in precious metals it may come as a surprise to some, in light of the recent pullback, to see how well we’ve done. We tend to have short memories, failing to recognize the long-term dynamics of what we’ve witnessed recently.
Take gold for instance. At the beginning of December, 2011, the spot price hovered around $1750. Yet by the end of the year it had dropped to below 1550, shedding over $200.
Viewing gold from this perspective presents a rather bleak picture. But, for those who understand the fundamentals, this drop represented an opportunity to get in at new lows. Let me show you why.
While in September we saw a spike up to $1900 gold, most of us recognized that it would likely be very short term. A buying frenzy happens once in a while, which causes these jumps in price. What many of us may have forgotten was that it was just under six months ago, in mid-July, that gold was at its current levels; a price reached for the first time, ever, in June of 2011.
Prior to June we saw meteoric gains in gold prices. April began around $1420, preceded by a rather flat March, but an early February price of around $1330. Granted, February’s lows followed a fairly significant drop in January, but the year was good to gold. On the last day before the markets opened in January, 2011, gold closed at $1421.60. On the last trading day of 2011 gold closed at $1566.40. This represents more than a 10% one year gain against the dollar.
The DIA, which ended 2010 at 11577.51 and closed a year later at 12217.56, gained just 5.5% against the dollar. With an official CPI inflation rate averaging about 3.2% for 2011 as of November, the DIA gained just 1.32% in real value during 2011 while gold gained over 6.8%. Of course, we know the real inflation rate is higher than the CPI, but for comparison purposes it’s easy to see how gold has outperformed the DIA during 2011.
The real buy today may be silver though. Rather than increasing this past year, it’s actually gone down slightly, from 30.91 to 27.86 in 2011. While this represents a decrease of almost 10%, it also represents what may very well turn out to be the last great buying opportunity for silver. Silver to gold ratios that have recently touched 40/1, closed 2011 at 56/1, representing what may be much greater potential for silver than gold at the moment.
Platinum and palladium both decreased against the dollar as well, and also represent attractive alternatives. Which is the best choice for the investor? While we’re confident that all of these are excellent opportunities, it’s very difficult to know which one will perform best over the coming year. Tomorrow we’ll take another look at the past in an effort to perhaps understand what to expect in the future with a little more confidence.