The Art of Speculation


After 50 years of global investing, my chief mantra is “There is always something we don’t know!”   

This fact rules the price of gold and precious metals which is why I look at owning them is never an investment but a speculation.  Precious metals are financial insurance against inflation for sure.  But isn’t all insurance a speculation ?  I have never had a fire in my house, yet fire insurance does make sense.

So let’s look at how to refine the process of buying, selling and owning precious metals a bit more.   For example see why the Kunlun mountains (below) can have an impact on the price of gold, that’s not even related to mining.

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The Kunlun Mountains.

In February and March 2017, a significant economic event took place that can have an impact on the price of gold.

Updates in our Purposeful investing Course look at ideal speculative opportunities in precious metals.   One ideal condition we track is the gold platinum ratio when the price of platinum is lower than the price of gold.

Platinum dropping below gold is a historical distortion that rarely happens.

Unless there has been a most basic change in the relationship between these two precious metals, whenever platinum costs less than gold, we speculate on the simple fact that platinum’s price will rise faster than gold’s until this distortion has equalized.

Yet the facts that dictate the prices of precious metals are rarely simple.

For example, there is conjecture that the growth of electric cars will reduce the need for platinum in catalytic converters.  This could be since about half of platinum’s demand has been for this purpose.  Yet let’s keep in mind, it is estimated, that one-fifth of everything we use either contains platinum or requires platinum in its manufacture.  Plus the gold platinum relationship existed well before catalytic converters and platinum still sold for more than gold.

Another example is that the price of gold could drop.  Platinum’s price could rise faster than gold, but if gold is plunging, platinum could outperform gold but stagnate or drop as well.

The relationship between gold and platinum is simple, but there are many factors that have an impact on the price of gold.  European interest rates, US and global inflation, US interest rates, US dollar strength, US job market, US economic growth, US trade deficit, crude oil are a few.   The chart below shows the importance of gold to interest rates.  So the current rising trend of US interest rates could hinder a rise in the price of gold.

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Chart from Marketrealist.com (1).

An article at Marketrealist.com:  “Why real interest rates impact gold prices?” (1)  helps explain why US interest rates matter to the price of gold.

Gold is used as an investment alternative.  Investors think that it protects money’s purchasing power.  As an investment, it has to compete against other investments that are available in the market.  The interest rate is a big factor here because it determines the attractiveness of those investment alternatives.  As real interest rates rise—interest rates adjusted for inflation—other investments usually become more attractive.  This reduces the demand for gold and vice versa.  Gold usually has an inverse relationship with real interest rates.

Rising US interest rates are a downwards pressure for gold prices and gold-backed exchange-traded funds (ETFs).  Since gold and platinum (and silver) are related, US interest rates also have an impact on these precious metals.

What many investors miss is the fact that Chinese and Indian interest rates are also important factors that affect the price of gold.  Both Chinese and Indian cultures have a historical leaning towards trusting and owning gold.  They are becoming increasingly important factors as China and India become larger parts of the global economy. 

If one eliminates Switzerland (the biggest importer of gold with over 70 billion worth of gold imports), Asia is the largest importer of gold (90 + billion worth compared to Europe’s 30 + billion).  China and India are the two largest Asian importers by far.

Increasing yuan and rupee real interest rates will stimulate investors to build up savings in those currencies instead of gold.  This is a downward pressure on gold prices and gold-backed ETFs.

After more than a year of steady interest rates, in both February and March 2017, the People’s Bank of China raised yuan interest rates.

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Indian interest rates continue to fall, but should also be watched.

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Indian Rupee interest rate – both charts from www.tradingeconomics.com (2)

Here is another interesting question.  If interest rates in these Asian countries impact gold’s price, what would be the impact of an Indian/Chinese conflict or war?  China and India have long had border tensions.  There was a Sino-Indian War in 1962 over disputed Himalayan borders.  At that time, the Chinese launched offensives in Ladakh and across a line (McMahon Line) regarded by India as the legal national border that disputed by China.  Disagreements have remained since that time.

The book “Why India Is Not a Great Power (Yet)” by Bharat Karnad, outlines a number of events that could lead to a Chinese Indian conflict. One of the causes could be these tensions that include border skirmishes. Tibetan protests and maritime disputes are others.

Karnad, a professor of National Security Studies at the Centre for Policy Research in New Delhi, suggest that India should be more aggressive to increase its position on the world stage.

His suggestions include nuclear land mines in the Himalayan passes, arming China’s neighbors like Vietnam with cruise missiles and atomic weapons, and actively assisting armed uprisings in Tibet.

Could any of these steps create a spike in the price of gold and consequently silver and platinum?

Screen Shot 2017-04-10 at 9.11.49 AM

Learn more about “Why India is not a great power (yet)?”

This image from India.org (3) shows a meeting between Chinese and Indian military at a conflicted border.  What happens if minor arguments as described in the article turn into something more serious?

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The distance of Tibet to the US east cost is about 8,500 miles.  What events, so many miles and times zones away, might be taking place that can have a serious impact on our wealth?

The answer is that we do not know and this is why ownership of precious metals is a speculative proposition.  Rising interest rates in China and India could cause prices to fall, but a skirmish or two or the planting of a few atomic mines and precious metal prices could skyrocket like they are nuclear powered.  Well, in a way they would be.

There is always something we do not know which is why when we speculate, especially in precious metals, we never risk more than we can afford to lose.  We leave plenty of time for the investments to mature.  Our recent Pi Update explains how to calculate profit and loss in precious metal speculations.

Gary

(1) Tradingeconomics.com:  Yuan interest rate

(2) Marketrealist.com:  What rising US real interest rates mean to gold investors

(3) Zeenews.india.com  China upset by reported hut demolition on India border


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