Tue 2/7/12 4:00 PM – Why are Gold & Silver Up so Much?

The market was up slightly today while it waited for concrete news on Greek creditors and politicians. Gold was up 1.5% and is up almost 12% since Jan 1. Silver is up 23% in the same time. The YTD gain in the two precious metals are probably the result of inflation fears and rebuying of positions sold at a profit six moths ago when traders needed to raise cash for margin calls in falling stocks.

The inflation fears, thus gold buying, are due to (1) the huge liquidity injection the European Central Bank made when it announced it would offer three year loans at extremely low interest to banks and allowed them to use troubled sovereign debt as collateral. This put a lot of new money in circulation and stopped much of the selling of sovereign bonds by banks.

(2) At the same time, the US Federal Reserve started hinting that it might embark once again on its own liquidity program which would be QE III. And, (3) the Fed announced that it would keep interest rates ridiculously low (actually they used a different term) until 2014. That also stirs up the inflation hawks.

And, (4) in China, lots of gold is being bought for gifts in the Year of the Dragon. Finally, (5) Central Banks in emerging markets have been diversifying into gold, including China.

So there you have five reasons people are buying gold. Add to that as (6) people who buy what is going up, especially if it adds diversification to their portfolios.

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