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The Bullion Report

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February 22, 2012 in 'The Bullion Report'

Long Term vs Short TermLong Term vs Short Term

 

 
Last issue, this newsletter commented on Warren Buffet’s preference of stocks over both bonds and gold. “Gold is a ‘sterile’ investment,” he said, “stocks are not.” The Oracle of Omaha can and should be recognized for being an astute and savvy long-term investor, through which he has amassed his reputation. His question of timing is valid: what should investors look to in the short term, and what about the long term picture? Buffet says he now prefers stocks, but there are reasons to maintain a preference for gold and other precious metals.

Presently, the atmosphere faced by investors is one in which stocks are potentially more vulnerable in the short term than precious metals on the downside. Investors should have nothing against investing in stocks; it may be prudent to take advantage of the fact that stocks have rallied and are at their highest levels in over a year. Of course they can keep moving up, but they also seem particularly vulnerable.

Stocks, as a group, seem to be more susceptible to the gravity of the situation brewing in Europe. Regardless of the outcome of the continuing critical saga with Greece, it seems that there are even still more concerns about additional tentacles spread throughout the global financial community. Comparatively, metals have the discernible attraction of being used as safe havens during times of economic stress. In addition, several members of the precious metal complex: platinum, palladium, and silver, aren’t necessarily as “sterile” as one might think. They all have legitimate and proven applications that can stimulate demand in their own right from unexpected forces in the economic engine. This makes it worthwhile to consider the long-term potential for precious metals as a group.

Take silver for example. How many of you are aware of silver’s usage in the manufacture of solar panels? The cost of solar panels is now half of what it was just five years ago. According to Bloomberg New Energy Finance, “Prices for solar cells have dropped about 27 percent this year and would be even lower if each panel didn’t require about 20 grams of silver.” (1) That’s right, solar panels require silver.

Granted, as silver prices increase it could serve to impede developments in the solar industry, but oil prices are on the rise. With oil already at record prices this season, it makes sense to consider the possibilities of increased demand for alternative, renewable energy sources. Furthermore, much of the growth in demand for solar panels isn’t based on costs alone. Significant attitude changes resulting from government policy efforts  have also influenced consumers. This response to the persistent “green” support provided by the government has resulted in a changing mind-set that make solar panels desirable for other reasons, such as tax credits and protecting the environment. The growing industrial use of silver in photovoltaic cells is only one side of the story.

Most investors are already aware that platinum and palladium are used in catalytic converters in the automobile industry, how many know of the other, ever-increasing applications for those metals in industry? For example, platinum is used in many diverse manufacturing processes including those of plastics, synthetic rubber, and polyester fibers. Both platinum and palladium metals are considered platinum group metals and their use as catalysts improve the efficiency of a variety of reactions critical in many existing and prospective products.

Palladium catalysts are used as a key element in the function of scrubbing equipment in the power industry. They help remove sulfur dioxides (SO2) and nitric oxides (NOx) gases emitted where coal is burned. In addition, all hard disks contain platinum in their magnetic layers.  Demand for data storage capacity is always on the rise, and even specialty silicones are an area of creation for platinum demand. In this, expanding the use of platinum compounds help control the curing process, thus serving to broaden the uses of a product line that seems totally unrelated. It is truly amazing to see how many areas where potential demand growth for these metals exists.
 
Summary

Overall demand growth will be the key for the long-term picture for precious metals. Long after the heat from the global debt crisis has cooled, there should be many reasons to look to precious metals as part of a diversified portfolio. Applications will likely help to fuel a move from a post in the economic storm to a tool on the road to recovery. The demand for photovoltaic cells is growing globally. Who knows how many more ounces of silver will be required to meet that demand? In addition, factor in the ever-increasing technological applications for the members of the platinum group and the potential for simple retail items like gold jewelry to come back into vogue, and you have a mix for precious metals support in the long-term.

1. http://hansafx.net/blog/?p=6532

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.