Investing in gold: Play it smart and make some money

Gold and silver present excellent investment picks at current rates.

The US Dollar Index very recently tested a low of 70.79, from it has recovered for now, but which may be breached once again in a few months thanks to money printing by the Federal Reserve Bank. As paper currencies lose their value against commodities (real money) investors should adopt a strategy to buy on dips. I have been recommending investors to buy silver when it was trading at $18. In last seven months the price has shot up to $49.85. After correction and consolidation the price may rise once again as above ground reserves keep on reducing sharply. The value and potential of silver should not be discounted. It is used in over 1,200 different applications including autos, medical appliances, toothpastes, washing machines, soaps, solar panels and many others.

Gold and silver took a nose dive after the operation that resulted in the killing of Osama bin Laden with China showing low growth. The CME Group which is by far the world’s leading and most diverse derivatives marketplace raised future margins by another 11.6 per cent after this – making it, at the time, the third rise in margins in just seven days. With the US having over $15 trillion public debt and obligations and an increase in this of around $5 trillion annually, it becomes pretty much impossible for US to do much about it. Many countries have been supporting the weakening superpower. They hold huge amounts of US treasury bills and bonds.  The negative of this is that when US dollar weakens these countries face asset value depletion. They cannot sustain this depletion without at some stage feeling the need to extricate themselves from this situation. And this is the time; this is the window of opportunity to invest in gold and silver.

Gold has continued to reach new highs while it was overbought technically. Some weakness in gold may be seen in coming weeks. Silver on the other hand is currently in an oversold state which needs consolidation. The $50 mark may be breached this time. Silver is 35 times cheaper than gold and middle class is moving rapidly in China, India and Russia towards silver jewellery and investment. The Gold Silver ratio is expected to fall from 35 to 30 in the coming months. Think about it, the ratio has hovered at about 60 for most of the past 10 years!

The writer is working as a Risk Manager in a private bank and runs KSEInvest.com

Published in The Express Tribune, May 16^th, 2011.