Billionaire's Massive Bet on Gold and Silver.

Hot on the heels of a 25 US dollar surge in the price of gold and a recent 5 percent rally in the price of silver, billionaire Frank Giustra, a fat cat, decides to make a massive bet on significantly higher gold and silver prices in the future.

Below is a recent interview with Frank Giustra;

“We are seeing a very nice move in gold and silver today. I have consistently said that the big move we are going to see for the next few years would start before 2015. The start of this move beginning in December seems perfect. I’m not surprised at the action at all and the breakout is clear”, said Giustra.

A number of investors have had their fingers burnt investing in precious metals over the last few years so many are wondering whether this recent support for the precious metal is just a short term spike upwards. In other words, are we seeing a short term bull market in a long term secular bear market, or could this be the beginning of a new trend?

“This advance will go a lot further on the upside, and this is happening at the same time that the stock markets are coming off a little bit and more importantly the dollar turning down,” believes Giustra.

But what has the dollar trajectory got to do with gold prices?

A lot, the price US dollar is inversely related to the value of gold. In other words, when the dollar falls, gold goes up and vice versa, reckons Giustra. There is logic in that, as the US dollar and gold are viewed as shelter assets, investors tend to flock to US dollars or gold in times of trouble.

Why?

The US holds the heavyweight title, albeit hotly contested, as the world's only superpower, militarily and economically strong enough to weather bad times. Moreover, the US economy is diverse. The current commodity and oil price crash hasn't depreciated the US dollar, it still remains top dog of all fiat currencies. But the dollar is just that, a fiat currency, it has no intrinsic value. It has value as a currency because people and investors place trust in the monetary authorities’ ability to maintain economic stability, tackle inflation and promote policies that create prosperity.

So when there is a lack of confidence in the US Federal Reserve’s handling of the economy, speculative money, or “hot money”, flows out of US dollars into other assets, often precious metals such as gold. During the first few years of QE, many believed that pumping the system with liquidity (increasing the money supply) would cause runaway inflation and devalue the dollar. Gold, a tangible asset, has always been viewed by investors as an excellent hedge against inflation. What happened to the value of gold when the US dollar was tanking a few years ago?

The price of gold went up. Today the US dollar has strengthened, meanwhile gold has fallen.

So there is a negative correlation between the USD and gold price, as one asset goes up, the other falls in value and vice versa.

But there is an opportunity cost of holding gold.

One of the downsides of holding the precious yellow metal is that unlike stocks, bonds or cash deposits at a bank, where the investor can earn interest on their money at the bank or receive dividend payments from their stock-holdings, gold pays the investor nothing.

Parking your wealth in gold becomes expensive, particularly if you could be earning good dividend in stocks, bonds or interest payments at the bank.

So when the Fed raises interest rates, or even talks about the prospect of a rate rise sometime in the near future, it is a real kick in the teeth for gold prices.

Will gold prices continue rising?

“This advance will go a lot further on the upside, and this is happening at the same time that the stock markets are coming off a little bit and more importantly the dollar turning down. That’s very significant because I’ve always said that a move up in gold will be linked to a move down in the dollar,” said Frank Giustra.

So US dollar down and gold up from here onwards?

“It certainly looks as though the dollar is turning down here and this should be the beginning of a very big move to the downside for the dollar. So this is going to be the start of an exciting period for the precious metals that KWN readers around the world will enjoy for the next few years.”

What about the looming problems of deflation and excessive leverage, what impact is that likely to have on gold prices?

“In the midst of this massive bank leverage there are powerful deflationary forces that are building. This is putting pressures on the global economy and the banking system. So we can’t be too far from a massive money printing program. Central banks know that a deflationary implosion would mean the end of the banking system. All of this will be incredibly bullish for gold and silver going forward as well as the shares.”

So that is one billionaire's, with an interest in mines, tip for 2015, buy precious metals.

But there is one caveat. Precious metals are a rival to the monetary system, when you are in gold you are no longer participating in the system. When there is a gold rally, it’s like a vote of no confidence and that's a problem because the kingpin doesn't like competition. For that reason, I believe the value of precious metals are being suppressed today, which might also be the case going forward.

Again politics at play, which explains why I was bearish on Bitcoin when it was trading at around 650 USD last summer.