Put Gold and Silver Correction into Perspective

October 15, 2011 | By | Reply More

It is time to put the recent media comments about the end of the end of the bull run that gold and silver have enjoyed since the beginning of 2002 into perspective.

To recap, at the beginning of that year the spot price of gold stood at $300 an oz. While silver could be bought for just over $4.00 an oz. Over the next six years gold reached $1000.00 an oz., a 333% rise with silver posting a 500% rise to $20 an oz.

Then came a sharp correction in the latter half of 2008, dropped by over 50 % to touch $9.00 an oz. and gold fell by a third to $650 an oz. The falls came at a time when the investing public at large woke up to the fact that the Western economies were in crash mode.

Excuses, Excuses & Votes

Then came money printing as governments, with the US leading the way, attempted to cure the economic evils that their previous encouragement of borrow and spend had been responsible for.

At the time it was hard to understand the logic of increasing the already heavy burden of debt of governments and its imposition on individual citizens, let alone future generations, with all its associated risks of deflation and eventual hyper inflation.

We are fully aware of the arguments put forth that encouraging the currency to devalue by printing more makes the burden of repaying debt and interest easier to cope with, together with the other specious arguments cobbled together such as controlling unemployment, encouraging further bank lending, etc.! The logic continues to evade us!

The Spectacular Rise of Gold

The message got home to investors, large and small, the governments and banks of those solvent nations owed money by the West resulting in gold and silver, the last bastions of wealth protection taking off once again.

This time the rise was even more spectacular, from a low of $650 gold hit $1900 an oz between August and September this year, a rise of 300% in only three years! Silver was even more spectacular, over the same time span it reached a high of just off $50 an oz. A meteoric rise of 550% !!

This Correction is Just a Blip

Put into perspective, the present correction in both metals since reaching their highs is nowhere near as harsh as that suffered in 2008. A fall at the end of this week of 35% for silver and only 13% for gold, although admittedly both metals are off their recent bottoms.

When, Not If, a Correction Would Happen

With gold prices in a range of $1590 – $1670 for the last three weeks and silver $29.50 – $33.00 and closing this week towards the high end of their ranges there is a good argument for thinking that the pull back is past its worst and that the metals long term bull run will resume after this interruption.

Of course it so easy to be wise after the event but after such a protracted and steep rise, it should have been expected that the lure of profit taking together with other factors such as the leveraging issues, stock market uncertainty calling for increased liquidity, banks exposure to the increasing European financial crisis, the believed safe refuge of the dollar for those who cannot get their head round the idea of gold and silver as real money, or are persuaded of this by their financial advisers, it was inevitable that a correction would take place.

As usual it was the market that dictated the timing.

Range Bound

Right now the precious metals market looks to have stabilized at these levels and is showing considerable resilience to any further significant falls. The technical indicators are in conflict with no clear resolution yet to be perceived, but, of course, this depends so much on each chartist’s individual bias.

The exception seems to be a consensus of opinion that silver is oversold, but beware, silver is notoriously volatile and prone to contradict even the most confident analysts.

Play it Safe

Our own opinion is that now is not the the time to be short of either metal, but then it never has been! The fundamental drivers have not changed, if anything they have got progressively worse over the last month with even more dangerous economic times ahead for both the US and Europe, factors that are very bullish for gold and silver.

That certainly remains our longer term view but there are some short term factors that may have a bearing, a stock market crash and consequent flight to liquidity being one, ever more onerous leverage requirements another.

Despite some misgivings we put our faith in those tried and tested stock pickers mantras, the trend is your friend and buy the dips, sell the peaks. With this in mind our present plays are confined to out of the money call options into 2012 on iShares Silver Trust (SLV) and SPDR Gold Trust (GLD).

In other words risking very little of our capital but then we got in over four years ago and are sitting on some nice profits. For those new to precious metals we seriously suggest that you have at 10 to 20% of your portfolio invested in them.

Nobody yet has solved the riddle of buying at the bottom at selling at the top, if it happens it is by luck, the precious metals market could take off again next week or next year for all we know but take off it we believe it eventually will so even if you show a loss by buying now at least you will not be left behind when the bull trend gets back into full swing.

If you favour the security of owning the physical metal go to www.bullionvault.com where you can learn how easy it is to own gold securely and without a large outlay. Other wise play the ETFs, GLD and SLV are our favourites and are quoted on the NYSE.

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