Gold | Silver and the Dreaded Double Dip

June 3, 2011 | By | Reply More

What a contradiction the prices of both gold and silver are experiencing to the realities of the economic situation that the world is wrestling with. Our followers will be well aware of the many fundamental factors that we believe should be driving the prices of both metals upwards and yet spot gold has been shaky since peaking at just shy of $1580 an oz. on May 1st to close yesterday in the NY after market at $1532.

Meanwhile the fate of silver has been even more unkind to loyal investors since making a double top of $49.60 an oz. on April 25th and 27th. After dropping sharply within a matter of days to just over $32 it has hovered around $34-38 with next to no sign of progress.

Will Precious Metals Fall Further ?

The questions are, despite all the evidence to the contrary, have we seen the epic rise in both metals that took off in the latter half of 2010, coming to a halt and leveling off, will the bull run in either or both restart after a breather or, worse case scenario, are precious metals due for a significant further fall?

Inflation Rises in US, Europe & BRICS

Just to recap, the US and Europe continue to print money with QE3 likely before the end of the year and continuing Euro bailouts of the weaker European economies a pretty safe bet. This is leading to the inevitable speeding up of inflation and which even China, India and Brazil are now beginning to experience.

Both gold and silver annual production is failing to keep up with demand. In silvers’ case the finding of new industrial uses are almost an everyday occurrence with the shortfall only made up by a dwindling recycling market.

China has declared that it intends to increase it reserves of gold substantially from its present level of 1.85% of its total within the next ten years. Some predictions have been by as much as eight times. If that were so, there would be little left to go round from each years anticipated production for the rest of the world to acquire.

Gold & Silver Protect Wealth

There are any number of other fundamental factors discussed in our previous posts that point to a reasonable assumption that the bull market in both gold and silver has a long way yet to go. Our point being that the inflationary spiral is likely to take off at any time.

We respect the probability of a prior deflationary cycle that will exclude the basic necessities of food, energy and essential services, but with no practical alternative to both metals as a store of value against depreciating fiat currencies likely to surface, they remain the only source of wealth protection available to the average investor.

ETFs Open Door To All Investors

  • So why do the price movements of the metals look as if confidence is evaporating from the prospect of a continuation of their bull run, at least in the shorter term?
  • Could it be that the steady rise in the prices of gold and silver from 2006/7 was originally fueled by precious metal specialist investors, perhaps foreseeing the events of 2008?
  • Were they then joined by a gathering crowd of speculators, hedge funds, et al, bailing out of their traditional investment vehicles as they plummeted and realizing that wealth protecting precious metals could now be traded as easily as any other quoted share thanks to the advent of bullion backed ETFs and the opening of the option market to them?
  • Now, thanks to the recovery in the Dow, S&P 500, FTSE etc. are they are reverting to type by putting their resources back into markets they are familiar with?
  • Have sales been triggered as the computers of the major funds and commercials kicked in the orders according to their preset technical parameters?

Gold Shows Signs Of Resilience

Although we are theorizing, it is hard to believe that this is not a possible scenario, it is just that the extent of its influence is impossible to judge, and just how much of the fall was due to many panic buttons being pushed.

There are signs of resilience to any substantial further drop in the price of gold for the time being but the technicals are pointing to a flaky period for silver.

Three weeks ago we stated that we would buy more silver when the spot price dropped to $35 an oz. which we did, and again at $30 which it has not yet hit. We see no reason to change our mind yet, but we should point out that since we started buying silver for the long term at under $15 we still, today, show a doubling of our investment so we can afford to take a chance as we will still come out on top even if our profit is reduced.

Hold Back on Gold, Wait For A Pullback

Our final reflection is to hold back on any further investment in gold for the time being. It is looking as if the stock markets of the developed world might be heading back into the dreaded double dip.

This will mean a flight to liquidity that will have a negative effect on the precious metal market that will open up a buying opportunity for those of us investors that retain their faith in the power of gold and silver to offset the erosion of our wealth when the consequences of the profligacy of western governments comes home to roost.

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