Gold And Silver Sink

December 23, 2009 | By | Reply More

From a peak of over $1220 an ounce at the beginning of December the spot gold price has sunk today to just $1080 an ounce, with silver following suit from touching $19.50 an ounce to below $17.00 an ounce.

So why the loss of faith in the safe haven metals as governments keep churning the money printing machines hoping that pumping and priming their pet projects for garnering popularity and keeping the recession at bay will continue to meet with instant public approval?

You could be forgiven for saying that so far it is working, with the exception of the UK, still left in recession, where financial policy is dictated by a leader solely focused on his electoral chances coupled with his ever increasing loss of touch with reality, ably backed by a cabinet of self serving morons.

However you look at it, the inescapable fact is that the currencies of the major developed western economies are still in trouble, and that trouble is likely to get far worse within the next 12 to 24 months.

What has at last dawned is that neither the euro economy, the Japanese economy etc. are any better off than the US economy, nor do the so called developed economies enjoy the US dollar status of worlds reserve currency or the economic dynamism that the US has shown itself capable of for over a century.

Mind you President Obama is making a good fist of trying to change that ‘get up and go’ independent Yankee attitude to dependency on a socialist welfare state.

Back to the point, China is the no.1 producer of gold having overtaken South Africa. It only allows exports of gold jewellery.

It is a buyer of gold in the market place. Of particular interest is the fact that it has, so we learn, only the seventh largest gold reserves in the world, of which much is difficult to extract.

Add the fact that it takes years to bring a gold mine up to production leads to the conclusion that China long ago recognised the signs that the US was heading into an economic mess and put the accumulation of gold on its short list  of priorities to becoming the World’s superpower.

At the same time India and to lesser extent Russia are topping up on gold and apart from the IMF, which needs the cash to bail out basket case economies, we understand that central banks have not taken up their sales allocation in 2009.

For the last few years oil and gold moved in tandem, that link has to all intents and purposes, been superseded by the euro/dollar movement, if the dollar goes up against the euro, as it is at present, then gold goes down and vice versa.

Who are we to query the logic that this entails, it may be very simple or a formula of epic proportions but at the end of the day Mr Market will bring us all down to earth with a bump, just as he always has done.

The outcome of the last 12-18 months of feverish activity by the masters of the western developed economies is that each new day of further tinkering is adding fuel to the eventual hyperinflation that is going to radically change our perceptions of the ‘good life’.

Prior to that we can expect a period when the last eighteen months will seem, in retrospect, as not so bad.

Gold and silver  may take off again early in the New Year or it may just trade sideways for months, we have no crystal ball. In the investment game timing is all important. However accurate you are with your picks, get the timing wrong and you will lose money.

Sooner or later gold and silver will fly.

In the meantime there is an argument that now is a buying opportunity for both metals but that is not a recommendation. We do, however, think that gold and silver, in the shape of their ETFs (GLD & SLV) should feature in every well balanced portfolio.

Some time ago I recommended our readers to buy the SLV $17 Jan call, unfortunately shortly afterwards I was taken ill with pneumonia and heart complications so was unable to follow up on the tip.

When I have previously suggested options I have usually added that it is good practise to sell half of your contracts if the price doubles, meaning that your remaining contracts cannot represent a loss whatever happens.

This option did double although the Jan 17 call is now showing a loss so I hope that our readers took note. I always put in a sell order for half my contracts at double the price I paid just as soon as they are bought.

In this case being ill and incapable meant that I did not lose money and, who knows, in another three weeks my remaining silver call options may be trading back ‘in the money‘.

Personally I have a foot and a half in the silver camp where I believe that there will be some good speculative trading opportunities in the first quarter 2010.

I will leave my fairly substantial holdings in gold and gold miners to continue as long term investments.

My principal focus will be on SLV options, meaning that I will have to keep a wary eye on gold in the expectation that silver will continue its age old pursuit of the yellow metal and in particular on that elusive gold /silver ratio, currently stuck at around 64-65, there could be some real action  if andwhen it goes to 60 and below.

Wishing you all a happy Xmas and great trading in 2010.

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