Will a Flight to Liquidity Affect the Price of Gold (as the stock market crashes)

August 4, 2011 | By | Reply More

As I write spot gold is trading at over $1680 an oz. Just three quarters of an hour into the New York  open and yet another all time high. Hardly a surprise when both the US and the European economies are giving every sign that the much heralded emergence from the recession that was triggered in 2008 has been revealed as yet another smoke screen perpetuated on a gullible public by free spending self serving politicians.

To those of us who are just ordinary run of the mill citizens of the world who take an interest in stock and commodity markets it is hard, if not impossible, to understand that those public servants and politicians that have risen to such high rank and power, can lack both the mental ability and the courage to say “enough is enough, lets put our houses in order, take the pain, accept the consequences and leave a clean sheet for future generations” .

This latest US refusal to face up to the realities of the situation by creating yet another fudge up to postpone and exacerbate the eventual day of reckoning has been recognised as a further assault on the value of the dollar.

Gold buyers worldwide, from the banks of the emerging nations to the lowliest precious metal investor are getting in and hoping to stay in.

The consensus of opinion is becoming overwhelmingly in the dollar (and the euro) is rapidly losing its value camp with no realistic hope in sight. I hope am exaggerating but in the course of time as these currencies continue to lose value, the end result may well resemble the economic chaos that Germany suffered in the aftermath of World War 1.

A barrow load of deutchmarks needed to buy a loaf of bread, wait a day and it needed two barrow loads of dosh!

But caution and extreme care is now needed. We bring to your attention that when stock markets have corrected, whether major, as in 2008 or less so since then, there has been, of necessity or otherwise, a flight to liquidity. With the exceptional rise in gold seen in the last week coupled with the strong correction on the stock markets which seems to be far from over there is a significant likelihood  that many investors will feel the need for cash.

What we do not like, and causes us to have sleepless nights, is the fact that precious metal miners, together with PGMs have fallen, despite major activity by newsletters and tipsters encouraging investors to buy on the grounds that they are significantly lagging.

A further sign that causes us concern is silver. Yes it has gone up from around $35.00 an oz. in mid July to $42.00 an oz today, a greater rise percentage wise than gold over the period, but we should not forget that while gold has been recording a series of higher highs, silver is still $8.00 an oz off its peak of nearly $50.00 hit on 22 April this year.

The reason this bothers us is that silver historically mirrors the rise and fall of gold although being considerably more volatile in its price action. It is favoured amongst many precious metal enthusiasts as it is requires much less cash to buy a substantial position in the metal and that it is almost as well considered as a wealth preserver and hedge against inflation as gold. Coupled with that it also has a measure of insurance, if we may use the term, insofar that it is widely used in industry and medicine and that demand exceeds production, the shortfall being made up from diminishing amounts that are recycled.

So why is it lagging?

Naturally we have a theory. We think that gold is in so much favour amongst the state banks of the emerging economies, particularly China, with even Pakistan reported to have bought 25 tonnes recently ( wonder how that goes down in the almost bankrupt UK that doles out regular financial aid to this nuclear power nation), together with the hedge funds and uber – rich that silver has taken a back seat with only, by comparison, the modestly rich taking an interest.

Whether silver will catch up and regain the highs of April before the inevitable profit taking in gold  takes place is in the balance.

Remember we are still in the traditional seasonal doldrums for precious metals so now the great US fudge up is out of the way for now, happy holidays will be enjoyed by the politicos, their cohorts and the market players. The man in the street has had his attention drawn to the profit possibilities of gold so it is possible the speculators will hold off selling for a while and in three/four weeks the Indian gold buying season will trigger the next upward gold surge.

Silver should follow suit. Our silver position is see out the next few weeks whatever the market does, keep our fingers crossed that the miners will eventually play catch up and that the severity of the stock market fall will not trigger a rush to liquidity. If we are wrong and both metals take a dive we will be looking to preserve our positions with  ‘out of the money’ call leap (long term) option plays which we will report on here.

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