Have gold and silver prices reached a tipping point?
Posted on 07 October 2008 with no comments from readers
Gold and silver went through a severe correction this summer just like the correction in 1975. Then gold prices dipped by almost 50 per cent from peak to trough.
Since its March all-time high of $1,030 an ounce, gold has completed a perfect 38.3 per cent Fibonacci retracement, bouncing back to current price levels. Silver also followed the Fibonacci sequence, albeit with a deeper 50 per cent fall from March peak to the trough.
It is important therefore to note that price corrections are behind us in precious metals. These were fairly brutal commodity price corrections. But the rebound has been quick in the case of gold and can only be around the corner for silver – the two seldom move out of synch for long.
Tipping point
Now we have to look at the supply and demand position to determine whether this could in fact be a tipping point. The downside after a big correction like we have just seen is clearly small or entirely gone.
Gold first: last week investors queued in the streets of London to buy gold. We have a similar rush in the souks of Dubai. Gold coins are selling at the highest premiums to spot gold price in 30 years, and stocks are running out.
Gold has risen sharply in price this week despite a very sharp rally in the US dollar, lower oil prices and collapsing stock markets. Usually the dollar and gold do not move in the same direction, so this is highly significant. Gold also usually falls with oil.
Bullion premium
In silver the premium paid for bullion bars is up to 50 per cent above the spot price as dealers are running low and demand remains very strong. Why are silver premiums higher than gold: simply because silver stocks are tighter.
This is the classic case of tugging on a piece of elastic fixed to a brick. The pull of the retail price is suddenly going to increase the silver spot price. It just has to as bullion dealers replace their stocks.
We now also have an official enquiry into the shorting of the silver market by two US banks over the summer that crashed the price. No matter that the banks will probably be exonerated. They have removed their short positions – so there is nothing there to prevent silver prices surging ahead.
Supply shrinking
Meanwhile on the supply side things could hardly be better for price rises in precious metals. Central banks are withdrawing planned gold sales while output is falling at the major producers.
Silver stocks have always been tight as unlike gold the metal is consumed by industrial processes; but silver is also a precious metal which tracks gold as ‘the poor man’s’ alternative. Silver production is increasing but only at a snail’s pace.
Will silver prices again outperform gold by a factor of two as they have in the 2000s so far? It is not guaranteed but looks a fair assumption. And once stock markets have ceased to fall silver producers look an excellent buy, as will the junior gold exploration companies.
However, if this is not a tipping point for gold and silver prices then it can only be a matter of weeks or a couple of months until we reach one. Mostly likely this is it!
From the 1975 correction up to 1980 gold prices grew eight-fold and silver 20-fold – and history has a habit of repeating itself. It never is different this time…
Indeed, the highly inflationary bailouts of the banks that we are seeing today are a mirror image of the rescues that occurred after the 1974 stock market crash and the tripling of oil prices in 1973. Oil prices tripled in 12 months to $147 earlier this year. We are watching an old movie here with money supply boosts from the central banks that can have only one effect: higher inflation.
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Hi Peter:
Have you noticed the gold/silver lease rate?
Gold has gone from 0.50% to 2.80% !!
Silver has gone from -0.50% to 1.50% !!
Both rates are at 2-year highs.
Lease rates just increased 12 fold today, go gold go.
Mark
Financial Times reports today:
Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.
The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.
Gold lease rates for two, three, and six months and for a year also jumped to levels not seen in the last seven years.
Message Today from gold guru Jim Sinclair (the one everybody follow):
I told you in the middle of the recent dismal state of mind many gold investors were in that I never felt better about gold. That may have sounded nuts to some of you.
I now say that I have never felt more confident about gold and silver juniors with good property, good management and money in the bank.
Hello Peter.
At the current shorter of gold and silver, it seems to me that we will have to move away from the ” Gold Standard” as far as the dollar is concerned. I read where some will say that gold will hit $5000.00 per ounce and silver as high as $50.00 an ounce. I disagree for even if these were real, prophesized prices, who would pay that much? I believe that if they were to rise that high, there would an alternative method used to value the dollar, in what way I don’t know, yet probably in the direction of technology.
To me, if I were to buy 10 ounces of Gold today, at about $915.00 per ounce with a huge step price, and was to sell tomorrow ‘ if gold shot up to $5000.00 an ounce, the coin shops would stay home for a while, or not buy, just sell. That is the rub I think. For people to fall for buying up silver bullion today, at a coin store for instance, with the spot at $3.00, that is near $14.00 an ounce. I can’t imagine a coin dealer would buy back tomorrow ar $50.00 an ounce, the coin dealer would be better off just going to the Bahamas for a couple months and come back when the prices drop again, for really, even though the coin dealer did this, then the precious industry would collapse like the auto makers and would be asking for a bailout as well.
But I could be wrong though. If not, I should sell my car and get a bicycle, buy all the gold and silver I can today, sell it all when the prices jump, and then I would have a new car paid in full and probably pay off my home as well. I can’t imagine anyone paying $50 an ounce for silver or $5000 for gold regardless of the so called shortage. And say it was true, all the more reason now to start mining than ever. I just don’t see it happening, and with these high possible prices, it is more likely simply a cool advertising plan to sell more precious metals for a struggling world economy.