Why gold and silver stocks might beat a market sell-off this time
Posted on 26 May 2009 with no comments from readers
History does not always repeat itself. Last autumn gold and silver stocks fell with the general stock market and the money went into the US dollar and treasuries. But it could be different this time.
Last week both equities and bonds sold off, something not often seen in financial markets. It is not hard to see why: equities have priced in an economic recovery that looks increasingly implausible as the latest data appears, while the US is inflating its money supply as if tomorrow never comes and expecting the dollar, and therefore bonds, to hold their value.
Supply and demand
Financial markets can defy the force of gravity for a short while but supply and demand always rules in the end. An oversupply of money means a devalued dollar and that bond holders will demand a higher yield to offset the impact of devaluation on their investment.
As bond yields rise so bond prices fall. Therefore anybody shifting their money out of equities now has a big dilemma. Is jumping out of the equity frying pan and into the bond fire a good strategy?
No, so what is the alternative? Well the sharp upturn in gold and silver prices last week suggests that precious metals are the answer. They do not deflate with the US dollar, indeed they are inversely related and will rise automatically in value as the dollar falls. The gold and silver markets are also tight and so serious new investor demand would quickly inflate prices.
Different this time?
Now last autumn owners of gold and silver stocks got burned in the market sell-off. But that was because the price of precious metals also took a tumble as funds scrambled to sell anything to meet margin calls.
How likely is that to happen if precious metal prices are rising and not falling this time? Surely if anything the shift ought to be in the other direction as funds look to leverage gold and silver with stocks. Pan American Silver, for example, rose twice as fast as silver in value last week.
At the very least in a big sell-off then a downturn in precious metal stock prices ought to be brief and followed by a swift recovery. It might be a buying opportunity, or it might be a buying opportunity that never arrives and that holding on to precious metal stocks is the soundest strategy.
no Comments posted by readers:
You cannot eat gold and silver!
Death Knell: Massive printing of fiat currencies around the world spells their death knell.
Gold can’t be manufactured, printed, or counterfeited; so I am reminded of that now famous phrase regarding gold:
Gold is money, when nothing else is!
Gold cannot be manufactured, but it sure can be mined, and unlike oil and coal it is never consumed.
Gold is not a good medium of exchange, US dollars are always in demand, where as Gold is subject to an ever increasing supply and a vacillating demand.
tlreed… You’ve got it exactly backwards…. Gold supply is finite… Paper currency supply is infinite…. Witness the printing of Trillions of counterfeit paper bills by the US Treasury.. They are backed by nothing more than a promise and cost about a penny to print… Gold supply increases about 3% annually, while paper currency is 50x to 100x more (as of recent)
You can’t buy oil with gold yet in the middle-east. What they need now is the price if oil to climb for summer. As summer ends, oil will drop, stocks will drop and metals may climb from there. This is my $.02..
Lee,
When all currency is worthless, gold and silver will buy you anything you care to eat.
Of course, you can eat paper money, but it will not sustain you: it’s worthless. Only “hard assets” that are needed to sustain your standard of living are really worth anything in these times.
However, the real purpose of precious metals is to maintain purchasing value to buy those commodities at any time in the future. Paper currency NEVER maintains it’s value for extended periods – only short term. When other countries that produce goods (China, India,Japan)or have natural resources (Russia,Brazil,Australia) are stockpiling gold for future use as a trading medium (instead of the dollar), it’s time to “see the writing on the wall”. The US dollar is on its way out as a trade medium, and on its way to worthlessness at a rapid pace. (The rest of the world can see what’s happening with our economy and our currency expansion, and no longer wants to use our dollar in exchange for goods and services.)
RE:You cannot eat gold and silver! Lee
Gold is the money of Kings, silver is the money of gentlemen, barter is the money of peasants and dept is the money of slaves.
You can’t eat gold and silver but it does not perish like foods and fiat currency, but will always be able to buy them.