How will gold and silver fare in another big sell-off?
Posted on 05 July 2010 with 1 comment from readers
You do not need to be a great stock market chartist to sense another big sell-off coming up. Markets started heading down in mid-May and have been on a down trend since then.
The great bear market rally from last March is over. It lasted until the hot air from Wall Street could no longer deny the obvious truth that the recovery was just inventory rebuilding and the reality is a continued recession for most parts of the US economy, including such important drivers as housing and automobile sales.
Stimulus wearing off
Meantime the huge stimulus dose administered to the Chinese economy is wearing off and the Europeans have decided to cure their economic ailments by amputation. The impact of the slowdown from austerity in Europe alone dooms the world to a second dip into recession.
Markets do not like what they see, and increasingly there is no reason to be optimistic about the outlook for profits and share prices. So this sell-off is likely to gain momentum and probably end in a selling climax in the traditionally bad month for stock markets of October.
Now what does this mean for gold and silver? Deflation is not really the best environment for precious metals which are more usually seen as a hedge against deflation. In the 2008 market meltdown both gold and silver took a bashing, and fell 30 and 50 per cent respectively.
Will it be any different this time? Could investors worry about staying in the US dollar and instead opt for precious metals as an alternative currency?
There is logic in this as the austerity measures of the Europeans will likely strengthen their currencies even as they weaken their economies. That is dollar negative. However, in a big sell-off such considerations will be overwhelmed by the weight of selling.
Almost certainly then gold and silver prices will be lower by a market bottom in October but perhaps will not suffer quite as much as in 2008. But what most people will then miss is that this will be the ideal moment to stock up on precious metals.
Next stimulus package
For what a big sell-off will also do is to concentrate the minds of US politicians on the next stimulus package. It will be bigger and bolder and precious metal prices will be quick to respond, as they did after March 2009.
Moreover, the October stock market bottom is likely also to be an important top for the bond market. Thereafter bond auctions will not be so successful and the price of money will gradually rise.
Once bond investors begin to buy precious metals instead that is when the big price rises will come, for the bond market is huge and the precious metals market tiny in comparison. You inject the latter into the former and prices will rocket. Sell precious metals short term, or hold if you are thinking long term, or trade out and back in again.
1 Comment posted by readers:
I could be wrong, but I wouldn’t count on the Republicans, together with conservative mostly Southern Democrats, supporting another big stimulus in the US Congress, anytime soon. The mass cable TV media over here is full of anti-Obama Republican talking heads saying that the fact that we still have 9.5% unemployment, after spending hundreds of billions of stimulus dollars, is proof that stimulus not only doesn’t work, but that it is dangerous, because it adds to the already unmanageable National debt. A good percentage of the population now believes this to be true. It is like the ‘Social Security will soon disappear’ myth. Few voters study economics, and Obama’s approval rating is falling fast as the economy and stock markets stall.
The Congressional election is in November, 2010. More than a few candidates will be running on a platform of cutting the budget. Austerity is seen as the road to prosperity and job creation by many voters, and some candidates. The austerity idea is snowballing. People say, “That stimulus didn’t reduce the jobless rate, let us try something else. Austerity might do it. After all, saving money can’t hurt.” And cutting the budget is a lot easier for a politician than raising taxes.
The Congress just recessed without extending the unemployment payments to over a million people, although the real reason was that the bill would have also raised the income tax on hedge fund managers. It’s comforting to know that they still have their priorities straight.
So we are more or less on legislative hold until next year after the financial reform bill is passed in a couple of weeks.