Silver ticks above $25 on QE2 but should sell off to $20

The price of silver crossed $25 an ounce after the Federal Reserve announced its $600 billion quantitative easing program. Silver was up three per cent. Gold managed half that and stayed below its recent all-time high at $1,355 an ounce.

However, these gains may prove short lived if the stock market now decides to go into correction mode. So much has been added to stock prices in the four-month build up to QE2 that traveling is likely to prove more profitable than arriving.

Inflation warning

In short, all the good news is priced into the stock market. The bad news coming is that QE2 is inflationary, and higher prices at the pumps and supermarkets are not an economic stimulus, quite the contrary.

But if the stock market now corrects then gold and silver prices will come under pressure due to margin calls – basically good investments being sold to cover the bad. Silver being the leveraged play will lose more value than gold, just as it has gained more on the upside.

That said the inflation outlook is great news for precious metal investors, so the anticipation is that any sell off in precious metals will find some eager buyers and that will put a relatively high floor under prices.

Where to next?

For silver $20 is an important resistance point. Gold might shed $200 in a pretty standard correction for the yellow metal. But then market prices generally move in a jaggard pattern and not a straight line.

Those already invested are best advised to hold on and weather what is likely to be a rather short storm, and if these fears prove unfounded then they will obviously win anyhow. Market timing is notoriously difficult, and until the precious metals bull market is really over it is best to stay invested.

Any pull-backs in prices should be used to accummilate more gold and silver. For the Fed’s QE2 is a guarantee that precious metals are going much higher in price. Few other asset classes look such a clear buy now, and that is only going to help gold and silver prices as money has to go somewhere.