How low would a correction now take gold and silver prices?

It might seem a bit contrary to be talking about a correction in gold and silver so soon after tipping silver as the asset class of the year for 2011. But annual performance allows for some serious market swings, and precious metals have come off their recent highs just after the New Year’s predictions – perhaps not without coincidence as confidence and market prices are birds of a feather.

However, if gold and silver are now entering a major correction phase, and they are most certainly correcting from recent highs of $1,420 and $31 respectively, then we need to consider why and how far this will go.

15% rule

Gold has moved up in $200 steps for most of the bull market over the past five or so years, and each time has then taken a step back of almost the same amount before moving forward again, some times hesitiating at the old high, and then going higher. Or seen in percentage terms we have roughly a 15 per cent swing, up and down.

Silver is more volatile than gold. A 15 per cent upswing for gold translates into more like a 30 per cent downshift for silver, and more positively it works with the same leverage to the upside.

On this analytical premise a serious correction in precious metals now would take gold back to just above $1,200 and silver a shade below $22. Those who have entered precious metals late and on a ‘buy-and-hold’ strategy should sit tight and wait for a recovery.

In the late 2008 financial crisis gold pulled back 35 per cent and silver by more than 50 per cent, before going to the stellar performance of last year which left precious metal holders up 65 per cent on 2008 levels, if they held 50:50 gold and silver. Will the world now go into another financial meltdown that impacts gold and silver?

Stock market correction

Definitely if the overbought stock markets of the world have a long-expected correction then this would likely pull down precious metals. It is a simply a matter of all assets being sold down to cover losses in stocks. The only winners, in the short term, would be bonds and cash because dollars are what you get when you liquidate assets priced in dollars, and that increases demand for the currency boosting its value.

However, as ArabianMoney newsletter readers heard in our New Year forecast (click here to sign-up) we think this would be an excellent buying opportunity for precious metals, and a last chance to buy at these low prices.

But actually we would not sell out of gold and silver positions now because this momentary correction may not last and turn out to be a false indicator.