Will stock market crashes now bring gold and silver prices down?
Posted on 22 February 2011 with 4 comments from readers
This is something of a rhetorical question. At the time of writing this article both gold and silver prices have slipped sharply off the highs of yesterday, while stock markets in Asia are taking a bashing.
In every statement made on ArabianMoney commenting on the price of gold and silver we also add the rider that a big stock market correction would almost certainly bring gold and silver prices down. This is now happening, even though silver posted a 31-year high of $33.70 as recently as yesterday.
Margin calls
As we have explained many times in the past there is good reason for this reaction to crashing stock markets. Basically as stocks fall there are margin calls to big investors requiring them to put up more money, and to obtain that cash they have to sell their gold and silver. They often have no choice in this, so the impact on precious metals is automatic.
The relationship is as simple as that, particularly when stocks go into a nose dive. Asian stocks are of course reacting to the oil price and events in Libya where the regime seems to be on the brink of collapse and, unlike Egypt and Tunisia, Libya is a major oil exporter – producing 20 per cent of Italian supplies.
Naturally the fact that Asian buyers have been the most active in the precious metals market recently will exaggerate the impact of falling Asian bourses on the price of gold and silver. Shanghai stocks fell the most at 2.9 per cent.
Oil price outlook
Markets are also finally turning from the greed of the past few weeks to a sentiment of fear about the future. Most pertinently the question is now rather belatedly being asked about which nation comes next in the Middle East unrest, and will it be a major oil producer like Saudi Arabia or Iran.
Who knows with news blackouts in those countries not exactly reassuring markets. Gold and silver should therefore sell-off with stocks until markets find a bottom, and then stabilize. ArabianMoney would regard that as an ideal buying opportunity for precious metals, and readers of our newsletter will know exactly what to do (click here to sign-up).
4 Comments posted by readers:
People fleeing gold, interesting concept. Into what?
Indian acceptance of US1,200+ gold in the jewelery trade not only established a new commercial floor for the world gold price but it also spurred a new type of buying activity that wasn’t there in 900’s range. There is a shortage of the metal on the street everywhere, 3 week deliveries are common in every city and town in North America, as we speak. Do you really think equities are cliff-diving? In which case there will be a corresponding flight into USD short-term instruments driving USD upward. What happens to gold when USD strengthens? Gold adjusts down. However, that history is short-based too, a period before gold monetized (again). Gold is regaining rapidly as the store of value, as per the last 6,000 years. It’s the only store of value all humans universally recognize. We still have QE 3, and then QE 4 to go thru, well into 2015 at about QE 9. Bernanke has flown the US economy into a blind canyon, wrecking USD as the global currency. There’s no way out now.
When the global financial system of the world goes over the cliff due to a ruined global currency, the picture view now going forward, and the chips are finally down, they will be in gold. This year watch gold beak out to above $2,000, regardless of an equities market melt down, or especially if one occurs. By 2013 gold will be trading in the $5,000 to $7,000 range and beyond, until that fateful moment when its evaluated and fixed once a day in RMB. You can’t see that coming? And the big war in between?
And what are the Chinese buying those tons of gold with? Ruppies? Rubbles? I don’t think so.
Ed Note: Think short-term and long-term – bonds and the US dollar are indeed rallying today, but for how long?
I might be eating crow in the next few days, but I don’t think that gold/silver taking a substantial contraction (30-50% or more) will happen, though I would LOVE for it to for another buying opportunity.
What you need to understand is that this appears to be a battle between Blythe Masters at JP Morgan and the buyers of size (BoS) of the PM contracts who are attempting to stand for delivery for the March contract in order to break COMEX and JP Morgan. As far as I know, there appears to be about 50,000 contracts standing resolutely for delivery with very few rollovers into April or May. That is much more silver than COMEX has at this time. Silver is ABOVE Friday’s close (though below yesterday’s Globex close) at this time.
Please note that position limits for the spot month for silver will start on March 28th, and that appears to be 1,500 contracts according to CFTC’s document. It looks like JP Morgan only has closed out 11,000 contracts of its 28-29,000 contracts it had short thus far, and the question is whether or not Blythe can get the company under the position limits by that date or not. It doesn’t look likely, and that might explain the broad hit in the markets. It appears they pulled their bids to cause a selloff in as many markets as they are short in so that they can buy back their shorts at a lower price (which is what’s happening right now) in order to use the money to buy silver to cover their shorts for deliveries and close out the contracts for parties who are settling for that premium.
Look for a commercial signal failure by the 28th this coming Monday through to March 10th. Keep your arms and legs inside the roller coaster, and make sure you have dry diapers to change into at the apex of the ride. Please pitch your dirty diapers to your RIGHT, not the left. The downside tracks are on the left, and we don’t want to risk derailing the roller coaster.
See? Markets took a beating today. Gold’s ramparts held.
What’s he saying?
http://www.marketwatch.com/story/war-the-second-derivative-of-the-financial-crisis-2011-02-23