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Gold and silver in 2008-style sell-off

Posted on 24 September 2011 with 14 comments from readers

History never repeats itself exactly but it certainly rhymes. Anybody who recalls the heart-stopping plunges of gold and silver in late 2008 will feel a distinct feeling of deja-vu all over again with this week’s sudden crash in precious metal prices.

On that historic parallel things are going to get worse before they get better. Then the Dow fell 18 per cent, about double its current fall. Gold would therefore have a fall of around another 10 per cent to $1,500 and silver double that to $24-25 an ounce.

Volatility rules

ArabianMoney always warns investors in precious metals that their higher absolute return over the past decade has always been at the price of greater volatility – something that can also work to their advantage if they buy low and sell high.

That will be no compensation to the enthusiastic new investors in precious metals who have posted many comments on this website in the past few months. However, ‘buy and hold’ is still our best advice as timing these cycles is practically impossible and getting it wrong really damages your long-term returns.

The only danger is that the long-term case for precious metals is dead and their bull market over. How likely is that in a world awash with money printing central banks and frightened democratic politicians facing elections? Let them try a little austerity and see how far it gets them!

However, the immediate cause of the plunge in precious metals is a flight to liquidity and margin calls on stocks as the Dow tanks. That could well continue through October and will be marked by a selling climax – Thursday’s sell-off came close to that in London but not quite in New York.

Past precedent

If the 2008-model is applied then after October/November will come a quick and powerful year-end rally followed by another slump to a true bottom in March/April. In spring 2009 we got the true bottom for stocks and precious metals but there is no guarantee that the same will apply this time. History also springs surprises on those who try to mimic the past, though not last week.

Perhaps as a consolation to precious metal investors this weekend we can offer the following thought: the correction of the near parabolic spike movements of gold and silver this year is completely consistent with very much higher price levels in the near future, indeed if it had continued at these rates of acceleration the price upside would have burned out at far lower levels and much more quickly.

It is sometimes hard to hold a volatile asset class. But remember how gold has delivered in performance over the past decade while the US stock market has also been volatile and delivered its many investors absolutely nothing, except losses due to inflation.

Posted on 24 September 2011 Categories: Banking & Finance, Gold & Silver, US Dollar, US Stocks

14 Comments posted by readers:

Comment by Walter D. - 24 September 2011

On the conspiracy-theory-side-of-things: why on Earth would CME need to raise the margins right after the FOMC meeting where QE3 was not announced (which was supposed to be bearish for PMs)? Either they have other vested interests or they really want to protect the bull trend from parabolic bubble-bursting increases :))

Comment by boatman - 24 September 2011

Trader Dan…….explains alot….. just like here,do not ever miss a post :

Comment by Tommy B - 24 September 2011

What other vested interests do you suspect?

Comment by Bill near Slidell - 24 September 2011

I read an article somewhere describing how dangerous many exchange traded funds have become. It said that they started out as a good idea, but that as time has passed, many now invest large percentages of their funds in dangerous financial instruments that could pose a threat to the entire stock market. I am hearing more and more people warning about them on financial TV channels. Is it true? I have no idea, but it may be good to keep in mind before investing in any ETFs.
As far as the gold price, some people who bought gold at $1,200 might be expected to sell some when the price is at $1,800 with more and more talk of a global slowdown and bank stocks tanking. Not everyone who buys gold is doing so because they expect to hold it for the Apocalypse. Remember what happened back in the 80’s. Gold would have to be selling for $2,300 today to equal the inflation adjusted price in the bubble back then. I do expect a QE 3 to be coming late this year, or early next. That will push the gold price back up for a while. I will be surprised if the price of gold really takes off without inflation also doing so. We get double digit inflation again and it should go through the roof. But all the cheap third world production will prevent rapid inflation for quite some time yet.
There is only one thing guaranteed to become much more valuable over time, oil in the ground. You see the price of oil falling, and you know the world economy is in serious trouble.

Comment by Walter D. - 24 September 2011

More credible reasons: fears of a potential Comex default – not at all unsubstantiated if you search around the internet.

More conspiracy theory-like: powerful players trying to put down the anti-establishment alternative (or rather the original) money (gold)

Comment by Walter D. - 24 September 2011

Regarding Trader Dan’s explanation: might be true… except, I don’t know which were first: the hikes (or leaked rumors of the hikes) or the abrupt drops in PMs.

Comment by Walter D. - 24 September 2011

Also, Peter might bring his expertise here.

I’m not competent enough to follow Dan’s logic. It seems there’s only one direction for the margins: UP – no matter which direction the commodity is going (up or down). Doesn’t make much sense to me…

Comment by boatman - 25 September 2011

tommy, click the url i printed above….just like reading Peter here at arabianmoney, dan is a must for AG/AU info.

also most of it verbally at (dan comes in after mark haines) do not ever miss dan’s weekly metals wrap:

Comment by obewon - 25 September 2011

Ed. Stated: “the immediate cause of the plunge in precious metals is a flight to liquidity and margin calls on stocks as the Dow tanks” True, that! But not sufficient. It doesn’t explain why the fall was so deep, and happened so fast. For example, how is it possible for silver to fall 15% in one trading day?

Carefully Planned and Orchestrated Smashing of Gold, Silver, & Copper:
The insane, unbelievable beating that precious metals and copper took last week was carefully planned, orchestrated, and executed by the gold cartel (Western Central Banks, using their agents JPM/ CME/ CFTC/ CBOT/ GS/MS/ DB/ etc.); lead orchestrator: JP Morgan. Central banks have a deep seated fear of gold, because they know its true function. As a result, last week’s rapid price declines were a totally manufactured event, precipitated by the CME hiking the margins twice in August and again last week by 21% for gold, 16% for silver, and 18% for copper. These margin increases, in the aggregate, are now over 55%! As if their egregious actions were not enough, the CME just announced that they’ll be raising the margins again on Monday, 26 Sept 2011.

This means only one thing: this highly corrupt cartel is not finished with their objective to hammer the prices of these metals. Expect another bloodbath ahead.

Why is Gold & Silver Being Hammered?
As FOA said, what’s happening now . . . “has everything to do with a changing world financial architecture.” And as FOFOA said years ago, gold’s true function is very closely correlated to the real, physical balance of trade, and not to man’s flawed, political overvaluation of debt and other monetary schemes.” Those who wish to read more should read FOFOA’s 12Sep’11 commentary here:

Comment by obewon - 25 September 2011

Update: late on 24th of Sep’11

Listen to Ben Davies comment on why western central banks will continue to suppress gold the gold price.

Comment by Walter D. - 25 September 2011

PS: Maybe indeed, CME was well-meant this time. Perhaps raising the margins is a general action taken against volatility as it may stop speculators from either sides (though I’m not a professional and I’m just “speculating” here myself). But the fact remains though that margins only seem to go up, never down.

Comment by Walter D. - 25 September 2011

Calculating inflation adjusted prices is not an exact science. Shadowstats which uses the stats the government used up unti around the 1980s shows a much higher inflation.

Also, there are now these billions of people in the emerging markets that in the 70-80s were basically shut out of the markets. And in a few years, emerging markets will constitute the bigger part of the world’s economy. That’s what we should concentrate on.

Back in the 70s there was only USA, SSSR, the developed parts of Europe and the fear of just having stepped into the uncharted territory of global fiat currencies.

Gold may exhibit wild swings in the short to medium future, but in the end, the world (a multipolar world) cannot keep using the fiat paper of an increasingly weaker and indebted country as the world’s reserve currency.

Comment by philcu - 26 September 2011

A lot of speculation about the causes of the price drop but no one recommending the filling of boots!

Come on guys is it time to back up the truck or should we wait a little?

Comment by boatman - 27 September 2011

jesses cafe americain on the PM price fall (printed on mon.) :

Tomorrow (27) is option expiration on the Comex as we might have expected. I would hope that long term investors would take advantage of these price drops by locking in physical bullion purchases when they can.

However, it is hard to do this with the leverage and margin requirements on Comex especially on the overnight globex trading session. How can an average trader hope to maintain a position? And that is the basis of their schemes.

“It is not immediately clear at this juncture who was selling or why – but in placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect.

Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both open – this would have ensured they would have hit the market when it was most liquid and ensured they got the best price for their sale.

Clearly finessing gold into the market was not their motive – they wanted a statement.”

Ross Norman, Sharps Fixley


if we get a dow pullback to 10,300 after this weeks rally,

we might test 1500 gold again….if not, then we’ll never see it again

lotsa chart guys i trust saying then dow rally to christmas (more dancing by merkel)

before the big crash to 5000 in 2012.

gold goes up before that on more qe

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