Gold and silver in 2008-style sell-offPosted 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.
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.
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.