Does gold and silver face a 2008-style correction now?
Posted on 19 November 2011 with 3 comments from readers
The sharp drop in the gold and silver price last week to around $1,720 and $32 respectively, in the context of rising eurozone yields and falling global stock markets is setting the scene for a 2008-style correction.
We even had the ultimate contrarian indicator with Jim Cramer say another big fall in the euro would be a precursor for a big lift-off in precious metals. There is no sign of that happening yet, quite the reverse which is what you would expect on the precedent of late 2008.
Margin calls
For as financial markets sell-off there is a liquidation of all asset classes to meet margin calls in falling markets. This is self-fulfilling and self-fuelling and there is little reason to believe this time will be substantially different to 2008.
Look at the high Vix volatility indicator and low stock market volumes last week. These charts are very similar to late 2008. Some traders in precious metals will undoubtedly jump ship now, so we hope this analysis is correct for them.
However, ArabianMoney hates to be short of precious metals in these markets. Last autumn the downswing failed to materialize for gold and silver and those who held on reaped big rewards and the market timers lost one of the few recent opportunities to make money.
Hedged position
Our newsletter is advising a precious metal position hedged with bear market ETFs (subscribe here). That way if the markets crash and bullion follows then you will be protected from 2008-style losses. Alternatively if the eurozone cisis suddenly comes right then you will benefit from the shift to bullion as a hedge against inflation.
The long-term chart for gold does not help us much at the moment. It could go in either direction:
That said we note that the precedent from 2008 is for a very rapid recovery of the gold and silver markets. Therefore a correction would also be a buying opportunity.
Hence we can still argue that silver is the biggest winner long-term (click here) even if the price takes a battering in ths short-term.
3 Comments posted by readers:
There is nowhere else, other than ArabianMoney, that I can get this wise and rational advice that gold and silver prices will fall because of a stock and/or bond market crash, and then rise again significantly because all those sellers have got to put their cash somewhere.
Congratulations to the Editor, and I hope that ArabianMoney is widely read and frequently visited.
It is so rational to understand that those, who have margin calls to pay off, will sell their gold and silver as they get out of stocks and futures.
It is also rational to understand that, once they have done this and have got loads of cash in bank because they have sold their stock, that they will want to get out of the banks asap because they are likely to collapse at any time.
So where do they go for a currency haven? Back to gold and silver but, this time, in vastly larger quantities than when they sold to pay off their margin calls.
“You know it makes sense!”
If the price of gold falls significantly, I for one will be buying (physical and mining stocks). However, PM’s and short ETF’s do not constitute a balanced portfolio!
What is a balanced portfolio? How about: A collection of investments which, at the time, produce the best yield over time.
If this is true, then a balanced portfolio would have excluded shares and bonds and currency from 2000-2010, because shares only yielded 67% over the ten years and bonds just 94% over the same decade.
I suggest that the balanced portfolio would have had little else than gold and silver in it from 2000-2010, since silver rose in value by 500% and gold 425% over that same decade.
Of course, a balanced portfolio can mean what is traditional, what has been the view of investors before bullion took off. If so, I suggest that the old balance is out of date, and one needs to get into the new, present-day balance for both safety and yields.