Will gold and silver test recent lows again before heading higher?Posted on 12 May 2013 with no comments from readers
These are dog days for precious metals investors with just about everybody out to dance on your grave. But as any contrarian investor knows that is usually a positive signal. It is when everybody agrees that you are right that it’s time to sell.
The sell-off induced by the plunge team manipulators last month has been followed by a short-covering rally and huge physical demand, mainly from Asian consumers. You would expect this cycle to be followed by a lull in buying and a testing of the lower price levels of the recent crash.
Think back to how the stock market crash of 2008 was retested in March 2009 before shares headed higher for more than four years. Gold and silver will likely prove to be very much the same.
Why? It’s the rising supply of paper money versus the very fixed supply of precious metals. The central banks of the world will issue more paper money this year than in any year since the global financial crisis.
Gold and silver, on the other hand, suffer from painfully restricted supply. Watch the reality TV series ‘Gold Rush’ and you witness just how hard miners have to work and how much money they need to put at risk to produce small amounts of gold. Or you can go several miles underground in South Africa to dig out the ore.
Silver is far less hard to produce but it gets used up in industrial processes so reserves are thought to be about half the weight stockpiled in gold. It’s therefore more price sensitive to changes in demand.
The problem for investors is that timing moves in the gold and silver market is next to impossible. If you don’t stay invested you can quickly miss out on the biggest price moves that make being invested worthwhile.
Buy and hold
To buy and hold and ride out the ups and downs of the market requires courage, or shall we just say commonsense. The S&P 500 is up a couple of per cent since the year 2000. Gold prices are almost five times higher and silver up seven times on a decade or so ago.
We just have not seen the kind of spike in prices, however, that would mark the top of the market. Indeed the current retracing of prices actually sets the precious metals market up for a higher spike than it would have seen if prices had not faced their recent correction.
That’s the way the marketplace works, you just need to stick with it and wait until everybody is telling you that they have just bought gold, many of them for the first time. It’s starting now in China with the rush of the aunties to buy (click here) but as ever they are just the first in the queue for a bargain.