As America wakes, my phone, my email and my texts all started buzzing, ringing and dinging. It was like standing in the middle of a casino. Why? It's simple! Everyone wants to know what's going on with the markets and specifically, precious metals. One reader commented on my last article, Is Gold Rally Losing Steam or Building Pressure? and asked, what do you say now?
Let me first say, enjoy the panic. More on that in a bit but before I explain, let's revisit the gold chart as it appeared less than 3 months ago.
I would bet many are surprised to learn, gold this morning, remains up nearly 7% in the last 85 days. That still translates to a 28% plus annualized return. By contrast, the S&P is down 17%., since July 1, and down 10% on the year. Note in the gold chart, the trading gaps created by exuberant gold buying in early August. Technicians will tell you these gaps need to be revisited and filled before the bull trend can continue. To this, I think we can attribute some of the sell-off, especially for those fund managers starving for profit in their portfolios.
The last time we saw a decline in gold prices of this magnitude was during the period between May 11, 2006 and June 14, 2006. See the chart
Here, we witnessed a 23% decline in the gold price from $720 an ounce down to $555. I remember clearly the comments. The gold rally is over. Even at today's levels, the gold price is nearly 3 times that. I did not believe the gold rally was ending then and I don't believe it is ending now. I just don't see a widespread change in the world financial landscape to suggest any crisis is over.
Also contributing to this sell-off is another round of hikes to margin requirements on gold contracts. Such moves in the past have been shown to have a temporary effect, not really deterring investors from investing. As I commented in a prior article, I doubt central banks are concerned about margin requirements on gold contracts when physical gold is what they are buying.
Of late, central bank gold buying has been considered a major factor in the rise of gold prices, so, naturally, one would wonder if central bank selling is now causing prices to dip. According to a recent zerohedge.com article, there is no evidence of central bank selling. That said, it would not be surprising to see this recent price action spark another round of buying. I don't think central bank policies shift into reverse in a matter of a few days. If central banks have become net buyers of gold, and they have, it is because of their long-term outlook for the global economy. The world is not crashing one day and soaring the next. Do you really think central banks, who printed money to buy gold are going to turn around and buy back printed money with gold? I mean, I'm just thinkin' out loud here.
As the gold price fluctuates, so does silver. While silver possesses infinitely more industrial uses than gold, its price is still affected by the direction in which gold prices move. Early this morning silver traded at $26 an ounce until domestic markets awakened and slammed the brakes on this downward slide. Funny how the best buying opportunities seem to come under cover of darkness when the average investor cannot take advantage.
Adding further to the confusion, stocks are up today. The Dow is up 150 points right now but still cannot break above the 11,000 mark. All the data still points to a possible double dip in the recession, hence, the scarcely repeated comment by Federal Reserve Governor Sarah Bloom Raskin, that additional Fed easing may be warranted.
This to me is a clear sign that nothing has changed. The economy still wallows near the brink of double-dip. The housing market may be getting worse as foreclosures loom larger than ever. And, as Treasury Secretary Geithner warns all of Europe, the threat of cascading default, bank runs and catastrophic risk must be taken off the table. Does this sound like reason for the markets to surge while precious metals sell off?
The next few days may be the most interesting days ever in the markets - both stocks and precious metals. Is today's rise in stocks a temporary reprieve from total collapse and the dollar? Can we kiss the gold rally goodbye or is it time to back up the truck and load up on both gold and silver as central banks have been doing for the last several months? I suggest a visit to this new End of The Dollar video may shed some light on the path down which we are headed. By all means, stay aware, stay informed! Watch this new video now! Your financial life may depend on it.