Global Precious Metals Correction: Healthy and Overdue
The recent global meltdown of precious metals prices is a healthy and overdue correction in a strong bull market.
Lacking answers for the suddenness and the strength of the down move that knocked gold down 11% from $1,025 to $909 (silver dropped 20% from $21.20 to $16.85) within 4 days, I hope the following questions may represent a guideline that may help you not to throw away all nerves and - mon dieu - your gold and silver investments.
Here come the questions. Find the answers yourself as it is always best to invest along proprietary knowledge and not the advice of others (when did your broker recommend precious metals investments the last time?)
- Why should Federal Reserve Notes reverse their slide since 2001 when the Fed uses every opportunity to crank up the electronic printing press?
- Both the Fed and the ECB have been lamenting a worrisome inflation outlook for some time now. Have they enacted a single (tightening) step since? (I am talking action, not empty words.)
- Can you see any structural improvement in the triple US deficits?
- Do you think commodity prices in general will descend again in a world where some 3 billion Asians will have evolved from paupers to car-buying consumers soon?
- Did you come across any news that South Africa has yet found a way to solve its energy crisis that severely cut PM output?
- Do you have a clear picture on the physical PM demand in the Eastern hemisphere?
- How many of the last 100 persons you spoke to have actually invested in gold/silver yet?
- Do you think the banking crisis is over or will we see more failures?
- Oil hit $100 before correcting to $88 earlier this year and nobody forecasted the end of the 7-year uptrend. Why are MSM so quick to call the death of the PM bull market, now in its 8th year too?
- Relating to gold's 11% drop this week: Did capital markets stabilize by 11% in the last 4 days?
- Can you name another asset class that is a store of value in itself and not somebody else's obligation.
- Did gold ever lose its value in the last 3,000 years?
- Global gold production may actually fall this year below 2,500 tons while demand hovers around 5,000 tons. Is this good or bad for prices?
- Short positions in COMEX gold and silver have kept rising through the latest record advances. Who are those "investors" that can afford to short such markets without running into serious margin calls?
- Assuming you hold bullion: Have you sold any of it or are you keeping it in the vaults despite the recent hammering?
- Assuming you do not hold bullion: At what price will you allocate 3% to 10% of your assets into PM's?
- When do you think that other investors will raise their asset allocations in favor of PM's?
- Have you discovered another inflation-proof asset recently?
I am confident readers can add many more self-answering questions. I am looking forward to your additions (and whacky answers) in comments.
Enjoy the holidays. It may be the time when the PM bull resurrects itself for the coming weeks. I uphold my view that we will see gold climbing above $1,100 in this spring cycle.
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This article has 16 comments:
- sammyg123
- 97 Comments
Mar 21 05:10 AMSecular bull markets do end. They also have corrections. It's hard to be convinced that the fundamentals, at this point, have really changed, however, maybe they will change, and those with more foresight than you or me have made their move and we are fools to keep our precious metals holdings in the short term.
As for me, I am not convinced that our economy is about to recover, and I am not convinced that the markets will either in the near term.
I expect there will be volatility in both directions. It does seem that the trend is broken in gold, so maybe it is best to accumulate, getting sample prices over the next few months.
I doubt your assessment that gold will reach 1200 by spring. I wouldn't mind if you were right though.
Gold and silver producers take short positions to lock in prices for their production. They can take short positions because this is the mechanism by which they deliver supply to the market. It's how they lock in profits. That's the "investors" with short positions, along with speculators who know more that we do, or are extremely lucky. Anyway, the futures markets are there for producers and consumers of the commodity, mostly. So, there's my semantic victory for the day - I object to your use of "investors with short positions." It is misleading, and lends credit to the Ben Steins in the world who think that traders like you and me control markets. Sometimes, it's actually supply and demand for the real commodity that sets the price. Go ahead, accuse me of naivete.
- gollwoods
- 1 Comment
Mar 21 08:58 AM- Indeendent
- 4 Comments
Mar 21 09:29 AM- dadodge2
- 8 Comments
Mar 21 10:41 AMThese two are absolute red herrings. The reason for gold's price increase should be and are related to the fact that that most powerful money making machine in the world is debasing the trust that people have in their currency, government and financial institutions.
It's almost like do you believe in the advertisement. I think (although I am an American I have not much to do with the country other than hold its passport) it comes down to whether or not you believe, "In God We Trust."
As for me, I really like America and its people, but the government and its financial institutions as currently structured are not building trust, unfortunately.
The author points out some very important observations other than the South African power crisis factor.
- Mister Jimmy
- 26 Comments
Mar 21 11:58 AM- Jim in Hav
- 4 Comments
Mar 21 12:25 PM- Mr. G
- 34 Comments
Mar 21 03:04 PM- Loco Gringo
- 1 Comment
Mar 21 05:30 PMNo, but with their swap, they effectively tacked the $30 bil and all the other swaps they've been doing onto the national debt. So you can put this move into the "fiscal irresponsibility" column. Fiscal irresponsibility: borrowing huge amounts, now from overseas mostly, to be thrown at whatever problem comes along. This short-sighted fiscal behavior is one of the root causes of the dollar decline. Thus, it's my belief that although it wasn't directly inflationary, the BSC move is inflationary nevertheless.
- iman
- 39 Comments
My Website
Mar 21 05:40 PM- Golden Oxen
- 30 Comments
Mar 21 08:18 PM- F. J. Taylor
- 46 Comments
Mar 23 10:35 AMI agree in general with the author and many of the posters - this drop is not a permanent down-turn, but a result of some "irrational exuberance" on the part of myopic investors who are reacting to the Fed's smaller than anticipated cut, and who cannot see what is clearly coming. Examples of the perspicacity of these individuals include investing in CDOs and the like which helped fuel the present debacle. I imagine their conversations ran like this;
"Oh boy! The Fed didn't cut the rate as deeply as expected! The economy is FIXED!! There won't be any more bank and investment firm failures! Our trade deficit and national debt will go away! Employment will go up! Oil will go down to $5 a bbl.! The Fed will quit printing money!!" (etc.)
Right. And we are winning the war in Iraq [or would be if we hadn't already won it in May 2003]. If you buy all that, the Tooth Fairy and Santa have lots of goodies for you - and I have some land in Hurricane Alley that is above water several hours a day [at low tide] for you to invest in...
The dollar will continue to sink like New Orleans in the long term for all the reasons I have outlined elsewhere - the US has NO savings (either as a nation or as individuals), and the continuing drain on our resources at approx. 12 BILLION a month by Mr. Bush's war of choice will soon make this a multi-TRILLION dollar debt), there is almost no heavy industry / manufacturing left to speak of. As but one example, Severstal, a Russian firm just bought one of the few remaining mainland steel plants, Sparrows Point, in MD, formerly a division of Bethlehem Steel (but owned by a German firm who divested because of anti-trust laws).
There are fewer and fewer good jobs outside of the (obviously over-paid, judging by results) upper management, as most of them were outsourced when they off-shored the industries concerned.
Someone recently said to me; "The government won't let the banks and the investment houses go down." This is proving true, and is a good example of why govt. intervention on behalf of stupid and greedy people is a BAD idea. (See here for reasons why the present contretemps occurred :
www.nytimes.com/2008/0...
Even if the devious little weasels in the Fed and other central banks continue to bail out these lousy investments and scams, as well as one another), remember - this is done with "money" that is no more inherently valuable than ours - it is all still fiat currency - and as with the S&L bail-out (which American taxpayers are still paying for!), the burden will fall on the shoulders of those people who are actually paying taxes - the working poor and the dwindling middle class, for the most part.
Speaking of which, the middle class is eroding at a fearful rate, and as they have been the ones "paying the freight" with their taxes ( along with foreign buyers of our treasuries, who are now showing a continuing and understandable reluctance to invest in a sinking ship of state), the situation as a whole does not bode well for the health or well-being of the economy or the country.
I might add that Federal "bail-out" units like FDIC (which "insures" your bank deposit up to $100,000) are quietly gearing up for what they expect to be a record number of bank failures (the former modern record was set during the S&L crisis). The PGBC (which "guarantees" pensions - see: www.pbgc.gov ) was already showing signs of stress in 2004, and if it gets saddled with more bad pension funds (as has happened in the past five years), could well reach the breaking point.
Don't count on the "election" (aka; "the illusion of inclusion" as a friend once called it) to change anything - you will only be getting one or another of the carefully vetted puppets the ruling class puts forward - all other "choices" - especially the few who stand for real change - are marginalized or eliminated. (If you still believe in the political process at this point, then see my advice above re: tooth fairies, Santa, and swamp land.)
In any case, this is an excellent opportunity to buy gold and silver, particularly if you were hesitating because of the price. I am planning to get some more. I would have even if the price hadn't come down a bit, as I see a long-term rise - but I don't buy gold as an "investment" per se - as one of my financial mentors, a wise old German Jew who had survived the Holocaust once said to me; "Put 2% of what you're worth in gold - and hope you never have to use it!" I would recommend considering as high as 5% or even a bit more. The author recommends 3% to 10% - and I wouldn't argue with that.
I favor coins. Gold Eagles and fractionals are easy to get, are "legal tender" have a known content, are widely known and accepted, and not as soft coins (such as the Maple Leaf) and therefore hold up better. Most US coins before 1964 were silver - they also make good "change." Remember - this is NOT an investment in the monetary sense - it is a hedge against disaster. (Of course, you can buy investment-grade gold and silver coins, and kill two birds with one stone).
- GKM
- 172 Comments
Mar 23 12:37 PMI now expect gold to go below $800 and possibly $700 in the medium term. Good to see you are building some support for those I can sell to. Or are you building the support of those you can sell to? Sometimes I get that mixed up.
- sadpuppy2
- 3 Comments
Mar 23 09:37 PMIt is perfectly OK to for an executive of a publicly traded company to go on all the national media and completely ignore his fiduciary reponsibilities by issuing what can at best be called misleading statements.
Then its OK for a group within the Federal government to overstep its charter to provide $30B to take the risk out of one company acquiring a longtime competitor since there was (please choose) a) no time to the due diligence or b) the due diligence was done in anticipation of this very moment.
Better yet the $30B does not a) recompense the shareholders who not only include pension funds but also widows and orphans, b) does not guarantee jobs for the seemingly overpaid and under attentive employees (who will soon need mortgage relief) and c) since no one knows whose mortgages have just been guaranteed, not a single homeowner got any relief either... and oh yes d) we now own $30B of stuff that not only nobody wants but nobody knows what it is....
Flitting past any suggestion of moral hazard, lets move on to outright immorality in the form of collusion once again amongst publicly regulated companies. Can anyone please explain how enough investors got themselves organized within a few hours to drop a supply of physical gold greater then that held by China or the European Central Bank some 20% in value in a few hours? While miraculously the financial institutions rose by a near equivalent percentage in those same few hoursthough there was no change in their condition?
- phlash79
- 17 Comments
Mar 24 01:45 AMThe IMF is supposedly going to sell 400 tons of gold...do you think one or more of the members jumpbed the gun...and sold some to support the dollar for their own interests? In addition, do you think some of the banks, dealer/brokers sold off some of their holdings in ETF's and physical gold maybe even leased gold...lol
The BSC transaction will be tied up in lawsuits for the foreseeable future guaranteed...
CIT is failing...
And I agree all the rhetoric on reasons why the institutions went to the Fed Window is just that...they really needed the monies...
Also the Fed loosened up the criteria prior to this weeks auction...sounds like we have found a shortcut to the RTC ...just pick up the mortgages without all the red tape and middlemen...lol
Have a great evening...
- Buy $ilver
- 1 Comment
Mar 24 04:40 AMAct 1...
Benny and Hendew are just hanging out on the beach. Soaking up the rays at Bernie's big, lush villa. But there's a small problem. Bernie
is a dead bloated smelly corpse. Everything will be cool, So long as
no one notices the green bile pouring down his chin. Or, that the top
of his scalp is peeling off... Or, that crows ate both of his eyeballs.. It's no small task, but thankfully it's only a movie.
So Benny and Hendew are sipping margaritas, and getting ready for
a big party, with a bunch of skanky gold digging beach bettys. But You can see that Bernie's foul odor, and disgusting appearance is putting a slight damper on their high hopes for the evening. They got Bernie propped up on a broom, with some sunglasses on, and Benny's on the phone trying to get a hold of some flesh colored paint, to brush on the world economy's rotton skin, so he'll look his best for the party.
In walks the Notorious Alan G(reenspan), looking all spiffy for the
party, with his new Testonis. His group of hairs, all pushed in the
same direction, and held in place with a little tounge spit. Benny and Hendew are like, "What's this mother f**cker doing up in here?!? We
don't even want this fool around here. It was his backstabbing,
freeloading ass, that led to Bernie's heart attack in the first place.
And on top of that, he's a cock blocker." But alas, the Notorious Alan G.S.P.N. is able to pretend to not notice that it's obvious to the world, that he's a cockblocking scumbag. And if he had any dignity at all, he'd be ashamed to ever show his face in public again, but he doesn't.
Then... Finally something interesting happens. (This is where it
veers off from the original movie, and I wrote in some stuff.) In
walks Precious Metals. PM, I've decided, is played by Elisabeth Shue,
Who You'll remember, was Karate Kids girlfriend. And also note, that
this movies time frame is the late 80's, so she's the young and
smoking hot Elisabeth Shoe, AKA Precious metals, and shes gonna be hot for years to come. Adventures in Babysitting, Leaving Los Vegas, and some recent stuff. You have to admit, she still looks hot.
With that said. Benny is super stoked, cuz he's been wanting to get
in her pants, ever since he saw her out on the beach in her skimpy
swimsuit, putting on the lotion, and he tripped over the fat guy,
while walking backwards, and eyeing her super sexy legs under the
shade of his hand. And today she is looking extra super smoking hot,
with a halfway see through dress that hugs her voluptuous figure.
But... before you can say Alan Greenspan cockblock... There's a bone snapping sound, and Bernie cracks open like a rotten egg. The stink that pours out of him, totally kills the mood, and Precious Metals starts screaming and freaking out. Now she knows the world economy is a dead and bloated smelly corpse, and if anyone hears her screaming, it's gonna totally ruin the weekend, and the slut party they got cooking up. So Benny, Hendoo, and Al, have to do what any raving lunatics would have to do in their shoes. They each grab a bottle of booze and start clubing Elisabeth Shue over the head. And this is where the movie takes a little science fiction twist. Even though they bust several unopened bottles of brandy and scotch over her head, she doesn't get hurt. She's unconscious, and there shoving ruffies down her throat, but she's relatively unharmed.? And here's the SCi-Fi twist... It's cause she's a frickin Superhero!! And what's more, when she wakes up, Precious
Metals, AKA. a young Elisabeth Shue, is gonna remember that Bernie, AKA the world economy, is really a corpse. And that Ben, Henry, and Al are some creepy dudes. And then she's gonna shoot lazers out of her tits. Won't that be cool!!
- Happy reader
- 1 Comment
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