Dull Outlook for Gold and Silver as Markets Correct

With gold apparently making another attempt to reach $1,000 an ounce this might seem an odd moment to reflect on the broader outlook for financial markets and what that means for gold and silver.

But if you accept that financial markets are at the start of a correction after their historic rally – and September and October are the traditional down months – then things do not look too bright for the precious metals.

For in a stock market sell off there is a move to cash and the dollar and bonds strengthen, while gold and silver are sold down by investors with margin calls to meet. It could well be that fears about inflation and devaluation to come help to put a floor under the gold price but this is unlikely to save it from some distress in a major sell off.

$850 price floor

Indeed, Dr Marc Faber and some chartists have $850 as a floor for gold. Silver is more volatile and also an industrial commodity so will fall harder. Precious metal equities are particularly vulnerable to a collapse in share prices and their leverage to the metal price also works against them.

However, if financial markets head higher on some new burst of optimism about recovery prospects or loose monetary policy, then gold would be a big beneficiary. Furthermore, after another financial crisis, gold and silver might well be the first assets to recover because the Fed would not stand still and a second stimulus package should benefit precious metals.

Risk avoidance

It is therefore arguable that staying out of precious metals entirely is a bit risky and that the downside is relatively small and should not last long. It is also a question of what to do as an alternative investment strategy.

If you stay long in the US dollar then that strategy also carries downside risk – and we can see the expansion of the supply of dollars far more clearly than any movement in the supply of gold. So the bigger risk might be being caught too long in dollars as the market rallies again, and missing out on a really big up shift in the gold price.

Personally I think Jim Sinclair has it right, and that the dollar will rally (and gold fall a bit) into November and then we will see the precious metals suddenly become the asset class of choice and the only investment play in town.

Comments

[Roger Knights:]

This column is OBE (overtaken by events), at least momentarily, perhaps driven by a couple of black swanlettes out of Asia. (The China disowning derivatives story & the victory of the opposition party in Japan, which has made noises about cutting down on Treasuries and bulking up on gold.)

Sep 03 09:43 AM

[AtTheMurph:]

If I'm right and I see gold $5000 in the next 10 yrs I could care less whether I bought it at $950 or $850. The risk I see is in trying to time the bottom. I'll just keep adding on any dips in price.
The big price mover in gold is going to be a realization that the ETFs are a sham. They aren't some alternative way to own the actual metal, they are a way to try to play the price but with no real basis in the commodity itself. I am convinced that there is going to be a call on gold at either the COMEX or GLD that shows the whole system to be a ponzi scheme. If I had bigger nutts I'd short the GLD and go long the actual metal.

Sep 03 10:03 AM

[GMiki1:]

Yes, why try to time gold over a few dollars and risk not getting in? I bought at under $300--yes--and at $400--yes--and if I missed the bottom by a few dollars, did it matter? Of course I bought some silver at $7 and some at $14 and some at $21, but I still think it doesn't matter.

Sep 03 11:04 AM

[Mad Hedge F...:]

fgj, ) Just as it is prudent to top up your flood insurance ahead of the hurricane season, investors are loading up on gold ahead of the treacherous September-October stock trading period. Yesterday’s $22 move up shows that attempt number six to run the yellow metal up to a new high has begun. Silver happily tagged along for the ride, tacking on 70 cents to $15.49. Historically, September is the best month of the year to own the barbaric relic, showing an average 3.5% gain over the last 20 years. The onset of the Indian wedding season, Ramadan, and the run up to the Christmas and the Chinese New Year jewelry buying binge are all conspiring to give gold a boost. A tip off this was coming was the big put selling seen for the shares of the gold ETF (GLD), and Kinross (KGC). One good way to play gold at this late stage might be the shares of highly leveraged unhedged producers like Rangold resources (GOLD), Jaguar Mining (JAG), and royal Gold (RGLD). Confirmation that the markets are moving towards risk aversion can be found in the euroyen chart, which hit a one month low at 131, after double topping at 140.50. If gold does break, it could tack on 20% very quickly to $1,200. Keep those American gold eagles.

Sep 03 11:06 AM

[The Recusant:]

Not all ETFs are equal. GLD and SLV are two that are notably suspect for being based more on derivatives than hard assets. But look to SILR, a relatively new ETF that is only asset based and to Canadian ETFs like GCS and CEF that are also backed by PM vaults. I have no shares in any of these yet. But that will change on the first pull back.

Sep 03 11:53 AM

[bkdc:]

You know it's a sham when you can settle COMEX contracts for delivery by handing over ETF shares.

Is it a coincidence that HSBC, the bank with the largest gold short position on the COMEX happens to be the bank that houses the SPDR Gold ETF.

Sep 03 06:51 PM

[Keer-eh Khar:]

You dont know what you are talking about-
Talk about raining on a parade!
If it falls and "corrects" as you claim, I hope it does, since Im going to buy even more at that price-
Why don't you go on vacation now. :)

Sep 03 07:51 PM

[bkdc:]

AMEN! If gold dips, I'm buying!

Sep 03 09:08 PM

[knight:]

Still see 12-18 months of deflation in our future which will not be good for Gold. Once we are finsihed with the market up and coming nasty sell off Gold will be the only thing that protects your from the dollar being inflated away. Imho the play moving forward is short the markets and long the US dollar. Reverse the play once Elliot Wave 3 finishes. I would wait for a better entry point on gold based on this view.

Sep 04 05:41 PM

[Keer-eh Khar:]

deflation! hahaha!

Sep 05 01:40 AM