After last week's extreme sell off in the precious metals complex, many gold and silver investors have been questioning the soundness of their strategies. Both gold and silver have experienced incredible rallies from the lows of 2010, and as a natural result were in need of a significant correction to attract new buyers, while shaking out speculators and late comers.
Many gold and silver investors are wondering why the metals have been sold off so dramatically and in such a short time. The answer, as I have understood it, is due to numerous complicated factors. Allow me to expound.
The likelihood of a Greek default has risen significantly since the end of the summer, and is now almost a sure thing. The true impact of this event is still not fully understood, and as such, is causing panic throughout global markets. Those responsible for offering a solution to Europe's woes have fallen short of the mark. This generated yet more fear of sovereign debt contagion to other larger debtors in Europe such as Spain and Italy.
With no plan to solve the situation laid out by European politicians, investors sent stock markets reeling lower. On Wednesday the 21st of September, all eyes were on the Federal Reserve FOMC minutes to provide guidance on where markets would find their next support.
Like a junkie hooked on dope, the global equity markets have relied heavily on their 'fix' over the last two years, which has come from the Federal Reserve in the form of QE and QE2. With the ending of QE2 on June 30th, many market players were looking to the Fed to yet again come to the rescue with another 'fix' for the sick liquidity junkie named Mr. Market.
Ben Bernanke, chairman of the Federal Reserve, apparently had no such intentions, and last week announced the commencement of "Operation Twist" without announcing further stimulus to the markets, as well as including some new language in the statement that severely rattled traders nerves. The statement not previously included in recent FOMC announcements was "there are significant downside risks to the economic outlook, including strains in global financial markets."
So, with the markets dope taken away, investors were facing a reality of going 'cold turkey' and rehabilitating without help from the liquidity 'pusher' of last resort, the Federal Reserve.
Again, stock markets around the world began to swoon. As these losses mounted and the entire commodities complex, along with the S&P index in the red for the year, market players began to get margin calls from their brokers. This created a 'cash crunch' in an already liquidity thirsty market. In addition, private investors began to call their fund managers and make redemptions en masse.
With demand for cash coming from all angles, hedge funds and money managers began to sell the only asset that was still holding a profit for the year, you guessed it, gold and silver. As volatility increased and prices continued to decline, the CME took it upon itself to once again increase margin requirements on gold, silver, and copper futures, which created even more margin calls across the board.
The obvious result has been a massive U.S. dollar rally, as institutions around the world scramble to come up with the necessary cash requirements by selling anything with a bid on it. Not unlike the behavior seen in the crash of 2008, many analysts have wondered whether the world does indeed face a 'double dip' recession. This would, in many investors' minds, create a significant decrease in demand for industrial metals such as copper and silver. As always, a series of interviews conducted by Eric King at King World News, are extremely well articulated, and explain very well what is happening right now in these markets.
As if to confirm these fears, late last week HSBC announced preliminary analysis which concluded that China, the world's no. 2 economy, was slowing. This sent silver reeling another $5 dollars lower from the $31 level that it closed at on Friday to a low of almost $26 in early Asian trade on Sunday night. At which point, phenomenal demand returned, sending both silver and gold rocketing higher into a reversal, which is where we find ourselves today.
This demand came from Asian buyers on the back of a report that the ECB had announced plans to quadruple its emergency lending fund to 2 trillion euros, and that Greek bondholders would face a 50% loss.
So just like that, the markets have found their liquidity 'fix' from the next pusher around the way (the ECB), and are feeling much better...For now.
Since the latest expected 'injection' of capital liquidity was announced, the Dow Jones has rallied over 200 points on Monday, and was up almost 300 points as I wrote this.
That is the reason why I believe silver and gold will not make new lows. Expansion of the global monetary base, (i.e. the steady trend of printing more, and more money around the world) in time will surely drive the masses to these tangible safe havens which carry no counter party risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.