Gold and Silver Will Not Save You From a Sell-Off

It is my contention that as the financial system comes under increasing strain - as it will - gold and silver will not save you. It very well may outperform, but if there is a broad based sell-off in financial assets, even if there is a collapse, gold and silver will not go up and will probably fall.

Gold and silver have been beneficiaries of the excess money creation this decade that has lifted the prices of all asset classes higher. As we enter into a period of tighter credit, asset prices will fall, as will gold and silver. The behavior of gold and especially silver over the past month is a testament to this, I believe.

[click to enlarge charts]

The chart of silver is terrible.

I have read arguments that gold is trading in an increasingly narrow but upwardly-biased range, presaging the next leg higher. I have difficulty with this argument when silver looks so awful. If the precious metals are about to move structurally higher, silver should be moving up with gold, not falling over under its own weight.

I am a long-term bull on precious metals but gold and silver will come under pressure as monetary conditions tighten. However, when the Fed eases - as it is beginning to - the financial system will eventually be awash in liquidity. As that happens, gold and silver will rise.

I believe gold and silver will hit new highs. But first we have to go down before we go up.

Related Stocks: (SLV) (GLD)

Comments

[The Kennel:]

PERHAPS A MORE ACCURATE INTERPRETATION FOR GOLD AND SILVER NEAR TERM DECLINE IS MORE MICRO BASED, AS LIQUIDITY IMMEDIACY HAS DRIVEN INVESTORS TO LIQUIDATE HOLDINGS NO MATTER THE GENRE FOR THE PURE SAKE OF CASH. AS THE LIQUIDITY RIPPLES SPREAD ACROSS EACH POND, ALL LITTLE BOATS HAS BEEN AWASH. WHEN THE CYCLE IS COMPLETE, GOLD AND SILVER WILL REGAIN THEIR MACRO POSITIONS UPON THE BRIDGE OF THE GLOBAL SHIP AND MAKE WAY NORTH BOUND. GOLD AND SILVER NEAR TERM DEMISE IS PURELY LIQUIDITY BASED. AS THE SMOKE CLEARS, AND EQILIBRIUM IN GLOBAL CARRY TRADE IS ATTAINED, FLIGHT FROM FOREX FIAT WILL FIND IT'S WAY TO THE DOORSTEPS OF PRECIOUS METALS. WHILE WE ALL FIDDLE OVER HOW ROME BURNS, PERHAPS THE SMART MONEY IS AWAITING THE CLARION CALL TO LAY SEIGE UPON THE GILDED GATES.

2007 Aug 22 04:46 AM

[mwilliams:]

You should write a book. The better one can articulate the more effective they become in getting their point understood. You articulate well.

2007 Aug 22 10:56 AM

[little_guy:]

Is it not the sell-off of ETFs, liquidating hedge-funds, combined with record central-banks gold sales that is keeping the price of metals in check ?

Nice situation for anybody loading on bullion ! anybody that understands that when FIAT paper hits fan, the heavy metals will be all that remains in your hands.

2007 Aug 22 07:00 AM

[Malkiel:]

The day of gold and silver as alternative currencies are over, the metals have no value beyond their industrial use, which in the case of gold is a lot less than its current price, so the long-term trend is down to the cellar. As has been said many times before in these discussions, in true financial and social collapses gold has no worth because there are no buyers, and gold won't buy you a pack of cigarettes when the next guy in line has something useful like soap to barter. In a broad-based selloff gold will decline more than other assets rather than hold its value because most of the owned gold is in leveraged form and must be sold to meet margin calls. This has already played out this way twice so far this year. Don't expect China to go on the gold standard in your lifetime, they are moving to the crude oil standard...

2007 Aug 22 10:59 AM

[little_guy:]

<blockquote>Don'... expect China to go on the gold standard in your lifetime, they are moving to the crude oil standard</blockquot...
Well, so why did China's gold purchase increased by +32% in the last 12 month ?!
True about an Oil Standard, but still I wouldn't dismiss gold though.
2.5billions people - China &amp; India - share a cultural tradition: they <strong>worship&... gold. And these are the new powers to be.
That's why i keep 20% of my savings in gold, ok, with a few gallons of oil and bars of soap !

2007 Aug 22 01:15 PM

[Greg Pinelli:]

Very prosaic Kennel...but less than enlightening. All precious metals moves to the downside are liquidity based. Someone is trading one form of money..gold..for another. Toro's point was not an analysis of "micro" moves in precious metals but a rather well stated warning that they won't save investors in debt driven panics. Liquidity crises (and their overhang) drive people to currencies (however phoney or manipulated they may be) because that's what real bills in the real world are paid with. Investors don't have to drive the price of gold down by selling...they can simply stop buying to use their currency elsewhere to cause a drop in the ask price.
Gold..silver will likely have their day...but not until the powers that be reliquify and it becomes much more obvious that the relative value of currencies is going further down. Golds days as a "crisis" hedge are decades gone..it is a currency hedge. The investment landscape is littered with gold bugs who buy on principle instead of investment knowledge.
Also..as a polite reminder. On the internet conversations don't take place in upper case letter diatribes..sounds and reads too much like shouting.

2007 Aug 22 11:15 AM

[The Kennel:]

pinelli, don't sweat the small stuff, consider the following: seekingalpha.com/artic...;u=65866

2007 Aug 22 01:26 PM

[jt:]

Kennel...agree with your prosaic description, but agree that it's very difficult to read in caps and detracts from your purpose of writing it. Malkiel, and you, too, Pinelli, to a degree...I suppose history just began not quite 100 years ago?? The Fed, our Presidents, et al, can no more take us or the world off the gold standard than you can free us from the law of gravity.

That there will be a transition back to it...or perhaps I should say acknowledging it as the true standard, that we will no doubt have some type of paper currency as a proxy for silver and gold at least in the interim, that there will have to develop first a type of "black" market (though I prefer "true" market in that the real black market that we have been forced to use for nearly half a century by the mafioso Fed and its henchmen in our Shadow Govt has been our "fiat" forced market) in which silver and gold are used to buy necessities, that TPTB will do their best to stamp it out so as to prolong as long as possible their golden goose printing presses, that we probably don't have a clue what a "falling apart" of our economy is going to look like, that those who are and have been working tirelessly for a one world govt (you do know that the Charter of the CFR is indeed a one-world govt, yes?) would love to see that financial collapse with perhaps declaration of martial law with a progressive retraction of the freedoms the USA once stood for...I would say these are all very probable.

That a "gold standard" is a relic of the past--the "day of gold and silver as alternative currencies are [sic] over" (unbelievable how brainwashed most Americans are...even those who o/w seem intelligent)--is ignorance at best...loss of the ability and desire to reason at worst...and perhaps more practically, what the Fed and the rest of TPTB are hoping the majority of Americans will believe. And they have once again slammed gold and silver back down at a time when there would have likely been a massive transfer of wealth from paper to precious metal...from NOTHING to SOMETHING...from worthless to valuable...had they not thru their ability to manipulate the paper markets made the PMs to look unstable at best...and useless at worst.

2007 Aug 22 11:29 PM

[The Vet:]

It's odd that with this "selloff" of gold and silver that both the GLD and SLV holdings of metal are at record highs... Perception, caused by the respective share prices, of a "selloff" is not backed up by the actual physical holdings. Remember that the ETF's can be sold short. The sellers do not own gold, never have owned gold, and never intend to own gold; they simply see a nervous stock market and they pile on their short sales... They are selling unbacked paper, not metal.

2007 Aug 23 07:31 PM

[Alex Wallen...:]

Sorry, dude, but you have no idea what you are talking about - as gold's price action beginning right after your article was published amply demonstrates. Not only did you miss the boat - you jumped in the wrong direction. Gold was then under $700, now it's at $960! Nice try, anyway.

2008 Feb 28 09:40 AM