Precious Metals: Scapegoats to Skyrockets

The past few months have seen a huge fall in the gold price from its brief plus thousand dollar peak. Look at the 6 month chart of the Gold ETF (GLD).

Now GLD is above both its 50 day and 200 day moving average. That is a strong, technical sign.

Latterly, gold followed the oil price downwards and on some days one could have virtually superimposed a gold price graph over the top of the oil price one and it would have been tough to tell the difference.

This led to comments that the oil and gold prices were inescapably linked and for several weeks this indeed seemed to be the position. Memories are short though as the gold price hadn't followed oil up to its July peak.

Mineweb commented in July - just a few days before oil started its price correction - that the oil price looked overcooked and suggested that oil at $90 and gold at $900 might be something we could see shortly.

Well, at least they were half right! But, as noted above gold came down virtually tit for tat with oil and ploughed well below the $900 mark, right back to around $750, but at this kind of level has seen huge physical demand resurrected in the Middle and Far East - and even in the USA - as consumers believe that gold is a bargain at these kinds of levels.

But, it may have taken the Lehman (LEH) collapse and the near-collapse of AIG (AIG) to begin to see the inevitable decoupling of the gold price trend from that of the oil price with the latter recently falling below $90 at one stage.

Now gold and silver are making very strong recoveries. They were in many ways scapegoats and victims of forced liquidations and big-money manipulations.

Rumors still abound that the Fed actually had something to do with forcing precious metals to retreat and stay down for awhile. Yet to get our hands on the physical, hard stuff was virtually impossible.

Now, "magically and suddenly" gold and silver are skyrocketing as "safe havens". Most of us knew that was inevitable.

Any forced, contrived and violent corrections in intrinsically valuable assets such as gold and silver will have an "equal and opposite reaction" on the upside.

Such a day was Wednesday, September 17th, the day the markets finally turned for the precious metals. While it's a bit too early to tell as yet, the signs were extremely positive as buyers streamed into the metals in huge numbers.

Gold notched a record dollar increase for a most-active contract, at least since 1980, the first year historical data are available, and its biggest percentage gain since September of 1999. Silver soared the most since 1979.

No doubt the reaction was to the spreading credit crisis, which yesterday saw the government having to, essentially, nationalize the nation's largest insurer, AIG, in order to prevent it from failing.

"When you're perhaps facing a catastrophe in the U.S. financial market, investors are thinking: 'Screw it. I'm jumping back into the old faithful'," said Joel Crane, a metals strategist at Deutsche Bank in New York. And, "Gold's relative value is cheap compared with the dollar," he added.

About $2.8 trillion of market value was erased from global stocks this week.

No wonder Amaury Conti, of investment adviser Austin Calvert-Flavin, was moved to say: "Gold is acting like it is supposed to on a flight-to-safety move … We have a global financial crisis and nobody has a clear answer.

Therefore stocks, currencies and debt are being questioned and nobody wants to own a 'paper' asset." Although there will be volatility, this trend seems to be in motion.

Brien Lundin, editor of Gold Newsletter, summed it up well, to our way of thinking:

Physical demand is breaking records, mining supply continues to fall, and the economic environment is, of course, promoting safe-haven demand … The shorts are covering, the funds are buying back in, and everyone wants the safety of gold.

These are unprecedented times and extremes might be the norm for awhile. As Jeffrey Nichols of American Precious Metals Advisors commented:

Long-term price prospects remain as bright as ever -- and nothing in the recent market performance has changed our forecast of record high prices in the next few years.

We still expect to see gold back over $1,000, if not late this year, then almost certainly in the first quarter of 2009. With the right confluence of economic and geopolitical developments we could see gold as high as $1,500 or even $2,000 an ounce in the next few years -- and a buying frenzy, such as is often seen late in the price cycles of financial and commodity markets, could briefly take the metal much higher.

Disclosure: Long GLD.

Comments

[CLH:]

Gold is finished. That was its dying gasp.

2008 Sep 19 07:49 AM

[User 30121:]

CLH, You continue to show your well welted ass!

2008 Sep 19 08:30 AM

[goldis4ever:]

Wall Street investors are swooning to the fact that the government printing presses are running at full tilt. Such delusionary delight!!! But folks, just wait til the hangover begins!!!!

2008 Sep 19 09:53 AM

[ussmls7:]

CLH,do you work for the Banks that control the FED? You seem to know so much!!

2008 Sep 19 10:04 AM

[bowman711:]

Does CLH stand for Curmudgeon and Lunatic Here?

2008 Sep 19 01:03 PM

[GMiki1:]

Today--Friday--with the addition of another half trillion or more of national debt, all I can say is--Got Gold?

2008 Sep 19 02:20 PM

[Engineer:]

I wonder if the paid bashers we all know and love were smart enough to have taken their gains and invest them in gold and silver?!!

2008 Sep 19 03:17 PM

[JBP:]

Nicely put CLH. I love your comments and detailed arguments for why you think the way you do. How's DZZ treating you?

2008 Sep 19 03:24 PM

[Smarty_Pants:]

Paulson and Bernanke write death certificate for the dollar. Now all we need is for Congress to approve and the President to sign and it will be official.

Our country has taken the fork in the road labelled "This way to hyperinflation".

Buy gold, short T-bonds. When the Chinese, Japanese, and arabs decide to salvage something from their massive reserves the dollar will plunge, interest rates will climb, and gold will soar.

2008 Sep 19 03:31 PM

[bearfund:]

Gold is headed to $100,000 an ounce. Unfortunately that ounce will still buy you no more than a good men's suit. Get out of dollars, but don't expect to get rich owning gold. No one ever has.

2008 Sep 22 12:29 AM