Is A Big Correction For Gold And Silver In The Offing?

Includes: GLD, SLV
by: BubbleBustInvesting

Gold was in another correction mode on Friday -- the fifth in less than a month -- dipping briefly below $1600; a big disappointment to the bullish crowed betting that the yellow metal will hit $3000 early this year. Silver dipped below $30.

(Click to enlarge)

(Click to enlarge)

Gold ETFs like SPDR Gold Shares (NYSEARCA:GLD) were also sharply lower (down 1.83 percent); silver ETFs like iShares Silver Trust (NYSEARCA:SLV) followed through in sympathy (down 2.42 percent).

Strong U.S. consumer data; a stronger dollar; and technical factors were all cited as the factors behind the sell-off in precious metals. Are these corrections the signal of an even bigger correction?

As I wrote in a previous piece, it all depends on the time frame of this question -- as well as assumptions made about the future state of the world economy. In the short-term, gold and silver are expected to continue their correction for three reasons:

  1. First, European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control.
  2. Second, an improving U.S. economy will make it less likely that the FED will launch another round of Quantitative Easing (QE)-the primary fuel of the recent gold rallies. Besides, Fed's QE impact on the dollar and the metals has been increasingly neutralized by ECB's and Japan's QE.
  3. Third, anxiety over Abe's promise to print yen until it creates 2 percent inflation in the land of the rising sun.

In the long-term, things are unclear. The direction of metal prices will be be determined by the direction of the world economy. A strong rebound in the world economy would be bullish for the metals, especially if it is accompanied by inflation- though such a scenario is very unlikely.

A weak rebound, or even a prolonged stagnation-a very likely scenario after the data that came out from Europe and Japan on Thursday -- would be bearish for the metals.

Bottom line: The best days may be behind for the precious metals, at least until the next crisis, provided that central bankers still have enough ammunition to fuel another rally.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SLV, GLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.