Are Metals Due For A Meltdown?

by: Derrick Lilly

Spain needs billions. Greece needs billions. Italy needs billions. Everyone needs billions. The FED is predicting slower U.S. growth and is apparently running out of options to further "twist" the U.S. economy around. Heck, even the Chinese are taking steps to stimulate their economy. It almost feels like we are watching 2008 unfold again in slow motion. So what does this mean for the precious metals investor?

By all accounts of some of my preferred commentators, Harvey Organ and TF Metals Report, mints around the globe, and leading banks (like China's), the demand for physical metals remains resilient. Add in the fact that the world's printing presses are seemingly running non-stop, and the first thought would be that gold and silver prices should certainly be on the move -- but in a different direction. Should we not be seeing gold and silver reclaiming or surpassing their recent highs? Alas, they're slipping.

So maybe history is repeating itself again. If that is the case, I expect we will see the usual rush of fear trades and fund liquidations. Remember, no matter how much metals investors may hate fiat, cash is still the king for many. So where do we go from here?

Let's look at gold:

Using historical London Fix figures thanks to Kitco's terrific resources, we can see that gold had reached a healthy high of $1,011.25 per ounce in March of 2008 after a strong multi-year bull market. As economic conditions worsened and widespread fears circled the globe, gold suffered a stunning fall of $298.75 per ounce or 29.5% to hit a modern low of $712.50 per ounce in October of 2008.

GOLD - 2008 London Fix

Gold then found its footing and started its bumpy climb up to its high of $1,895.00 per ounce in September 2011.

GOLD - 2011 London Fix

However, since then we have watched our precious metal consolidating or correcting in choppy fits to its current range between about $1,550 and $1,650 per ounce. I think this consolidation is part of a slower-moving, larger correction that may end up being comparable with the fall in 2008. Assuming we have a similar pullback in terms of percentage, we could see spot gold come down to around $1,336 per ounce before it finds its footing again.

That said, I don't think the long-term bull's back is broken.

GOLD - 2000-Present London Fix

If this plays out as I suspect it may, great buying opportunities for long-term investors should present themselves.

On to silver:

I think the scenario here will be much the same as above as silver has moved in a similar direction to gold with increased volatility. Again, back to March of 2008 silver hit a high note of $20.92 per ounce followed by a steep $12.04 or 57.5% decline to $8.88 per ounce by October of 2008.

SILVER - 2008 London Fix

Like gold, silver then found a base to bounce off and began a long climb to reach a high of $48.70 by April of 2011 only to be followed by steep pullbacks. It can be argued that silver was in a bubble territory at this point, but after coming down to the mid-$30s, silver followed gold back up and by September 2011 was pushing $43.49 per ounce. Since then, we've seen some hefty declines, signs or consolidation, a rally here and there and more pullbacks.

SILVER - 2011 London Fix

Simply put, silver has been under a lot of pressure and now we are back below $27 per ounce. If we are to compare the declines with 2008, we could be in for much more downside. Based on the high of $48.70 we could touch $20.69 per ounce before the tide turns. Or, if we go by the September 2011 high of $43.49 per ounce maybe $18.48 could be the turning point.

Again, I don't think the long-term bull market in metals is over. There are far too many catalysts for metals to go higher, and with all of the fiat currencies of the world becoming ever more worthless, a real change is going to be needed. I think metals will be a large part of that change. Gold and silver will be "money" again.

So how do you play the metals? I wrote this article, "Precious Metals Are On Sale! Or Are They?" suggesting a strategy for using the silver:gold and gold:platinum ratios to identify buying opportunities. I think this strategy can work for long-term physical metals buyers especially, but paper traders/investors may be able to use it to their advantage, too.

Without a doubt, the market is going to be very volatile; if you can be an active day trader, or want to enter and exit the market without the hassle of liquidating physical metals, ETFs will be your best bet. For gold, you can look into the popular SPDR Gold Trust (NYSEARCA:GLD), Sprott Physical Gold Trust (NYSEARCA:PHYS), PowerShares DB Gold Fund (NYSE:DGL), or ProShares Ultra Gold (NYSEARCA:UGL) as some leading options. For silver, iShares Silver Trust (NYSEARCA:SLV), Sprott Physical Silver Trust (NYSEARCA:PSLV), or PowerShares DB Silver Fund (NYSE:DBS) may work for you.

As always, do your own due diligence and invest in the way that suits your goals and tolerances best. David O. England points out in this article that gold should be pushing $2,500 when adjusted for inflation. With all the money printing that has and will be going on, I suspect we'll get hit badly by it sooner or later.

So where do you see gold, and silver, going? Are we worse off now than in 2008? Share your strategies and outlooks.

Disclosure: I am long MUX.

Additional disclosure: I am long physical gold, silver and platinum.