As gold and silver prices fail to break out upwards and succumb to some downward pressures, are investors in precious metals becoming disillusioned and thus contributing further to the recent downturn?
Author: Lawrence Williams
Posted: Monday , 11 Jun 2007
LONDON - Any bull run in any commodity or stock index will include corrections from time to time, and when the upward price movement has been as strong as it has been for precious metals over the past three years there are bound to be occasional steep setbacks. Investors become disillusioned in the wake of nearly all the experts predicting breakouts upwards, and these not occurring, and the impetus behind the bull market stutters. Downturns, often accelerated by external factors like the recent Spanish gold sales, create technical sales when computer programs call for stop loss intervention, and the professional investors and funds, which have bought low and sold high, walk off with tidy profits.
The individual investor then gets a little panicky (and with relatively new investment instruments like ETFs around there are probably more individual investors in the metals than ever before) and may also take profits, while the new ones who may have bought high, bail out again for stop loss reasons.
Those who hold their nerve will wait with bated breath to see if their investment will continue downwards, or recover, as many of the precious metals gurus insist.
The question is where are we in the cycle now? Personally I think there is no doubt that gold and silver prices will recover and test recent highs - and perhaps, as many experts suggest, move into the stratosphere - but the big quandary is whether it will fall back further first and should one sell and try and pick the next temporary bottom before the runup continues. Timing is of the essence and the investor who can pick the tops and the bottoms in a market correctly most of the time is well on the way to fortune. Unfortunately it's not that easy.
As Neal Ryan pointed out in his recent article here on gold supply, the fundamentals of supply and demand for gold - and although there may have been a recent short-lived breakout from the relationship, the silver price has been tracking that of gold pretty closely - are extremely positive. Mine supply is showing no significant increase, and may even be falling back a little, and this situation shows no signs of any change. Industrial demand is good and probably rising, while jewellery demand seems to have recovered as fabricators get used to generally higher price levels.
But, in the face of this fundamental strength, the downward pressures have nipped any breakout upwards of the $690 level in the bud and the metal price seems to be moving in a trading range of between $640 and $690. Any upwards movement seems to be countered almost immediately by downwards pressures which suggests, in the market's eyes at least, that perhaps overall the metal price may have moved too far too fast over the past three years and we may be seeing a hiatus period, and perhaps a further small fall, before the upward path is renewed.
Dollar weakness may well be the ultimate key here. Forget oil price movement except perhaps in the context of its effect on the US or World economies. Everything suggests further weakness in the US economy ahead in the short term, although the currency seems to be holding up reasonably well at the moment, which has been another dampening factor on the gold price.
So, perhaps the upward movement of the gold price has been faster than the greater market is happy with. But, as everyone seems to be pointing out, the fundamentals are strong for a continuation of the upward movement at some point, but whether this will happen in days, weeks or months remains to be seen. As is always the case, as an investor you are out on your own here. Timing is everything.