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Gold and Silver: The Sale of the Century

Blog by Toby Birch

26th September 2011

The last week has witnessed one of the greatest tests in living memory for investors in precious metals. Gold endured its worst two-day slump since 1983. Silver likewise took its biggest tumble in 31 years. To put this into context, 1980 witnessed a spectacular price collapse once the Hunt Brothers’ plan to corner the physical silver market was thwarted.

As one who had accurately predicted the credit crisis (at least to the correct year) and had been promoting the accumulation of precious metals since 2002, it is incumbent on me to make a statement on where we go next. While it looked like some dollar strength was on the cards and commodities might be squeezed, even I was caught out by this plunge in prices. Allow me to go on record in saying that that the current sell-off has set up the sale of the century for precious metals. This is not just a price factor, after all, the market only fell to levels that were first encountered at the end of April this year This time we have the fundamentals on the side of precious metals like never before, yet a dash for dollars and cash has hammered the very market that is traditionally a safe haven against inflation, banking crises and global tension.

It should be remembered that precious metals are not an immediate hedge against danger and do not behave like an options contract that is highly sensitive to volatility. Instead they are a long-term form of protection but can suffer in the short-term as we have just experienced. Having seen a plunge of almost 8% this morning from peak to trough, it looks like gold has completed its climactic sell-off. It fell just shy of a key Fibonacci level and also bounced straight back from the 200-day moving average. This does not mean that we will see a rally back to previous highs though. No matter what the market or asset, when you have a disorderly decline like we have witnessed over the course of just a few trading sessions, there will be lots of sellers on the way back up so progress will be slow. While it is good to shake out the weak investors it will take time to recover, even for the faithful who have been flabbergasted by the move. Nevertheless, this now forms a significant base for a more substantial up-leg.

Many echoes of 2008 are apparent with mainstream banks reducing their exposure to eachother and cutting the maturities of fiduciary deposits. Much like that year, every asset bar government bonds was sold in a panic move to liquidity yet this proved to be a great time to buy gold. True connoisseurs will be eyeing the expansion of the gold:silver ratio and will be switching gold for silver but mainstream investors can simply buy silver with fresh cash to re-balance the precious metal element of the portfolios.

Many who purchased precious metals in the last 6 months may well be feeling dazed and confused this morning, but for those willing to learn the lessons of the past, it is time to accumulate rather than ditch those lustrous bars.

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