Fickle gold and silver prices - a pragmatist's viewpoint
For whatever reason gold and silver prices have been falling recently, but this may be irrelevant in the long term scheme of things
Author: Lawrence Williams
Posted: Wednesday , 09 May 2012
LONDON (MINEWEB) -
Despite the gloom being felt by gold and silver investors as the price continues to be pushed downwards, the more level headed will realise that the price is still above that prevailing at the beginning of the current year and over $100 higher than at this time a year ago, which might not be considered a particularly poor performance overall. Nevertheless the big fallbacks in gold in September last year from the probably then-overdone peak of around $1900 down to below $1550 in late December, followed by another sharp fall from the $1790 level achieved at the end of February followed immediately by a $100 crash down in price after which the gold price has struggled ever since, will certainly have tested the staying power of precious metals investors.
The pattern of some of the heavy, almost instantaneous, sharp falls in price have led many of gold's proponents to cry foul, and it's not hard to see why. Whether these unusual price movements are seen as big players trying to drive the price down, perhaps to push the weaker investors out of the market, enabling them to buy back at lower levels, or whether there are deeper government (with the aid of the bullion banks) moves afoot as the gold price suppression aficionados would suggest, remains a point of contention. However there have indeed been some very big selling contracts put in (in paper gold rather than in bullion) the size of which would run counter to what might be considered sensible trading practice. Draw your own conclusions here.
Given the main price drivers which have seen gold through its eleven year bull run - global economic turmoil and the out-of-control money printing by Central Banks to try and bring some support to the crumbling system - are all still in place, the logic to a pragmatic non-economist would seem to be that external forces are indeed trying to control the price - but to what end is also obscure. There are indications that Central Banks are now buyers rather than sellers, although a single month's figures, which some commentators eagerly extrapolate to suggest this level of purchases will extend month by month for the full year, is perhaps too early to call. We need a few months more heavy purchases to really understand the trend. If indeed the extrapolators are correct in their forecasts then the fact of Central Banks buying at these levels should perhaps give some encouragement to the gold lobby.
But this theory presupposes that Central Banks are any better in their judgement than anyone else, and that is not necessarily a fact borne out by recent history. For most of gold's latest bull run, Central Banks have been heavy sellers of gold and it is only in the last couple of years that they have apparently moved in the other direction. Perhaps one should be a contrarian with respect to Central Bank gold purchase initiatives!
If one looks at the silver chart over the past year, it is a bit like that of gold on steroids.
It rises more steeply when the gold trend is strong and falls more sharply when gold is weak. The silver bulls are strong on the gold:silver ratio (GSR) returning to 16:1, its historic level - when silver was part of the monetary system (the ratio is, at the time of writing around 55:1). Things do change and a material change of this nature in silver's prime usage does, to this observer, suggest that the historic GSR is no longer relevant. They also point to silver's peak of around $50 an ounce back in 1980 suggesting the metal should be aiming for a peak of perhaps $150 in today's money, but conveniently forget that the $50 peak was itself a total anomaly in that it came at the time the Hunt Brothers had almost, but not quite, cornered the silver market. It does not suggest that such a level in today's money is necessarily likely to be reached in the near term.
Don't get me wrong here. I'm not suggesting that silver is overpriced at current levels. Indeed given its propensity to follow gold's movement in a more volatile manner, if one feels that gold still has a way to run upwards too, and, as pointed out above, the key economic drivers for this remain in place, then silver could also appreciate nicely - but not necessarily to anywhere near where the ardent silver bulls would suggest.
The other big positive game changer for both gold and silver remains China and, to a lesser extent India, although the latter has always been at the forefront of gold purchases as the yellow metal is inbuilt into the psyche there. Both these countries are growing, and continuing to grow, at what in the West would be seen as an enormous rate (even taking slowdowns into account) and the accumulated wealth of their citizens is growing alongside their countries' economic advance. China too has a historic association with gold as a store, and indicator, of wealth, but which had been suppressed up until recently. Now the Chinese are allowed to buy gold the impact on the market should not be under-estimated. If the country's Central Bank is also expanding its gold reserves at an ever-increasing rate, as many are assuming, then this should definitely underpin the sector. But the extremely astute Chinese probably have no wish to drive the price upwards. If they can keep it relatively steady they can expand their reserves even faster without causing a huge price surge.
Overall it would appear to the pragmatic observer that gold and silver are not through their bull runs yet as the global financial turmoil is far from over. The current gold (and silver) price hiatus is because many see the Eurozone crisis, which is the most newsworthy at the moment, as deteriorating further, but those fleeing it financially are putting their trust in the US dollar rather than gold. Given the U.S.'s own economic problems, which are neatly being hidden from public perception in the runup to this year's Presidential election, this has to be a pretty shortsighted viewpoint and will surely come to an end before too long. When it does both gold and silver will likely resume their overall upwards trend - but probably not as rapidly as the major gold and silver bulls would have you believe.