By: John Fisher – May 4, 2011
As I write this silver is down from essentially $50 to $40, a 20% decline. Gold is down approximately $30 for a 2% decline.
What’s causing this and why?
Silver and gold are not acting in unison, a new paradigm. Silver is “feeling” weak while gold remains “relatively” strong.
Here’s my take.
Silver
- While silver’s price traditionally followed in “sympathy” with gold, those days are now over in many respects
- Silver became the “metal du jour” and the hot new investment, while gold became relatively boring
- Whereas gold used to garner front page news, it is now silver that predominates the headlines
- At the same time, wholesale distributors have an unprecedented supply of silver on hand
- Then, this past week the COMEX raised the silver margin and maintenance requirements twice! This forces the small futures speculator out when they can’t maintain their position
- Finally, the Johnny-come-latelies came out in force – trying to catch the speeding train
What does this all mean? Silver moved from a gold step-child to a stand-alone investment. But that investment had risen in price like a rocketship. Unsustainable – at least in the short term.
Watch for even further increased volatility in the days ahead. Next stops $49.50 or $34.00 – we’ll see which way it heads. Buy and hold silver – just know it is going to be a very bumpy ride!
Gold
- Gold continues to hold its strength due to all of the factors that established it thus far
- Budget and trade deficits continue to grow with no hope of reversing let alone stopping
- China has indicated they will reduce the government debt they hold by 67%
- Japan is terminating their purchases of US debt due to their desperate need for cash
- Standard & Poor’s is threatening a potential future downgrade of US Treasuries
- QE2 has been ineffective – the Fed is preparing to unveil QE3
- The US is now fighting wars on three fronts
- The Euro has been rocked by their decision to bail out member nations
- Oil is continuing to rise
- Housing and employment continue to languish at best
- Other countries around the world have their own unique, significant challenges and problems
Although gold is participating in the sell-off, it will retain its relative strength for the reasons cited above. Why? On a global scale, little if anything is getting any better – and most things are getting worse, if not much worse.
All Things Considered – John’s Commentary:
What to make of it all? Silver has gone up too far too fast. It could go much higher; even $70 is not unfathomable. It is now catching its breath. At some level it will consolidate. This is a very good thing for the long-term.
Gold will remain strong despite a current correction, as the global economy remains tumultuous and challenged. That is gold’s role, and that is why you need to buy it and hold it. It is not really an investment, instead it serves as insurance.
Action to take: Overweight gold over silver by a factor of 65/35 or 70/30. There are some very inexpensive forms of gold that weigh less than one ounce – referred to as fractional gold. Call us to discuss different forms and pricing.
Quote of the day: “It is the greenback which is unstable, and not bullion.” – Dr. Franz Pick
