This is the ‘big’ question
investors all over the world are now asking.
Gold
Gold fell
from $1,578 to $1,492 [5.45%] in the fall. In the euro it fell from
€1,065 to €1,042 [2.16%]. The fall of gold in the euro painted a
more accurate reflection of supply and demand, because the dollar rose
against the euro, as gold was falling. This was simply a correction, provided
the gold price has stopped falling now. A fall of 10% is a proper correction
and a mid-trend correction fall should be around 20 to 30%.
We can
identify that the fall was caused by a big investor and his following
virtually dumping around 37 tonnes in a two week
period into a market that is used to seeing around 6 tonnes
a day from the producers. Pity he didn’t have a better dealer. This
seller appears to have completed his sales [If it was George Soros, then he
has completed them, for he only held 30 tonnes
apart from gold shares].
Silver
The fall from
just about $50 to $32 rattled the entire market. After all, a fall of 36% is
a major trend correction were it broad based from many investors over a
period. But this drop was again due to awful dealing with 1,000 tonnes from the Silver Trust’s holdings onto the
market over two weeks, with the bulk dumped into the market in the second
week together with another 7 tonnes from similar
thinkers. With the silver price over $37 the drop is now down to a fall of
26% from the peak of $50. Again the selling has largely stopped with two-way
traffic now in play.
The nature of the two markets
The gold
market is a global, well centralized market based in London, where heavy
sellers and buyers are brought together quickly and a well-priced deal made
that cuts out the bulk of the volatility we see in the silver market. The
London Fix is where potential buyers and sellers of physical gold sit on the
end of their telephones twice a day and see what’s on offer and what
the bids are for it. Even the appearance of a large amount such as we saw
from the States is swallowed up quickly and in an orderly fashion.
The value of
an ounce of gold at 41 times the price of an ounce of silver increases the
liquidity for the big players in the market, making it easier to move large
amounts quickly. Silver has nowhere near that level of liquidity or depth of
investors. The type of investor is wide from institutions to industry from
the small investor to the large one and a fully global market at that.
However, the day-to-day dealings, while well organized are not sufficiently
large in two-way traffic to accommodate the sudden appearance of 1,000 tonnes in two weeks. This is why the market is so
volatile and swings so widely, compared to the gold market. The silver market
will, over time, see a lessening of volatility once prices are higher and
silver more accepted as a precious metal more closely linked to gold. We
would then expect to see silver prices move far closer to those of gold.
Have the Fundamentals changed?
Bearing in
mind that the fundamentals for silver’s traditional uses and industrial
applications are either for investment, jewelry or much needed applications
in industry, the fundamentals for silver are just as they were while the
silver price was rising and are unlikely to change. These users will be
delighted with any pullback, but tend to be price-insensitive. That means
they need silver no matter what the price. As to the investment demand for
silver, this is at its largest from the emerging world and is likewise
relatively price-insensitive. People from this part of the world are buying
in line with their increasing income and ability to buy. The price rises have
simply confirmed the wisdom of such a policy.
The same
applies to the gold market, but with the added feature that central banks are
buyers as well. These too are price-insensitive buyers, simply taking up gold
as it appears on the market, without chasing prices.
Have the gold and silver prices stopped falling now?
The prices of
both gold and silver have risen from their recent bottoms and have begun to
rise. This is a classic ‘floor’ finding exercise. Silver has been
the slower mover and has waited for gold to lead the way. In the dollar the
silver price is recovering and is now moving through the $37 level. In the
dollar the gold price still has another $50 to rise to its peak levels too.
This is another 3% more. Silver at $37 still has to rise another 26% to reach
its peak. But what is hiding their moves has been the rally in the dollar
itself. In the euro silver fell from €33.56 to €22.53 a fall of
33%. It now stands at €26.3 a fall of 21.6%. This shows it is
recovering faster in percentage terms, once we extract the dollar gyrations.
It is clear
then that support is now effective and holding up both the prices of gold and
silver in the market.
Now take a
look at the gold price in the euro. This week it rose to €1,086, a new
record high. This tells us the new direction of gold. It’s up!
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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