Gold and Silver - where next after the crash?
CHART - GOLD:SILVER RATIO
“AS ThEy PRiNT MoRE MoNEy, ThE PuRChASiNg PoWER oF EACh uNiT DECLiNES.” So, just what did cause the drop in the gold and silver markets? It seems that a large sale order of 400 tonnes of gold that was dumped into the market on April the 13th was ‘the straw that broke the camel’s back’ and caused the remaining excess speculative positioning in the futures markets to exit en masse — particularly when the raising of margins by the CME was thrown into the mix. One thing I have learnt over the years is that “selling begets selling” and where levered markets are concerned, this is even more accentuated... To me, quite simply what occurred on those black days in April for gold and silver bugs was a plain old mini panic. We would suggest that we are, however, now within 5-10% of a new equilibrium floor price and also that the “black swan” premium that remained embedded in the two metals has now dissipated.
In effect, should there be an exogenous shock (perhaps courtesy of our Korean “friend” Kim Jong Un or an exit from the Euro by one of the major Southern European economies), then the two metal prices are primed for a new spike. The long-term fundamental reasons to hold gold and silver are most definitely still with us. The major central banks are now acting in concert in “currency wars” or “the race to debase.” As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments’ huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to a loss of confidence in their ability to pay back their debt which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently.
May 2013
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