Long term trends the key for gold and silver investors
Day to day movements in the prices of both gold and silver have little relevance to overall price trends
Posted: Sunday , 30 Aug 2009
If one reads the daily newswire services coverage of the gold and silver price - and similarly for most other commodities too - undue importance is often imparted to intra-day price movements, yet these generally have little or no real significance in the overall scheme of things. I
What one really needs to follow are the overall trends as expressed by the markets - not only for the metals themselves but also for other significant market moving elements - of which the strength of the dollar is the most significant. With most metals prices expressed in U.S. dollars and most mining companies' revenues received in dollars an increase in metal price may simply be a reflection of a fall in the dollar - and this is then compounded by additional supply and demand factors.
Often too a perhaps undue correlation is given credence to price relationships between different commodities - like gold and oil for example - where they may both in reality be expressing the strength or weakness in the dollar, at least on a day to day basis. Longer term analysis though can strip out some of the day to day effects so not too much should be read into daily movements in commodity prices unless these form part of a longer term trend.
For gold and silver in particular, where industrial demand, particularly for the former, is perhaps less important than investor demand in setting the price trend - or it has been at least over the past few years - one only has to look at the charts to see the trend has been, and remains, very much upwards. True there are price spikes in both directions above and below the overall trend, but the latter is unmistakably upwards. It is noticeably apparent too if one looks at the charts how much more volatile silver is than gold, but the overall trends are remarkably similar with gold setting the basic silver price scenario.
Psychological barriers do come into play though, which can affect movement. $1,000 gold is one of these and probably $20 silver another. Round numbers such as these have little real significance in the overall strength patterns but they do represent relatively arbitrary levels at which perhaps more investors may decide to rake their profits. In recent weeks gold has been trading between about $930 and $960 and these seem to represent a range between which traders will buy and at which they will sell and quick movers can do well under such circumstances where the price seemingly jumps up and down between these levels.
Longer term holders though tend to ignore the trading ranges and are there for the duration - but the 'duration' means very different things to different types of investor. The true gold bulls for example may be looking for a huge price breakout up to $2,000 an ounce or more for gold - some say $5,000 - but this latter is only likely to happen alongside a catastrophic collapse in the dollar and the global economic and monetary system. Pray that this eventuality does not occur because the social and political consequences are extremely scary to contemplate. Hyperinflation - as has been seen in Zimbabwe recently - takes a horrendous toll on people across all spectra of society
A $1,000 - $1,500 gold price, which does seem to be a not unreasonable possibility over the next year or so would largely represent a serious decline in the value of the U.S. dollar against many other major currencies, and while this would be uncomfortable for many in dollar areas, although not for exporters (every cloud has a silver lining), it might not prove to be quite so socially disastrous. Indeed many economists feel that this may be inevitable given the huge U.S. deficit and the amount of money being pumped into the economy in an attempt to stave off a depression - recession is already with us. So even though the quantitative easing programme may be working in that there is a general feeling that the worst of the recession is behind us, there could yet be a sting in the tail for the American population - but under the better scenarios not a hugely disruptive one.
So why the difference in volatility between gold and silver, given the latter generally follows the former's lead? Arguably, and some would dispute this, gold is a monetary metal while silver, although it has a monetary history and retains some monetary overtones, has much more in the way of industrial usage affecting its price. Thus when the bottom dropped out of the general commodities sector in the second half of 2008, while gold's fall was relatively limited, silver dropped much more drastically in line with the industrial commodities - and while gold is now only a little lower in percentage terms than its 2008 high spot, silver is still hugely below its 2008 peak. To the silver bulls this thus still represents a big buying opportunity with the perceived pick-up in industrial demand giving the potential price an additional boost to recover more of the lost ground. But price behaviour over recent years suggests that it will still need to take a lead from the gold price for its overall direction - it is likely to just move further and faster in whichever direction the yellow metal moves. There is also considerable discrepancy in views on the strength of silver supply and demand - as indeed there are different interpretations of gold supply and demand but perhaps not to the same extent.
What has made a difference, though, to the prices of both metals has been the strength of investment demand, for both the metals themselves and also as shown in the strength of exchange traded funds and the huge holdings of metal within these. This does add another element of price danger into the equation in the form of an overhang which could feed its way back into the market if investors feel it is time to sell.
But the big reason behind the investment demand has been uncertainty over the global economy - the 'safe haven' element and while economic turmoil persists, which may well be for a few more years yet, then serious selling of ETFs and bullion is unlikely. This investor demand has flattened, but has not gone away, and with central banks seemingly less inclined to sell their gold, the market has been able to absorb the amount of scrap coming on to the market generated by the higher prices, and the recession-driven decline in jewellery sales. But the resulting supply/demand balance is much more difficult to predict going ahead than in the past.
Overall the trend in price remains upwards for both gold and silver. The question is does the recent volatility in the price of both metals suggest the start of a change in pattern, or just a blip in overall price growth. We would cautiously suggest the latter, but that remains to be seen.