Thursday, December 15, 2011

Gold and Silver: The Wobbles before the Crash?

Gold and silver have had a marked sell-off this week. Various mainstream news commentators call this the blow-off of a precious metals market too far extended. Gold commentators are saying this is a sell-off of Lehman's proportions in the markets. Investors rushing to liquefy their assets and park it in USD cash. Just like after the Lehman's event in 2008.

Markets are deeply troubled with debt. No one knows value anymore. Trust is disappearing and counter-party risk is just too great to trade. You can smell the fear.

Here is an excerpt from Franklin Sanders:

We are seeing come to pass what I have long anticipated. Paper markets are unraveling. Now the very structure of the market itself must be questioned. In the bull market that peaked in 1980, paper (futures) prices drove silver and gold market. This time around, I think it will be more important to have actual physical possession, and that will means the physical price would be driving the market as the "real price", not the futures. We already saw that happen in the 2008 panic, when paper silver prices were 33% or more below physicals prices (physical silver carried a 50% premium over the paper price). Now, if some big entity that claims to have beaucoup silver stored suddenly goes belly up like John Corzine sent MFG belly up, well, who'll want "stored" silver then?

Here's an excerpt from James Turk over at King World News. His view is that what is happening now is a Lehman's in slow motion:

"Notwithstanding the enormous fallout from Lehman’s collapse and the disruption and distortions occurring in markets from all of the government interventions with their so-called ‘bazookas,’ the market structure itself was not questioned.  Today is very different...The aftermath of the Lehman collapse was a liquidity scramble.  So precious metals prices were hit back then as people needing liquidity threw out the baby with the bath water.  They sold what they could sell, not necessarily what they wanted to sell.  It was a great buying opportunity, and largely irrelevant to all long-term holders and accumulators of the precious metals.

This time I have been expecting a ‘fear event,’ with money rushing into the precious metals for safety, to avoid counterparty risk.  Therefore, higher metal prices will be the result. [The Precious metals] price may go down, but the price of everything else would go down even more, so you would still be better off owning the precious metals.  And even more importantly, physical gold and silver do not have a counterparty risk, so you never need to worry about the precious metals defaulting on some promise."

No matter what the price fluctuations, precious metals are the ultimate monetary asset and it looks like higher prices are coming. After all, can you imagine Ben Bernanke letting these defalting prices last too long before he calls in the QE?

Gold in New Zealand dollars: $2098.37 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.55 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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