In our last commentary we discussed how fear is generally associated with solar eclipses, the consequences of which lead to higher precious metals prices in the long run. Although a decline was foreseen, precious metals and mining stock prices plunged into unimaginable over-sold territory as investors became frantic. As we are fully aware, fear boggles the mind and leads to confusion. Now, it seems that a buying frenzy in precious metals has begun and nearly every major coin and bullion retailer is facing a huge shortage:
It’s not the first time this year that the US Mint, Kitco, APMEX, Monex, Perth Mint, CNI Numismatics and other precious metals coin and bullion dealers have had trouble filling orders. With prices so low, who wouldn’t want to start buying? Besides the fear ushered in by a solar eclipse, the other main catalysts for such a sharp and sudden decline in metals prices were: a full moon, conflicts in the world’s major natural gas region, the Olympic games, write-downs, and recent ETF sales:
- As you’ll recall, a full moon (one occurred over the weekend), brings about fear and lunacy.
- Russia and Georgian forces battled in secessionist Ossetia causing many to fear a disruption
in energy supplies and to fear a start to World War III.
- The Olympic Games have halted metal and industrial production in China as officials exchanged economic production for cleaner air.
- Big bank write-downs over the past 9 months have forced the liquidation of precious metals ETFs, contracts, and mining stock positions in order to raise funds.
- As the popularity of gold and silver has expanded this year, ETF sales and contracts have increased more than the direct purchase of the physical metal in 2008.
- A late summer volume slowdown is typical during the weeks prior to Labor Day and usually means low upward momentum.
Many traders and investors are wondering how metals will recover given that demand has grown but prices remain low. It’s not really our job to wonder how, but why. For example, silver has corrected to $ 13 because its price has skyrocketed from $ 5 just 5 years ago to over $ 20 a few months ago. If it’s expected to go as high as we’ve forecast this year, then the recent correction was certainly in order. Think about a slingshot–the more it’s pulled back, the farther it will launch.
There’s nothing wrong with our present situation in the precious metals market and it’s by no means the beginning of a long term trend. When investors wake up and realize that ETFs and contracts are still expected to be backed by the physical metal (which is in short supply), then things will change. Moreover, they’ll soon realize that demand for the physical metals has picked up tremendously in such a short amount of time and in such a tight market.
Make no mistake about it — the long term implications of our present situation are bullish. Things are shaping up quite nicely. Over the past week we’ve already witnessed RBY (Rubicon Minerals) settle around a support level of $ 1.15 and begin to inch higher. We find no reason to fear what’s going on. After all buying at very oversold yet reversing prices should be your primary goal anyway.
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