April 4, 2009 – Gold And Silver Bullion

After both gold and silver spot prices began to ramp up in late 2008, investors began speculating with wild abandon about how high gold could possibly go. After initially falling along with everything else in October of 2008, it took about a month for gold and silver bullion to reach their most recent “bottom.”

Since that time, it’s been a near-perfect rise to the top, with gold futures hovering near $1,000 per ounce for nearly a week before dropping back down again. And that’s the biggest question that is facing anyone trying to decide whether to purchase gold and silver now or wait to see how far the “correction,” in what some saw as a “gold bubble,” will go. In fact, it almost seems as if people who have been waiting to invest in gold and silver have been holding their breath since the price of gold began to fall back down to Earth again in early March of 2009.

Much of what has driven the sharp increase in gold and silver spot prices has been as a result of the very steep increase in the amount of electronically traded funds that are based upon precious metals. Both gold (GLD) and silver (SLV) stocks have been trading high, but concerns about the actual amount of gold in those investments has kept gold and silver investments in ETFs an almost exclusively short-term hedge against riskier stocks like the recently difficult manufacturing or banking sectors.

But the interest in ETFs has been cooling off, and short term investors often move money in and out of such funds on a weekly or even daily basis. This sort of volatility is more easily absorbed in the much larger number of stakeholders in the gold markets, whether their holdings are virtual, “paper gold” or real, physical gold and silver coins.

While investors who favor physical silver bullion are accustomed to the often “rough and tumble” silver commodity markets, new players in the silver ETF markets tend to respond more quickly to losses than a more traditional investor, and even very a normal and reasonable correction to gold and silver spot prices can be viewed as ruinous by investors who are more accustomed to “day-trading.”

So how low will the price of gold and silver go? Signs of hope in the investment sector has been uncharacteristically tracking with the London spot price of both silver and gold, though the latter is by far the more glamorous of the two, often getting far more news coverage that might impact the average consumer.

The consensus among financial planners, investment bankers and long-time market watchers is that the decline in the price of gold is only temporary, but may represent the last stop before the gold train leaves the station. Estimates of likely summer prices for both gold and silver put the metals at historic highs, even after adjusting for inflation by the crudest means possible. Numbers in excess of $2,000 per ounce for gold and over $30 for silver have been bounced around in more than hushed voices.

Whether these incredibly high gold and silver spot prices will actually come to pass is anyone’s guess, especially as it is highly dependent upon other markets such as currencies and derivatives. However, it does seem clear that the market conditions that led to the steep rise in gold and silver prices has not yet abated. A rule of thumb that many practice in such situation is that when the price falls to 1/3 above the most recent low, and market conditions aren’t significantly different, it may be prudent to buy again.

Clint Faust

April 4, 2009

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