As we head into the final quarter of 2012, it’s time to take stock of what’s going on in the gold and silver markets.
In the third quarter—August and September specifically—both metals saw tremendous gains from their summer lows.
At the beginning of the third quarter (July 1), gold hovered around the $1600/oz mark for what seemed like an eternity. Silver languished around $27.50.
That all changed in mid-August.
Troubling economic news, additional monetary easing by the world’s central banks and general bargain-hunting (among other factors) combined to give gold, silver and other metals like platinum and palladium a big shot in the arm.
This “running of the bulls” continued well into September, as silver neared $35/oz and gold hit $1790.
As the leaves started bursting into all their fall glory, it grew clear gold couldn’t sustain its $1790 price level, and it began to retreat right along with the summer. Silver dropped too. It stands around $32.50/oz at the time this was written (Friday, October 19).
A stronger dollar, along with profit-taking, are widely viewed as primary drivers of gold and silver’s most recent—albeit modest—pullbacks
Of course this isn’t a permanent situation. Gold and silver have both seen temporary pullbacks following a large rally. Also, gold priced in U.S. dollars is subject to fluctuations with the value of the dollar. And though we regularly discuss currency devaluation at Provident, it isn’t necessarily a linear move downward.
In fact, the dollar may strengthen against other currencies from time to time. When this happens, metals priced in dollars generally respond by heading downward, too.
In a report at Mineweb, Jeff Nichols, Managing Director of American Precious Metals Advisors, said “Gold’s failure last week to sustain gains over $1790 an ounce triggered profit-taking by frustrated longs and technically inspired selling by institutional traders and speculators in ‘paper gold’ derivative markets.”
Another report from Resource Investor points to slowing demand from China. Shipments of bullion from Hong Kong, for example, slumped 30% in August (from July). A slowdown in China, coupled with higher rates, could result in higher returns for cash and bonds.
This would most likely have a negative effect—at least in the short-term—on gold and silver, according to the report.
What can we expect for the rest of 2012 into early 2013?
If we could definitively answer that question, we’d be down in Jamaica sipping margaritas through the winter.
We can, however, get a good idea from taking a look at current sentiments and trends.
Nichols for example said “…short-term market psychology has turned increasingly gloomy.” Meaning we could see a short-term pullback before the bulls come roaring back.
Alex Thorndike, a senior trader at MKS, says the majority of his colleagues “…still feel there will be significant support on any extended pullback towards $1675-$1700.”
At that point, Thorndike claims central banks and others will be drawn back to the buying table.
Once the slight correction/recalibration is over, Nichols expects gold to continue its ascent, with all-time highs in the next three to four months. He explains that upward trends usually see occasional corrections—sometimes as much as 20%.
Another analysis by CIBC projects gold to be at $2200 and silver at $38 by 2014. However, the road to get there may be bumpy, causing some investors to second-guess the versatility of the precious metals.
For the rest of 2012, CIBC anticipates both metals to be strong in terms of increased demand before the holiday season.
In fact, November and December historically represent the first and third strongest months for both metals.
One common thing we see—as long as central banks like the Federal Reserve continue loose monetary policy in an effort to stimulate the weak economy—is that metals like gold bullion and silver bullion stand to gain over the long-term.
Like the dollar itself, gold and silver do not see a linear upward tick. Rather, it’s a long-term trend that’s been playing out since 2001.
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