Last Friday and this Monday, gold and silver experienced staggering losses.
Over the past few months, we’ve seen both precious metals maintain overall tight ranges. Gold’s floated around $1600, while silver held in the high twenties.
Yet Friday’s metaphorical bloodbath sent both metals on a downward spiral. In that day alone, gold slid $84 — or 5.38%.
On Monday, gold fell another $100 (approximately), to less than $1400, for the first time since 2011. That year, gold reached a record high of more than $1900 an ounce before sliding back. Many assumed gold reached its bottom last Spring, but by the Fall, the rally lost its steam.
For gold and silver bugs like us, this has been painful to watch — especially since the S&P and Dow reached record highs during the first quarter of 2013.
Over the past few years, we’ve been optimistic about gold and silver’s prospects. And while it’s easy to jump to conclusions, our optimism certainly hasn’t dimmed.
What’s Driving the Sell-Off?
That’s a tough question — with even tougher answers — but we’re willing to speculate.
One answer is paper contracts.
In our post about silver market manipulation, we discussed “short” and “long” positions, and how they often affect the price of gold and silver (along with just about any commodity).
Exchange Traded Funds, or ETFs, are another form of paper contracts. ETFs are essentially indexed to gold and silver. The investor buys shares without owning any physical bullion.
Many believe these paper contracts are a major driver in the recent price crash. Some even claim manipulation.
Other Game Changers
According to an informative piece from Market Oracle, there are a few other factors to consider.
One is a recommendation from Goldman Sachs to “sell” gold and invest in the S&P 500. Many investors believe gold’s bull run is over, so they’re selling their positions after several years in the market.
Another motivator is the large financial networks like CNBC, which recently declared that gold is done — the Fed’s stimulus efforts are working. They claim anyone who owns gold is hanging on to an antiquated idea.
Also, Cyprus’ government announced a much anticipated move on Friday to sell some of its gold holdings and give the funds to the European Monetary Union. As anyone not living under a rock knows, Cyprus has been gripped by financial crisis, which led to a bank holiday last month.
The Real Answer? No One Knows
When all is said and done, no one can say for sure what triggered the big drop in metal prices. We can only hazard a guess.
What we can say is that bear markets turn around.
Gold has been used as a form of currency for more than 5000 years. So there’s no doubt it will go the other way. In fact, even with declines over the past two years, gold is still up an astounding 580% since 2001.
It’s also critical to remember that all financial markets can be cruel. Remember 2008 when the Dow Jones lost nearly half its value in one year?
A Golden Opportunity
What this does mean, is it’s a tremendous time to buy. Those investors that do not have an allocation to precious metals in their portfolios at present, this pullback, once complete, may present an attractive entry point for a longer term investment.
With gold bullion and silver off its highs, many are flocking to physical coins and bars. In fact, there’s a major disconnect between paper-based contracts and physical bullion. There are stories of record demand for Silver Eagles (and other coins) while the price is crashing.
One thing we know for sure, both gold and silver will return to bull market status eventually. We’ve seen these cycles play out in the past.
If you’ve been sitting on the fence, now may be the time to ride the bull-train to its next stop.
According to Jim Rogers, this correction is a natural and expected part of the market. He’ll be buying gold as soon as he feels it has reached a definitive bottom.
What Do You Think?
Will gold and silver rebound? Or will it continue to fall in the months to come?
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