Gold and silver should end this week higher
After the tumultuous swings in financial markets last week – with gold having its biggest one day rise for 26 years – and closing up more than $100 at $874, we can well speculate on the week ahead.
It is perfectly possible that we will see more wild gyrations in precious metal prices, and even a return to $1,000 an ounce gold. Silver will follow in gold’s wake and show its usual gearing ratio to the yellow metal, which should make it the better performer.
Coming up by the mid-week will be the $800 billion Wall Street rescue plan from Ben Bernanke and Hank Paulson, the dynamic duo of this crisis. However, the euphoric market reception of this plan in concept may be lessened by reflection of what the reality might mean.
US house prices are still falling and that is the route cause of the current chaos. Falling house prices mean home loans are going bad on an epic scale and bringing down the global financial system like a house of cards with its interlinking via derivative products.
Fixing the bank balance sheets stems the blood but it does not eliminate the flow. The housing market will still have to find its market bottom – unless the Fed proposes to buy up the unsold inventory and create a ‘bad housing corporation’ of toxic properties.
To my mind the outlook is still a very sharp global recession for 2009 and into 2010 with rising unemployment, bankruptcies and a falling stock market. What the Fed market intervention will do is to slow this process down, which may make it longer but not so deep.
The price to pay for this intervention – apart from a longer recession – will be the inevitably higher rates of inflation and dollar devaluation that will follow the printing of a lot of money. That should sustain commodity prices at elevated levels, and precious metals are the most probable asset class to gain in such a market of limited alternative opportunities for investors.
This should be a very good week for stocking up on quality junior gold explorers – whose shares just have to be at rock bottom in view of the outlook for bullion – as well as gold and especially silver producers, and of course bullion.
On 2. I think it foolish to change your position – the juniors are oversold and well due for a bounce on the back of higher gold prices, possibly as soon as this week. Hedge funds are a factor depressing junior prices with shorting – so when they go that is absolutely a good thing. If shorting is banned it will happen much more quickly, and some clever buyers will anticipate it this week. Thanks for your comments, this sort of feedback is useful for thinking things through – it is a very dynamic situation, but exactly the kind of situation in which depressed juniors will bounce back! How could they go much lower? I noticed bearish articles from Gold Drivers and Zeal last week – so the last bulls have thrown in the towel and capitulated – that is normally the market bottom. Now the only way is up!
peterjcooper
September 22, 2008 at 7:51 am
I already hod a “stock of quality junior gold explorers”. Obviously I am losing money and think that they are grossly undervalued. However, their market is being by powerful technical factors at present. One of these may become an unwind of short selling, if the ban on this ever becomes extended beyond financials. That would be sharply positive but (for me) merely remains a hope. More certainly, in the words of Prof. Roubini in the FT today is that: “The next stage (of the global credit crisis) will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.”
THe latter is surely more short term bad news for “quality junior gold explorers”.
M Miller
September 21, 2008 at 11:23 pm
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
The problem? Wall Street stole trillions from the banking system. The solution? Give Wall Street unlimited, non-reviewable power over the Treasury.
BTW, Everyone is saying this bailout is limited to $700B. IT IS NOT. The treasury can hold up to $700B at one time. But Hank buys $100B in mortgages at par from his buddies, then sells them at $50B. The fund has just made $50B profit, and the Treasury still holds no mortgages. It simply has a $50B loss, and the authority to buy $700B in mortgages.
Shawn H
September 21, 2008 at 10:06 pm