Perfect Storm for Precious Metals Leads to Price Correction

Gold Price Chart

- Click to enlarge

The futures market saw massive volumes of selling with over 1.6 bn ounces of silver contracts sold yesterday. That’s a value of over $40 billion.

But what’s behind this massive move and is the bull market over just as it was getting started?

A combination of factors has created a perfect storm for precious metals which has led to this price correction including…

1. Silver was running into strong resistance as it tried to test the psychological resistance at $30.
2. Both gold and silver were massively overbought in the short term leaving it exposed to downside pressures.
3. Recent short term traders with less appetite for this type of volatility and price swings exited the market en masse as the price began to fall.
4. Those holding massive leveraged short positions, namely the bullion banks, have been hemorrhaging money and nursing very big losses on their positions since the recent break out in the metals prices. They were able to take advantage of this short term weakness in the market to pummel the price. This allowed the downside move to be over-exaggerated as they attempt to cover their short positions at a better price. There is even an argument to be made that they added fuel to the fire of the recent price run up to create the short term weakness, allowing their subsequent selling pressure to create this over-exaggerated move to the downside.

This short term correction can be viewed as overdue and indeed healthy for the metals. A wave of nascent buyers will always tend to fuel an overbought market which risks short term vulnerability and weakness. They have now been cleared out.

Nothing has changed fundamentally in the world in the past 24 hours when it comes to the rationale for holding precious metals. The Central Banks are continuing to run their printing presses at full tilt to protect economies from total collapse. However, although the recent run up in price allowed many precious metals commentators to say “I told you so!” and it is always nice to see the value of our metals increasing, we must remember that owning precious metals is for the long term.

Gold and silver’s returns for the year are impressive even after yesterday’s rout. Gold is up by over 28% and silver is up over 43%! They are doing their job of protecting portfolios against uncertainty.

As the bullion banks continue to try and reduce their short position at lower prices to stop themselves losing even more money, this will underpin the gradual move higher in metals prices as their positions and hence their impact reduces.

We need to understand the cause of short term price volatility as well as we understand the long term value of holding precious metals to hedge against exactly the type of situation that we are seeing unfolding in the world today.

That way we will remain protected.

Silver Price Chart

- Click to enlarge