The recent drop in precious metal prices has many investors concerned. Spot metal prices for both gold and silver have dropped significantly in the last couple of weeks, leaving some certain that the secular bull market is over. However, a closer look at the facts may just suggest that this “correction” is a perfect opportunity to either add to holdings or else take a position in physical metal, not only for protection against fiat currencies, but also for profit.
There’s no escape from the reality that the drop in metal prices has been significant. However, the intricacies of the metal markets, and investment products, creates a set of circumstances that can mean things aren’t always what they seem. Indeed, what might appear as a flight from precious metals might actually be an anomaly of other factors.
For instance, consider the reality of exchange traded funds for precious metals. In the last ten years, there have been a number of exchange traded funds, not only for physical precious metals, but also for the mining companies that bring the gold and silver to the surface. What this means is that it has become very easy for the average investor to “own” gold and silver in the form of an ETF, which is nothing more than owning a stock to them.
However, let’s look at the mechanics of an ETF. The fund actually has to buy metal, to a greater or lesser extent, to “back” the investments. At the same time, however, the fund has to sell metal to cover liquidations. And, since it’s so easy to buy and sell, weak-handed investors can “dump” their gold or silver by clicking a mouse. This type of fund redemption can lead to massive amounts of physical metal being dumped onto the scene. This, in turn can temporarily, if not artificially, depress prices.
Speaking of there being a glut of metal being sold, consider a situation like we have in Cypress. Cypress is selling gold in an effort to help save their economy. This has nothing at all to do with the inherent value of gold or silver as an investment. In fact, most major banks are currently net buyers of gold. Moreover, entire countries, like India and China, are stockpiling gold as a hedge against the fiat currency meltdown happening around the planet.
None of these considerations even account for the games being played on the futures markets. It’s long been understood that major banks and investment houses have been manipulating the “paper” gold and silver markets. On the one hand, they issue their “recommendations” which can influence the market. On the other hand, they can short the metal markets and artificially depress prices in that way. And few with a keen understanding of what’s happening doubt that they temporarily depress prices to squeeze weak investors and cover their positions.
All told, it’s not a simple market of supply and demand. There are plenty of machinations behind the scenes. But the inherent value of gold and silver is unchanged. It’s finite and a valuable hedge against paper money.