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Monday, June 21, 2010

New Record High For Gold, Silver Up, Time To Buy Or Sell?

With gold prices touching $1,260 last week and hitting a new all-time high, the difficult question is whether this is some type of short term top in the gold bull market or whether something has fundamentally changed in the currency markets that is going to send gold much higher from here.

For once with gold the charts do show a financial asset not in danger of a big breakdown. That is what you can see in most other major asset classes right now, including silver.


But thinking in terms of the next few weeks or months is more difficult. If financial markets sell down sharply into this summer and autumn then logically the gold price ought to weaken, and silver very much more so as an industrial commodity.

Of course, conversely a continuation of the modest upturn in stocks could take gold up to $1,300. But stock markets have been rising on weaker and weaker volumes. They need to be climbing on higher and higher volumes to make this a sustainable trend.

That would tend to suggest that gold has been riding this upwave and will follow the rest of the markets down. But gold is being bought both as a diversification play and currency now, and that should act as a powerful support in falling markets, even if it is not enough to keep the precious metal rising in value.

Gold has recently outperformed silver, and the gold:silver price ratio is now 66 compared with its long term average of 15. But the silver market is smaller and less liquid than gold so it has room to catch up with the percentage advance in the gold price if gold continues to go up.

Silver outlook

Investors can be encouraged by silver’s Friday close of $19.24 an ounce, and there is room for an advance to $21-22 unless global financial markets take an immediate turn for the worse.

In a big correction silver will then become the best asset to buy for a recovery, or bounce off the bottom, when financial markets become oversold. Less than two years ago silver sold at under $9 an ounce so the scope for trading this volatility is considerable.

That said it does not make silver the more attractive precious metal to own going into a downturn, and that remains gold. Given the uncertainties of global currency markets – and who knows what the Chinese mean about a ‘more flexible’ yuan – holding gold as a part of a currency basket makes more and more sense.

Disclosure I am long GLD and SLV Shares.

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