Precious Metals Wipeout… Now What?
Precious metals investors are grimacing…
As you may know, gold and silver prices took a hefty dive in recent trading. In fact, gold fell $90 an ounce, or 5%, while silver sank $3.50, or 10%… just in the past three weeks!
What’s going on?
While there’s been absolutely no change in the underlying bullish supply/demand fundamentals, market sentiment has quickly turned against precious metals. It all started when the Federal Reserve announced they’re rethinking their quantitative easing (QE) strategy.
Let me explain…
Recent economic strength in the US has some Fed board members suggesting a slow down in QE measures will come sooner rather than later. As a matter of fact, Federal Reserve Bank of Dallas President, Richard Fisher, said in a recent CNBC interview that it’s “…time to taper this thing off.”
Of course, he’s speaking of the Fed’s $85 billion a month asset purchase program designed to stimulate the US economy.
The Fed’s new language has precious metals investors running for the hills…
Gold and silver prices have been supported by the belief that endless QE would drive the US Dollar into the cellar, eventually causing inflation. With that notion now being called into question, investors are selling now and asking questions later.
Not only are retail investors pounding on the sell button, but professionals are headed to the sidelines as well. According to Commodity Futures Trading Commission data, hedge funds and other institutional investors decreased their net long exposure to gold by 40% in the week ending February 19th.
How low can they go?
Let’s take a look at gold first …
As you can see from this long-term weekly chart, gold’s on the verge of testing multiyear lows at $1,550. We’ll likely see renewed buying interest there. However, if that support level fails, it’s not out of the realm of possibility to see gold fall to the 200-week moving average (WMA).
The chart looks similar for silver….
Given the bearish market sentiment and downward momentum, it’s highly likely silver will test the $26 area soon. As you can see, the 200 WMA and multi-year technical price support are converging at that price- something to keep an eye on in coming weeks.
As inconvenient as all that may be for precious metals bulls, here are the most important things to realize…
Even though the recent bout of selling has been extreme, gold and silver are still in confirmed long-term uptrends. In other words, both metals are still going from the lower left to the upper right side of the chart. Viewing gold and silver from a longer-term context makes February’s sell-off look like a normal bout of seasonal weakness- which it is.
What’s more, Fed Chairman Ben Bernanke begrudgingly admits that unemployment is still much too high. In fact, in his semi-annual testimony before Senate earlier this week Bernanke says a target unemployment rate of 6% is still years away. As a result, it’s unlikely QE will be wrapped up anytime soon.
So, what should precious metals investors do now?
For long-term investors who bought these metals at much lower prices… stick to your guns. We’ve seen multiple sell-offs of this nature over the past few years. Yet each time, precious metals regained their luster within a few months.
However, if you bought these metals at higher prices and are now sitting on losses, it’s best to take your lumps now. You’ll likely be able to buy these metals back at lower prices in the near future.
Until Next Time,
Justin Bennett
Category: Commodities
