While it seems like the headlines were down most of the week, gold actually managed to eek out some gains by close of trading on Friday. Prices for gold recovered to the low $1,660 range before everyone headed home for the weekend.
Looking out over the broader economic landscape there remain ample reasons for caution. I’ll warn you in advance some of this discussion may be confusing because there are times when precious metals move in harmony with equities markets. If you look at the five year gold chart you’ll notice those times roughly coincide with times the equity markets are melting down.
If that seems strange you have to keep in mind what’s happening during times of market contraction. Investors are selling off equities to try and contain losses, but they also have to cover bad bets in the options and futures markets. To cover those bets they need cash and, if they’re already taking a bath on equities, it’s likely they would turn to converting other investments, including gold and silver, into cash.
It’s in times of liquidity crunches that you’ll see gold and silver, along with fancy cars, trophy wives, second homes in the mountains, and expensive watches all going on sale as investors try to pull in cash to cover their markers in the options market.
If you’re like me and are looking at the equities market and not seeing a long-term driver for growth, then you’re also like me in thinking we’re likely to see the equities market contract in the months ahead.
While it’s true corporate earnings have stayed strong, those earnings have been kept up by slashing the workforce and cutting expenses. Very soon companies are going to start running out of track for the budget ax train and will be forced to start making capital investments which will hurt margins.
A sudden pull-back in the equity markets would likely trigger a short-term sell off in precious metals. The time to be building up some cash reserve is before the panic selling kicks in. That way when equities and precious metals go on sale, you’ll be in a position to make small buys on the way down.
Maybe we’ve all been kicked by the economy so many times we’re gun shy, even when things do seem to be getting better. All I know is my faith in the current recovery is razor thin and right now seems to be a good time to start building up some cash reserve.