I’m not a fan of volatility in markets. Volatility frequently indicates there’s something fundamentally wrong with the market and it makes it hard to stick to a disciplined investment plan. No one really wins in whipsaw markets. Volatile markets remind me too much of a casino; lots of noise and motion, not much clarity.
Last week saw the introduction of saw-tooth volatility in the gold and silver markets; looking at the chart you’d think it was the stock market. After reaching a parabolic high over $1,900, gold prices crashed to the $1,700 range and then started a slow recovery toward the end of the week.
The recovery in gold prices was further fueled by statements from Federal Reserve Chairman Ben Bernanke indicating the Fed was willing to step in with more stimulative efforts to aid the recovery. Anything the Fed could do to stimulate the economy would only serve to undermine the dollar; debasing the dollar will fuel a rise in precious metals.
Given the current climate, here’s what I see down the road for gold prices. In the absence of any additional stimulative efforts by the Fed, I’ll have to trim my gold target from $2,400 to $1,900 for the year. If the Fed kicks off another round of quantitative easing or some other trick to print cash, I’ll stay with $2,400.
My target could go lower if sanity breaks out in Washington and Congress passes a jobs bill that provides immediate opportunities for getting people back to work, but I consider that a low probability event. So high unemployment looks like it’s here for the indefinite future and no jobs bill at least through 2013.
Unemployment weighs on demand, demand weighs on the economy, the economy weighs on the Fed to keep interest rates low and provide further stimulus, which fuels gold prices. The wheels on the dysfunctional monetary policy bus go round and round.
The rigged game we call equities markets will almost certainly recover from here and could push higher still this fall, but without an underlying increase in demand, expect the sudden and catastrophic programmed-trading death drops to continue. The more retail investors like you and I get fed up with the market, the more people who will be looking for somewhere else to park their cash and at least some of that will end up in gold and silver.
The volatility in gold prices is likely to continue until the equities markets settle down. Just stick to your plan, watch your entry prices for precious metals purchases and you’ll do fine.
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