Gold Down On Euro Woes

Posted: May 23, 2012 12:01 AM

Gold was down in line with gains on the dollar in overnight trading on Tuesday, with commodities generally tracking lower across the board. 

Gold was down $17.90 to $1,576.48 and silver was off $0.41 to $28.15, raising the silver/gold ratio to 56.  Joining gold and silver lower are platinum, palladium, crude oil and copper. 

A couple of you correctly pointed out that my defense of silver failed to mention that the lower price support for silver is $22 an ounce on a technical basis.  That is true, but I seldom pay attention to technical indicators when making purchases because they tend to be lagging indicators. 

Trying to time any commodity in the current market is like trying to catch the proverbial falling knife.  You can either make small, regular purchases on the way down, like I recommend, or wait until prices recover off the bottom and lose a couple points at the margin.  How you play any market is really up to your personal preferences as an investor. 

When it comes to silver I’d also add that, since it is an industrial metal, it is sensitive to inventory considerations in the production pipeline and right now those are bearish indicators.  Manufacturing in China has slowed to the point that Chinese manufacturers are turning away shipments of some commodity deliveries, with many, literally, piling up on the docks. 

That slow down will back up in the supply chain for every industrial metal, including silver.  Gold prices are not as sensitive to industrial demand since the yellow metal has few industrial uses.  Its historical demand as a currency hedge means that gold and manufacturing are seldom in sync. 

It’s a little less complicated for me.  I buy when prices are on the way down because I know history is on my side.  Sooner or later precious metals will adjust to a relative value against paper currency.  On a long enough time horizon, global currency policies are on my side. 

There’s a feeling amongst some analysts that we’re in a long-term bear adjustment for precious metals, including gold and silver.  I’m not sure about that, either.  There’s a limit to how far the Fed can let the dollar gain against other currencies before layoff notices become common again.  The Federal Reserve is not going to let that happen. 

But my main reason for buying now is that no one ever made any money buying when the rest of the market was confident and prices were rising.  To me the best time to buy is when the investment is out of favor with the rest of the market. 

Like anything in investing, you pays your money and takes your chances. 

Chris Poindexter, Senior Writer, National Gold Group, Inc