Generally, people think that Gold is a Safe Haven and a good hedge against inflation… an excellent investment during times of recession, as Gold always holds its value and increases over time. This is generally correct – however, if you’re looking for some investment ideas then I’d like you to consider Silver as well, and think about the right price points to buy Gold or Silver.
Please use below only as a guide, and use your own judgment for making any investments.
Here are some facts to help you make your investment decisions:
- Silver is far more volatile that Gold, i.e. if both metals were to fall, then on a %age basis Silver falls more than Gold… and likewise rises faster than Gold as well. Hence, compared to Gold, buying Silver at the right price point gives you a better bang for your buck
- Check this out! From Sep/Oct 2008 low (Gold $682 / Silver $9) to 2011 highs (Gold $1920 / Silver $50)… so far, in 2011, Silver has dropped up to $26, i.e. 58%... while Gold has dropped up to $1532, i.e.31% (prices and %ages rounded off)
- For those who understand Fibonacci Retracements would know that the following %ages are quite significant… 38.2%, 50%, 61.8% and 76.4%
- Based on the Sep/Oct 2008 lows to 2011 highs of Gold and Silver (stated above)… the Fibonacci Retracements on Gold are $1447.74 (38.2%), $1301.61 (50%), $1155.47 (61.8%), $974.67 (76.4%)… … while the Fibonacci Retracements on Silver are $34.19 (38.2%), $29.37 (50%), $24.55 (61.8%), $18.59 (76.4%)
Now that’s interesting… isn’t it?!? Over the past few months, Silver has already dropped 58%, while Gold has dropped only 31%. Can Gold or Silver drop further? Hasn’t it dropped enough already? If you wait for Gold and Silver to drop further, then will you not miss a bullish rally? You may, or you may not… no one knows for sure, as a lot depends on the changing fundamentals and the market forces, which includes big time intervention by Governments and Central Bankers to avoid a major recession. Hopefully, the following points will help clear some of these points for you.
If you think today’s price of Gold $1,587 and Silver $29.46 (at the time of my writing) are attractive price points to buy, then consider the following:
- Much like the USD, precious metals like Gold and Silver are also considered Safe Havens – however, there is one big difference… Gold/Silver is an inflation hedge against mindless printing of USD which will create inflation in the US economy over the long term
- Between Quantitative Easing 1 and 2 (2008 – 2010) Federal Reserve has printed over $2.3 Trillion (16% of its total debt $14.3 Trillion) to simulate the economy to avoid a major stock market crash and hence avoid a 1930s type depression. Unfortunately, all this printing has not resulted in a meaningful reduction of the unemployment rate, or increasing growth, or reducing the national debt – the too big to fail banks have become even bigger, the real estate market is still pretty weak, and now we have the EU crises… we moved from the Real Estate Bubble crash of 2007 – 2009, to the Sovereign Debt Bubbles presently looming in the EU and US, which are far bigger in size and impact if it were to burst.
- So far, in 2011, the macro funds have given some leeway to the Politicians and Central Bankers to get their act together. However, it seems more and more likely that there are no real solutions on the table and the market will sooner or later lose its patience and correct itself. This is when the next big crash happens!
- There is a very weak to almost absent political will or hegemony in the US or the EU to address real issues. The US super committee could not agree on a mere $1.2 Trillion cut, when they have over $14.3 Trillion of national debt… while the EU leaders just cannot seem to agree upon a common fiscal and monetary union, which seems to be really what the market is looking for to calm down.
- On Dec 8th & 9th the EU members got together for the 5th time this year to put up another comprehensive plan (which is now becoming a joke on the news media)… and “once more” they failed. S&P threatened to review the ratings of all EU countries failing this EU summit, including Germany and France amongst other four EU countries that have AAA rating. The markets (bond & equity holders alike) may react quite negatively if Germany’s rating is dropped from AAA, or Italy continues to refinance its $1.9 Trillion debt upwards of 7%, which is not sustainable.
- Any one of these or similar events may become an excuse for the Bond Vigilantes, and their likes, to lose patience and cause a domino effect for the global stock exchanges to crash around the world. Sorry to sound so pessimistic, but my point here is that if the market crash is imminent… then it’s just a matter of time, the question is what are you going to do about it?
- Okay, so back to the point… what the heck does all this have to do with Gold and Silver and the correct price points to buy them at!
- Here’s the point… if and when the markets crash (I mean really crash!) margin calls are made, which leads to “fire sale” of investments, like Gold & Silver, by macro funds and retailers alike, to pay up their margin calls. Massive selling of any item, including Gold & Silver, results in reducing the price of that commodity.
- So, if a stock market crash is potentially possible over the next few months… then is it likely for Gold to hit it’s 50% Fibonacci @ $1301.61 … and for Silver to hit its 61.8% @ $24.55 or even 76.4% @ $18.59? Maybe… maybe not… what do you think?
$21.36 is a tempting price point to start buying Silver… it is the high reached on March 17, 2008, which is now a decent support, and right between the 61.8% - 76.4% Fibonacci retracement levels.
As I said earlier, both Gold and Silver are Safe Havens – a good store of value, and hedge against inflation. I’ve made a lot of assumptions that may not necessarily play out at all, or in the order stated. The intent of this article is to raise your awareness around Gold and Silver, and consider some points while making the best investment decision for yourself. Good Luck!