By Peter Cooper
Last week gold and silver prices advanced by three per cent while the S&P 500 lost that much in its worst week for two years. Is this a new trend?
Gold has almost certainly traced out a bullish triple bottom in its price chart, although the position looks less clear on the silver chart. Many areas of the US stock market are already past 10 per cent corrections while the major indexes are the last dominos to fall and on their way down now.
Safe haven status
Is this a straightforward rotation into safe havens? T-bonds are also up. Riskier assets like junk bonds are out of favor like small cap stocks. True but this is not going to be a repeat of the 2008-9 wipe-out for precious metals for three reasons.
First, gold and silver have just completed a three-year-plus correction. They are not at the top of their cycle waiting for a correction like equities today as they were in late 2008.
Secondly, this time is also different in that investors are now worried about paper money as a future store of value. What if the central banks respond to a stock market crash by cranking up the money printing again? That’s what happened last time. This will create inflation which is bad for paper money and good for gold and silver.
Thirdly, there is a linked concern to the underlying stability of bond prices. If investors panic and sell these low yielding assets for fear of inflation then what would be left with fundamental value? Only precious metals and that would be self-fulfilling as investors sold the huge bond market and bought the tiny precious metal markets: prices would go through the roof.
Of course, anything can happen in the short-term. Mini-rallies on calming words from the Fed as happened for one day last week. Big scale manipulation of bullion by the central banks as in September But the bigger picture will always triumph against such background noise.