Why are Gold and Silver Prices Falling

There is simply too much going on the precious metals markets currently not to comment on it in some detail. The questions begs…why are gold and silver prices falling?

A few weeks back gold and silver prices experienced some of the biggest drops in the last 30 years. We wrote about it at the time and mentioned that the price action for the precious metals had been weak for a while. After a 12-year cyclical bull market it was only natural for gold and silver to take a break.

Gold (and silver) hadn’t responded well to the circus in Cyprus and once they closed in to some significant technical support levels there wasn’t much that could stop prices from breaking through. All it would take was a little push. Now, that little push actually turned out to be quite a big push.

Over the course of just a few hours sell orders of 425 tonnes hit the market. Now, to put that into perspective, 425 tonnes is about 17% of annual gold production. Was there a hidden agenda behind the sale? Perhaps. Surely, someone who wants to get a good price for his sale will avoid flooding the market. Another possible explanation was that the sale actually was caused by a forced liquidation as a result of the recent plunge in Japanese bond prices.

From an academic point of view it can be interesting to speculate on the causes behind the drop, but what is much more interesting for us as buyers of gold bullion and silver bullion is to look at what could happen next.

The graph below shows the recent spot prices for gold…


…and for silver.


As we wrote, there was a high likelihood for the rally in prices that we saw following the significant drop to retrace. This development is now almost complete for both gold and silver prices, although it is better illustrated in the graph for gold. The move in silver prices was especially violent as prices tanked at the open the other day, dropping as much as 8% to a low of $20.25, which was considerably lower than the $22 area it dropped to a few weeks back. Prices did recover later, back to the $22.50’s but most likely the damage is already done. Silver has dropped to September 2010 lows and its ratio to gold is the highest it has been in 33 months, according to Bloomberg.

So what can be expected in the near term future? No one knows for sure of course.

The bad news is that gold and silver can go lower now. The good news is that if that happens you will be able to accumulate precious metals at increasingly attractive prices.

Don’t be fooled by the current stock market rally, which to a large extent is driven by money printing, which is inflating asset prices. The spot prices (“paper prices”) for gold and silver will rise again as soon as we see trouble on the horizon.

When you decide that you need to buy silver bars, silver bullion or gold bullion it will be difficult, or even impossible – since everyone will be thinking the same thing. In the past, that has lead to supply shortages and significant premiums. Instead of waiting for finding gold and silver bullion for sale, the best way to handle the current situation is to buy precious metals now, while you can get them at attractive prices. If you continue to accumulate gradually you will ensure.


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