Markets collapse, silver static, platinum falls below gold.

Gold has soared ahead of the platinum price for the first time in over a decade, while silver has stuttered. Where do we go from here?

Author: Lawrence Williams
Posted: Tuesday , 09 Aug 2011

LONDON -

Realisation has dawned, not before time, on the investment community and the general population, that the global financial problems are, indeed, serious and gold appears to have been the major beneficiary to date. Interestingly, other precious metals have not moved up alongside gold, as has tended to be the norm - indeed they have either fallen back or stuttered. But if one looks at demand for these other precious metals this is not really surprising. Indeed, it is surprising that they have not fallen back as much as might have been expected under the circumstances, particularly in the case of silver.

The reason for this, of course, relates to the degree of industrial usage in the demand for the precious metals. Gold's industrial usage is relatively small in relation to its industrial demand. Silver demand is perhaps relatively evenly divided between investment and industrial use, while platinum and palladium have a far stronger industrial element in their demand. And, given that much of the economic uncertainty revolves around fears that U.S. and Western economies may not be recovering as expected, while there are some doubts expressed over Chinese growth being maintained at recent levels, the moves by the precious metals begin to make sense.

The doomsayers have been predicting another market collapse for some months now and found it difficult to understand what seemed to be climbing stock prices in the face of what they saw as an obvious financial meltdown brewing. The gold bulls have been predicting the rise in price - but the speed of the increase in the past couple of weeks will have taken many of even the ardent bulls by surprise.

But then the silver bulls have been looking for an even sharper increase in their favourite metal, but it hasn't happened - yet!

One has to learn from 2008 though when worries then about global recovery sent stocks crashing - and industrial commodities - and related mining stocks - were amongst the worst hit of all. So far this time, one could say that silver, in particular, which suffered really badly in 2008 falling from over $20 at peak to around $8 at its nadir, has actually performed pretty well by comparison. This could bode particularly well for its future once the market falls are over, assuming it can maintain its position. To a great extent the silver price consolidation is almost certainly because of continuing strong investment demand from the Near and Far East, which was not quite so apparent three years ago

But the portents for the markets do not necessarily look good at the moment. If we draw parallels with2008/9, markets fell around 50% from peak to bottom and if this pattern repeats there's an awfully long way down to go yet and virtually all kinds of stocks and commodity prices could be hit again too - even relating to those which are considered safe havens like gold. Putting such parallels in place, the S&P could fall to around 675 and the FTSE to 3000. Very worrying statistics for market investors!

But before gold stocks investors start patting themselves on the back for selecting the ultimate safe haven, it is worth noting that gold itself fell around 30% and the Amex Gold Bugs Index - the HUI - fell more than 60%, although both recovered far faster than other market sectors. Gold for example regained its losses in about 4 months, while the S&P at its recent high point still remained well below its 2007/2008 peaks.

But maybe things will be different for precious metals this time. The big problem though is that if markets continue falling, potentially strong sectors, like gold and gold stocks, need to be sold off to cover losses elsewhere - hence everything can fall back, and probably will. Juniors become particularly vulnerable as sources of finance tend to dry up.

What the precious metals investor may have learnt from 2008 though is that the market collapse then created some enormous buying opportunities. In the three years since 2008 fortunes were made in carefully picked gold stocks and the same could happen again. The problem here is to get back in at, or near, the bottom and that may not be for a couple of months yet and stocks could fall a long way in the meantime.

On the other hand, markets are fickle. They are falling at the moment because investor confidence has diminished dramatically - not necessarily because companies are doing any worse. Indeed gold producers at the moment should be making record profits given current prices and they find it hard to understand why their stocks are falling too. The gold majors should be the safest options but these have all also come back between 5 and 10% in the past few weeks - even Newmont which has promised to tie dividends to the gold price and thus promises increased yields for investors. The falls here are not nearly as bad though, as say major banks. Bank of America for example has fallen more than 30% in the past few days.

A change in sentiment though will see markets recover, but now no-one believes politicians' attempts to talk up the economy. The U.S. in particular, shot itself in the foot over the debt ceiling wrangles and this, taken in conjunction with the Eurozone debt problems and the S&P downgrade, was probably the straw that broke the camel's back. It may take some time yet for investor confidence to recover.

But what about the other main ‘precious' metals - silver, platinum and palladium. In 2008 silver plunged around 60%, platinum around 65% and palladium around 70%. Horrendous figures for investors at the time. This time around - again assuming a parallel crash to that of 2008, there is a chance that similar plunges will not occur - at least perhaps not to the same magnitude. Gold is a great deal higher now and there has always been an element of the other precious metals moving in conjunction. As noted above, silver has become much more of an investment metal in its own right - particularly as gold has become too expensive for the smaller investor to purchase and they are finding an outlet in silver which perhaps was not there three years ago. The fact that platinum is currently selling at around below the gold price - a situation that has not tended to persist for long in the past - may lend some support here too and palladium may well move in concert. The suggestion here is that either gold is due a fall from its current heights, or platinum may pick up a little.

The situation is certainly interesting and will tax the thoughts of those looking to protect what they have. To this observer the gold price at current levels may be a little vulnerable to profit taking, while there may be a flight to cash as investment professionals seek to try and buy time until they have a better handle on which way markets will move. Uncertain times!