INCREASED VOLATILITY

Day to day movements in the price of gold and silver have little relevance to overall price trends

Author: Lawrence Williams
Posted: Sunday , 30 Aug 2009

LONDON -

If one reads the daily newswire services coverage of the gold and silver price - and similarly for most other commodities too - undue importance is often imparted to intra-day price movements, yet these generally have little or no real significance in the overall scheme of things. I

What one really needs to follow are the overall trends as expressed by the markets - not only for the metals themselves but also for other significant market moving elements - of which the strength of the dollar is the most significant. With most metals prices expressed in U.S. dollars and most mining companies' revenues received in dollars an increase in metal price may simply be a reflection of a fall in the dollar - and this is then compounded by additional supply and demand factors.

Often too a perhaps undue correlation is given credence to price relationships between different commodities - like gold and oil for example - where they may both in reality be expressing the strength or weakness in the dollar, at least on a day to day basis. Longer term analysis though can strip out some of the day to day effects so not too much should be read into daily movements in commodity prices unless these form part of a longer term trend.

For gold and silver in particular, where industrial demand, particularly for the former, is perhaps less important than investor demand in setting the price trend - or it has been at least over the past few years - one only has to look at the charts to see the trend has been, and remains, very much upwards. True there are price spikes in both directions above and below the overall trend, but the latter is unmistakably upwards. It is noticeably apparent too if one looks at the charts how much more volatile silver is than gold, but the overall trends are remarkably similar with gold setting the basic silver price scenario.

Psychological barriers do come into play though, which can affect movement. $1,000 gold is one of these and probably $20 silver another. Round numbers such as these have little real significance in the overall strength patterns but they do represent relatively arbitrary levels at which perhaps more investors may decide to rake their profits. In recent weeks gold has been trading between about $930 and $960 and these seem to represent a range between which traders will buy and at which they will sell and quick movers can do well under such circumstances where the price seemingly jumps up and down between these levels.

Longer term holders though tend to ignore the trading ranges and are there for the duration - but the 'duration' means very different things to different types of investor. The true gold bulls for example may be looking for a huge price breakout up to $2,000 an ounce or more for gold - some say $5,000 - but this latter is only likely to happen alongside a catastrophic collapse in the dollar and the global economic and monetary system. Pray that this eventuality does not occur because the social and political consequences are extremely scary to contemplate. Hyperinflation - as has been seen in Zimbabwe recently - takes a horrendous toll on people across all spectra of society

A $1,000 - $1,500 gold price, which does seem to be a not unreasonable possibility over the next year or so would largely represent a serious decline in the value of the U.S. dollar against many other major currencies, and while this would be uncomfortable for many in dollar areas, although not for exporters (every cloud has a silver lining), it might not prove to be quite so socially disastrous. Indeed many economists feel that this may be inevitable given the huge U.S. deficit and the amount of money being pumped into the economy in an attempt to stave off a depression - recession is already with us. So even though the quantitative easing programme may be working in that there is a general feeling that the worst of the recession is behind us, there could yet be a sting in the tail for the American population - but under the better scenarios not a hugely disruptive one.

So why the difference in volatility between gold and silver, given the latter generally follows the former's lead? Arguably, and some would dispute this, gold is a monetary metal while silver, although it has a monetary history and retains some monetary overtones, has much more in the way of industrial usage affecting its price. Thus when the bottom dropped out of the general commodities sector in the second half of 2008, while gold's fall was relatively limited, silver dropped much more drastically in line with the industrial commodities - and while gold is now only a little lower in percentage terms than its 2008 high spot, silver is still hugely below its 2008 peak. To the silver bulls this thus still represents a big buying opportunity with the perceived pick-up in industrial demand giving the potential price an additional boost to recover more of the lost ground. But price behaviour over recent years suggests that it will still need to take a lead from the gold price for its overall direction - it is likely to just move further and faster in whichever direction the yellow metal moves. There is also considerable discrepancy in views on the strength of silver supply and demand - as indeed there are different interpretations of gold supply and demand but perhaps not to the same extent.

What has made a difference, though, to the prices of both metals has been the strength of investment demand, for both the metals themselves and also as shown in the strength of exchange traded funds and the huge holdings of metal within these. This does add another element of price danger into the equation in the form of an overhang which could feed its way back into the market if investors feel it is time to sell.

But the big reason behind the investment demand has been uncertainty over the global economy - the 'safe haven' element and while economic turmoil persists, which may well be for a few more years yet, then serious selling of ETFs and bullion is unlikely. This investor demand has flattened, but has not gone away, and with central banks seemingly less inclined to sell their gold, the market has been able to absorb the amount of scrap coming on to the market generated by the higher prices, and the recession-driven decline in jewellery sales. But the resulting supply/demand balance is much more difficult to predict going ahead than in the past.

Overall the trend in price remains upwards for both gold and silver. The question is does the recent volatility in the price of both metals suggest the start of a change in pattern, or just a blip in overall price growth. We would cautiously suggest the latter, but that remains to be seen.

Personal Comment : As of last friday aug the 28 th the price of gold on the TSX was $958,80 and the price of silver was $14.82 for a ratio of 64.7 at it's high of 2008 the ratio was about 50 , given the actual price of gold rounded up at $959 if the ratio between gold and silver were to be reduce by half the difference between now and then we would have a ratio of approximately 57.3 and the price of silver would be $16.74 .

Applying the same ratio to a price of gold at $1100.00 silver would be $19.20

At $1200.00 for gold silver would be valued at $20.94

At 1300.00 for gold silver would be at $22.69

Considering an analyst from India who predicted the price of silver could rise from sept 09 to dec 09 from around 23,000 roupis to around 28,000 roupis consequent on the ongoing wedding season there , silver's price would be going up by almost 22% at the actual price this would mean the price of silver could reach $18.08 and if the actual ratio between gold and silver were to remain the same as now ( 64.7 ) the price of gold would be $1169.80 if that ratio were to be 57.3 gold would then be at $1035.98

As stated in the previous article many factors influence the prices of both silver and gold including the $US value , we're now at a point where many analyst predict a coreection in expectation of portfolios reshuffling in anticipation of the triple witching hour coming up sept 17 th and the US fed deficit to be announced following sept 30 th .

A little more then a week ago treasury announced the deficit would be $220 billion less then expected and that the ffed would keep interest low in the coming months so we may assume that those news have been computed by the markets already .

On the other hand september marks the return to work for many institutional professional and also the return of a lot of retail investors waiting to see if a correction will happen in order to take advantage of a market many of them have been shy of this year, wether or not a correction happens this september many of them will want to get back in by the end of september in fear of missing out more considering the rise the market had this summer thus bringing upward pressure on the market and maybe pushing back the correction further in the fall .

One must also consider the inevitable ongoing stimulus package effect in the US wich will last trough 2010 and of wich only a fraction has been used by now bringing some more liquidity to an economy in great need of it. Other recent important news stated the fall in US industial inventories beyond expectation spurring renewed industrial production aheadand with it increase revenues and profits though probably still way under the highs of recent years considering the state of consumer demand affected by unemployment both in the US and worlwide .

All in all it's my personal belief that the markets have more positive ongoing then negative while at the same time the reduced sale of gold announced by the ECB this month and the will of some countries to increase their gold reserve among wich China will along with the long term uncertainty about the $US push the price of gold higher and along with it it the price of silver wich will also gain from industrial growth thus reducing the ratio between them to a somewhat lower level somewherere between 55 and 60 .

Being no professional and trying to be conservative it's just my personal opinion that the price of silver should reach somewhere between $16.00 to $18.00 before the end of this year and the price of gold might range between $960 and $1170 .

Regards Tec !