Gold Continues Lower

Monday, 02 December 2013
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Published in Gold Investing
Gold prices to hit floor. Gold prices to hit floor. PhotoDune.
Asian demand for physical gold stepped up to slow the fall of gold and silver prices, as demand for bars, coins, and jewelry picked up in China — but it wasn't enough to reverse the recent downtrend. In early trading on Thursday, gold was down another $33.16 to $1,241.74 an ounce; and silver prices firmed up just under $20.

Fiscal-Cliff

The price action left the silver/gold ratio, the amount of silver it takes to buy one ounce of gold, at 63. That means that silver has taken the brunt of discounted prices, which is not unusual during times of high industrial demand for metals.

Unlike gold, which is mined as a target product, silver is a byproduct of mining other types of metal. This is an oversimplification, but the upshot is that when industrial metals are in demand, silver production can increase independently of the demand for the metal itself. That quirk in the silver supply chain is one of the factors influencing the silver/gold ratio.

Times like these are a bonanza for those who make small, regular purchases of gold & silver...

While physical demand for gold picked up as prices crossed $1,260 an ounce, it wasn’t enough to staunch the drop in gold prices. My sense is that we will continue to see softness in commodity prices, and apparently many investors agree as holdings in the SPDR Gold Trust, a gold ETF (Exchange Traded Fund), declined for a third straight day to levels we haven’t seen since early in 2009.

The influx of gold from investor products, like ETFs, was enough to offset an increase in demand for physical gold from India. Even though demand was 25% higher during the fall festival season in India, prices were lower by a similar percentage.

While investors may lament the soft market for precious metals and shift their money to equities, times like these are a bonanza for those who make small, regular purchases of gold and silver as part of their investment strategy. The money you invest every month is now yielding a few extra coins and bars in the package. It’s a buyer’s market, and brokers are ready to deal.

So how much lower can gold and silver prices go? Since prices are typically soft in the spring and summer anyway, I look for prices to trend down the rest of this year and into at least the first half of 2014. It’s possible we could see sub-$1,000 prices for gold; but somewhere in the $1,100s for a floor seems more realistic.

For sure the window for selling precious metals is past, and this is the time to be skimming profits from equities and accumulating small lots of physical gold and silver. With forward downside softness in prices I wouldn’t get silly about accumulating too much at one time. Just by way of a reminder, the people who looked like geniuses in 2010 were the ones selling small lots of gold and silver and shifting money to equities.

The problem with opportunity is that it’s not always apparent until we see it in the rearview mirror.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.