As the U.S. dollar appears to strengthen in the global market, precious metals such as gold and silver have taken a significant dive in value. Although it remains unclear how long this downward trend will last, precious metal investors should take note of the increasingly volatile conditions surrounding gold and silver markets, and may wish to adjust their investment strategies accordingly.
According to a report by Forbes on Tuesday, Sept. 9, gold for December delivery dropped to $792 an ounce on the New York Mercantile Exchange, after earlier falling as low as $779.70, the lowest settlement price since Oct. 12 of last year. Gold has declined in value by more than 18 percent over the course of six months, when the metal reached a record-high average of $968.43 per ounce last March, according to Kitco.com.
The price of silver has taken an even worse nosedive in recent months. The average price of silver peaked in July at$18.03 per ounce, whereas the price of silver closed at $12.06 on September 8, according to Kitco.com; a decrease of 33 percent and a record low for 2008.
“The overriding theme in metals, energies and other commodities continues to be the utter implosion in this niche—one that shows few signs of abating just yet,” Jon Nadler, an investment products analyst for Kitco.com, said in an online commentary.
Precious metal prices plummet in an increasingly volatile market|]Experts speculate that precious metal declines may be tied to the decline in crude oil prices, according to the report by Forbes. If so, a continual decline in oil prices may be bad news for gold and silver investors. However, the strength of a short-term correlation between crude oil and precious metal investment performance is fuzzy. For more information, read our previous article, Gold and Oil: What is the Correlation?
The short-term outlook for precious metal price performance, especially in the case for gold, varies among analysts. Proponents of a short-term recovery believe that the precious metal has been oversold and prices will soon improve based on technical selling patterns related to a weakening dollar. Gold prices, for example, made a modest recovery on Thursday, Sept. 11, as the value of the dollar slipped against the euro after reaching a one-year high, according to a report by MarketWatch.
“With technical indicators suggesting the metal is heavily oversold we could be due a larger end-of-week bounce,” James Moore, an analyst at TheBullionDesk.com, said in a report.
Furthermore, the dollar should continue to stay weak against currencies that are important to the gold market, such as the India Rupee, the Chinese Yuan and the Australian and Canadian dollars, according to Daniel Sacks, a portfolio manager at Investec Asset Management, as quoted in Forbes.
Bullish market analysts also contend that the bottom has almost been reached and gold prices won’t fall any lower.
“This game is only half over. The best half is yet to come,” Roger Wiegand, editor of Trader Tracks Newsletter and The Rog Blog, said in an online commentary. “Just consider our current weaker selling point as being half-time in a big football game. Futures and commodities will provide some of our largest, consistent winners with gold and silver during the second half.”
According to Sacks, gold prices won’t sink below a lower limit of $750 per ounce, or else gold producers would have to start closing mines.
In spite of some bullish optimism surrounding the market, the outlook for gold remains extremely volatile and can fluctuate widely on a day-to-day basis. Some analysts believe that gold prices will sink even lower before they begin to show reliable signs of improvement. Again, opinions among market analysts are largely dependent on their outlook for the dollar, as well as whether or not gold remains overvalued.
“From a fundamental point of view I would expect (gold) prices to be stronger over the coming months due to high demand, but from a technical point of view there are reasons to believe they may go even lower,” Commerzbank analyst Eugen Weinberg said, according to a report by Reuters on Friday.
“My current estimate is that it will take at least a year to work off 7 years of built-up optimism,” Gary Savage, a commodities investor and publisher of the newsletter Smart Money Tracker said in an online commentary.
Although the short-term performance for precious metals seems difficult to predict, the long-term outlook for gold and silver appears more propitious.
According to an article published earlier this month by the online mining publication MineWeb, “gold price fundamentals are strong.” Demand for gold, for one, appears to be on an upsurge, particularly in U.S. and Indian markets. Furthermore, production appears to have slowed in South Africa and Australia, the two leading gold producers in the world. The lack of new gold deposits being discovered further supports the notion that gold is becoming an increasingly scarce commodity.
A similar case can be made for silver, particularly in terms of demand. Silver has a wide range of uses; it is primarily used in industrial applications, as well as jewelry, photography and silverware. It appears unlikely that silver will be synthesized any time soon, and as more industrial uses for silver are discovered, demand for silver should remain strong. For more information about investing in silver, read our previous article, A Silver Lining in an Unstable Market.
But unlike gold, silver’s production and scarcity has not yet reached a critical turning point. According to a report by MarketWatch last month, U.S. Silver Corporation reported July silver production was 179,400 ounces, 30 percent higher than the average monthly production in the 2nd quarter 2008 and 94 percent higher than the average monthly production from 2007. Silver, it would seem, is still in abundant supply.
In conclusion, both gold and silver are notoriously volatile markets, and are especially subject to fluctuations as the U.S. dollar and crude oil prices struggle to reach stability. Investors should keep an eye on these markets in determining appropriate short-term investment strategies, taking into account the higher level of risk. Because gold in particular has fundamental attributes—high demand and scarcity—that are major determinants of its value, it is still considered by many to be a decent long-term investment in a balanced portfolio.