What To Make Of Gold And Silver Pullback?
The precious metals markets have been rocked in recent days as the U.S. Dollar has been strengthening and large hedge funds and institutions sell winners to raise cash. The losses have been jarring, particularly in silver. The iShares Silver Trust ETF (NYSE: SLV) is down around 20% in the matter of two days.
Silver in particular looks worrisome due to the fact that it has now broken through previous support which goes back to last May after prices collapsed from just under $50. The low that the SLV hit during the last silver crash was $31.83. On Friday, intra-day, we are trading at $31.15, and it appears unlikely that the SLV will close above its previous support level.
This could be problematic, but some things should be put into perspective before investors decide to panic. First, silver continues to be in a major bull market. Major. Furthermore, the silver run has not lasted that long at all. At the beginning of 2009, the SLV traded at around $11. For the sake of comparison, gold has been in a 10 year bull market.
Now the skeptics will surely say that silver is merely in a bubble, and discount the rally that we have seen over the last couple of years. While this could be correct, given the violence of silver's rally after years of dormancy, this is likely the middle innings of a much bigger trend. If you don't believe it, this recent sell-off might be a good opportunity to short silver on a snap-back rally.
Furthermore, the fundamental picture for silver has not changed very much in the last couple of days. This is not a fundamentally driven sell-off. Rather it is liquidation by funds looking to raise cash amid a panicked move out of stocks and commodities. Despite the most recent massive sell-off, silver is still positive for 2011, rising around 2.50%, compared to a loss of 10% for the S&P 500. Over the last year, the SLV is up around 50%.
Now onto gold. The sell-off over the last couple of days has been very deep, but we are only back to levels seen last month. At this point, it is not time to panic in the gold market. The world is awash with debt, the Eurozone is about to experience a crisis of epic proportions, and the likelihood of QE3 is rising everyday.
Against that backdrop, gold is likely a solid buy amid the volatility. The SPDR Gold Trust ETF (NYSE: GLD) is still up around 16% year-to-date and better than 8% over the last 3 months. The long-term trend in precious metals remains up despite the current market fear.
