Have Gold Prices Stopped Falling? - 27 May 2011

Record highs in Euro gold prices suggest the market has found a floor...

WE'VE SEEN Gold Prices fall from $1,578 to $1,492 in recent weeks – a 5.45% drop. Gold Prices in the Euro it fell from €1,065 to €1,042 – a fall of 2.16%. The fall of gold in the Euro painted a more accurate reflection of supply and demand, because the Dollar rose against the Euro, as gold was falling, reckons Julian Phillips at GoldForecaster.

This was simply a correction, provided the Gold Price has stopped falling now. A fall of 10% is a proper correction and a mid-trend correction fall should be around 20 to 30%.

The fall appears to have been caused by a big investor and his following virtually dumping around 37 tonnes in a two week period into a market that is used to seeing around 6 tonnes a day from the producers.

Pity he didn't have a better dealer. This seller appears to have completed his sales (if it was George Soros, then he has completed them, for he only held 30 tonnes apart from gold shares).

The fall from just about $50 to $32 rattled the entire market. After all, a fall of 36% is a major trend correction were it broad based from many investors over a period.

But this drop was again due to awful dealing with 1,000 tonnes from the Silver Trust's holdings coming onto the market over two weeks, with the bulk dumped into the market in the second week together with another 7 tonnes from similar thinkers.

With the Silver Price back above $37 the drop is now down to a fall of 26% from the peak of $50. Again the selling has largely stopped with two-way traffic now in play.

The gold market is a global, well centralized market based in London, where heavy sellers and buyers are brought together quickly and a well-priced deal made that cuts out the bulk of the volatility we see in the silver market.

The London Fix is where potential buyers and sellers of physical gold sit on the end of their telephones twice a day and see what's on offer and what the bids are for it. Even the appearance of a large amount such as we saw from the States is swallowed up quickly and in an orderly fashion.

The value of an ounce of gold at 41 times the price of an ounce of silver increases the liquidity for the big players in the market, making it easier to move large amounts quickly.

Silver has nowhere near that level of liquidity or depth of investors. The type of investor is wide from institutions to industry from the small investor to the large one and a fully global market at that.

However, the day-to-day dealings, while well-organized, are not sufficiently large in two-way traffic to accommodate the sudden appearance of 1,000 tonnes in two weeks. This is why the market is so volatile and swings so widely, compared to the gold market.

The silver market will, over time, see a lessening of volatility once prices are higher and silver more accepted as a precious metal more closely linked to gold. We would then expect to see Silver Prices move far closer to those of gold.

Bearing in mind that the fundamentals for silver's traditional uses and industrial applications are either for investment, jewelry or much needed applications in industry, the fundamentals for silver are just as they were while the Silver Price was rising and are unlikely to change. These users will be delighted with any pullback, but tend to be price-insensitive.

That means they need silver no matter what the price. As to the investment demand for silver, this is at its largest from the emerging world and is likewise relatively price-insensitive. People from this part of the world are buying in line with their increasing income and ability to buy. The price rises have simply confirmed the wisdom of such a policy.

The same applies to the gold market, but with the added feature that central banks are buyers as well. These too are price-insensitive buyers, simply taking up gold as it appears on the market, without chasing prices.

The prices of both gold and silver have risen from their recent bottoms and have begun to rise. This is a classic 'floor' finding exercise.

Silver has been the slower mover and has waited for gold to lead the way. In the Dollar the Silver Price is recovering and is now moving through the $37 level. In the Dollar the Gold Price still has another $50 to rise to its peak levels too. This is another 3% more. Silver at $37 still has to rise another 26% to reach its peak.

But what is hiding their moves has been the rally in the Dollar itself. In the Euro silver fell from €33.56 to €22.53 a fall of 33%. It now stands at €26.3 a fall of 21.6%. This shows it is recovering faster in percentage terms, once we extract the Dollar gyrations.

It is clear then that support is now effective and holding up both the prices of gold and silver in the market. Especially if we look at the Euro Gold Price – which set a new record high this week.