MARKET STRATEGIST, GFT
PRECIOUS metals have had a particularly rough ride of late. Gold has struggled since hitting a fresh all-time high just under $1,265 on 21 June this year, while silver has also retreated sharply after jumping 30 per cent in the first quarter of 2010.
Technically, prices for both metals have broken down below significant support levels. Silver fell below its 50, 100 and 200-day moving averages (DMA)?some days ago, while at the time of writing, gold is comfortably below both its 50 and 100-DMAs, falling down to $1,200. This certainly represents a target for sellers, yet a move below here doesn’t invalidate the bullish argument for the metals.
Bullish investors tend to interpret such prolonged sell-offs in precious metals as a result of speculative leveraged holders relinquishing their positions. As a consequence, such moves provide the perfect opportunities for long-term holders to add to their positions. For committed bulls, precious metals are the only assets worth holding in uncertain times. Their argument is that all fiat currencies are at the mercy of self-serving governments and central bankers. Consequently, physical precious metals are the only universally recognised stores of wealth and mediums of exchange. With a number of emerging market central banks (notably China, India and Russia) still apparently anxious to diversify their foreign exchange reserves away from fiat currencies and into gold, there should be a floor to how far prices can fall.
But silver has even greater trading potential than gold. Not only is it an investment metal as it can operate as both a medium of exchange and a store of value, but it is also viewed as an industrial metal, which is both a blessing and a curse. It has applications over and above being used in jewellery, such as in photography, batteries and printed circuits. This means that it sometimes moves with the business cycle, in a similar way to copper. But for speculators who are looking for volatility and believe in the fundamentals of the gold trade, exposure to silver can be an exciting alternative.