The sharp drop in the gold and silver price last week to around $1,720 and $32 respectively, in the context of rising eurozone yields and falling global stock markets is setting the scene for a 2008-style correction. We even had the ultimate contrarian indicator with Jim Cramer say another big fall in the euro would be a precursor for a big lift-off in precious metals. There is no sign of that happening yet, quite the reverse which is what you would expect on the precedent of late 2008.
Margin calls
For as financial markets sell-off there is a liquidation of all asset classes to meet margin calls in falling markets. This is self-fulfilling and self-fuelling and there is little reason to believe this time will be substantially different to 2008.
Look at the high Vix volatility indicator and low stock market volumes last week. These charts are very similar to late 2008. Some traders in precious metals will undoubtedly jump ship now, so we hope this analysis is correct for them. However, ArabianMoney hates to be short of precious metals in these markets. Last autumn the downswing failed to materialize for gold and silver and those who held on reaped big rewards and the market timers lost one of the few recent opportunities to make money.
Hedged position
Our newsletter is advising a precious metal position hedged with bear market ETFs (subscribe here). That way if the markets crash and bullion follows then you will be protected from 2008-style losses. Alternatively if the eurozone cisis suddenly comes right then you will benefit from the shift to bullion as a hedge against inflation.
The long-term chart for gold does not help us much at the moment. It could go in either direction:
That said we note that the precedent from 2008 is for a very rapid recovery of the gold and silver markets. Therefore a correction would also be a buying opportunity. Hence we can still argue that silver is the biggest winner long-term even if the price takes a battering in the short-term.
