PM Bulls, Why the Long Face?

October 17, 2008


In spite of false claims of falling demand, gold and silver are actually victims of hedge fund and investment bank liquidation. Although gold and silver are expectedly at cyclical lows, many investors and even gold bulls are in panic mode.

In fact, there's been a full divergence between gold and silver index prices (on commodities exchanges and ETFs) and the price of the physical metal. For example, the silver American Eagle common date coins usually sell near the market price per silver ounce; however, they're now selling for 50% higher than that amount. That's right, physical silver prices (and gold as well) are not nearly as low as market prices. Furthermore, the US Mint will not sell silver American Eagles until further notice.

Physical gold and silver prices are actually doing quite well this year (see chart below). In 2007, you may recall that gold spent most of the year trading below $ 690 and its 2007 high near $ 840 didn't occur until November. This year, gold has risen above $ 900 each and every single month thus far. Yesterday's pullback below $ 800 should be seen as a great buying opportunity for traders and investors.



Similarly, silver spent the majority of 2007 near $ 13 an ounce reaching highs of just $16. In 2008, silver has remained above $ 16 for most of the year and recorded astounding highs above $21. Over the past 3 months, the correction has brought opportunities to get in on the hottest precious metal.

Physical gold demand has not decreased even in face of global metals ETF and contract sell-offs. Thus the question for precious metals bulls remains, why the long face? Now consider these recent events:

- The America's largest coin dealers continue to report difficulty filling customer orders and an unprecedented surge in business.

- German gold demand is up 10 fold and dealers run out of bullion as investors seek safe haven.

- India will start selling gold by the gram at post offices nationwide.

- The Indian gold buying season, Diwali starts next week, in time for a cyclical high at the end of the month.

During the global market downtrend over the last few months, the dollar has quietly risen into extremely overbought territory and the charts signal a big tumble is imminent (see chart below). Today, just 2 days after the full moon cyclical low, we're calling for a reversal in $ USD index. This usually means positive gains for equities and precious metals -- right on target with our late October new moon high forecast.