This PM Slump Is Only a Healthy and Overdue Correction

Friday, March 21, 2008

Enjoying 2 weeks in Paris I should concern myself with the truly beautiful issues in the world as there are the unmatched elegance of Parisian women crowding chic cafes, seafood platters that want you to forget the over-fished oceans, wine whose quality has profited from global warming and a general attitude that money is only a medium of exchange for the extravagant delicacies on every corner of a world where inflation seems to be only a technical term but not an existence threatening economic reality.
Well, one ride with the Metro shows that those who were priced out of the rental/property market on the shores of the river Seine have again descended to the netherworld as did their ancestors 3 centuries ago when they populated the catacombs, miles of tunnels stemming from Roman times and giving shelter to 1000s of poverty stricken people for many decades.
So much about past volatility in property markets of which Paris was the most sought after in continental Europe.
Looking at current residential property offers Paris has long surpassed the €10,000 mark per square meter (roughly 11 square feet) with prime locations topping out some 50% higher.
Some emergency sales by foreigners, who drove up prices in order to get a glimpse of the Louvre, may soon prove that such levels are difficult to sustain as soon as easy credit wanes.
But I am straying from my original topic, the global meltdown of precious metals prices.
Don't worry as this is only a healthy and overdue correction in a strong bull market.
Lacking answers for the suddenness and the strength of the downmove that knocked gold down 11% from $1,025 to $909 at the time of writing (silver dropped 20% from $21.20 to $16.85) within 4 days I hope the following questions may represent a guideline that may help you not to throw away all nerves and - mon dieu - your gold and silver investments.
Here come the questions. Find the answers yourself as it is always best to invest along proprietary knowledge and not the advice of others (when did your broker recommend precious metals investments the last time?)
  • Why should Federal Reserve Notes reverse their slide since 2001 when the Fed uses every opportunity to crank up the electronic printing press?
  • Both the Fed and the ECB have been lamenting a worrisome inflation outlook for some time now. Have they enacted a single (tightening) step since? (I am talking action, not empty words.)
  • Can you see any structural improvement in the triple US deficits?
  • Do you think commodity prices in general will descend again in a world where some 3 billion Asians will have evolved from paupers to car-buying consumers soon?
  • Did you come across any news that South Africa has yet found a way to solve its energy crisis that severely cut PM output?
  • Do you have a clear picture on the physical PM demand in the Eastern hemisphere?
  • How many of the last 100 persons you spoke to have actually invested in gold/silver yet?
  • Do you think the banking crisis is over or will we see more failures?
  • Oil hit $100 before correcting to $88 earlier this year and nobody forecasted the end of the 7-year uptrend. Why are MSM so quick to call the death of the PM bull market, now in its 8th year too?
  • Relating to gold's 11% drop this week: Did capital markets stabilize by 11% in the last 4 days?
  • Can you name another asset class that is a store of value in itself and not somebody else's obligation.
  • Did gold ever lose its value in the last 3,000 years?
  • Global gold production may actually fall this year below 2,500 tons while demand hovers around 5,000 tons. Is this good or bad for prices?
  • Short positions in COMEX gold and silver have kept rising through the latest record advances. Who are those "investors" that can afford to short such markets without running into serious margin calls?
  • Assuming you hold bullion: Have you sold any of it or are you keeping it in the vaults despite the recent hammering?
  • Assuming you do not hold bullion: At what price will you allocate 3% to 10% of your assets into PM's?
  • When do you think that other investors will raise their asset allocations in favor of PM's?
  • Have you discovered another inflation-proof asset recently?
I am confident readers can add many more self-answering questions. I am looking forward to your additions (and whacky answers) in comments.
Enjoy the holidays. It may be the time when the PM bull resurrects itself for the coming weeks. I uphold my view that we will see gold climbing above $1,100 in this spring cycle.


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