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Guest Post: Expect Increased Volatility for Gold and Silver

January 21 2011, 11:15

FMX | Connect – www.fmxconnect.com - (Reported 1/21/2011)

Expect Increased Volatility for Gold and Silver

By Laura Gross

This month both gold and silver have fallen, but this is, in part, due to seasonal activity and to be expected. Typically gold and silver rally in December as there is a great demand for physical metals in Asia during that time of the year. Then traders take profits in January, and that's when you see the fall off.

But lately, gold and silver are falling for another reason. Based on verbiage in the Dodd-Frank Act and a recent CFTC vote, however, author Chris Martenson believes that JP Morgan has already won this battle because there are enough loopholes for the banks to skirt. Martenson states, “While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM’s (and HSBC, et al) current outlandish positions. (Click here to read the full article: http://www.zerohedge.com/article/guest-post-jp-morgan-wins-cftc-position-limits-do-not-apply-them

Elsewhere, Robert Kiyosaki of Rich Dad, Poor Dad fame notes, “The laws passed by the CFTC and Congress take effect by March 2011. If the laws aren’t repealed, the big commercial banks will be forced to buy silver to replace the silver they’ve been borrowing. . . This means the big banks and COMEX will be doing everything possible to keep the price of silver low so that they can buy silver to cover their exposed positions. In the next two to three months, you will probably see huge swings, up and down, in the price of silver.” Click here to read the full article: http://finance.yahoo.com/banking-budgeting/article/111838/sell-gold-buy-silver Kiyosaki’s predictions so far have proven correct: as I write, silver is trading at $27.54 an ounce, which is an 11% drop in just sixteen days. Gold has fared slightly better, falling just over 5% in the same time period.

Some including Martenson believe that JP Morgan and HSBC have already won this battle, but the one thing that the banks cannot control is the public’s demand for physical metals. Earlier this week, the US mint hit a new record for selling 4,588,000 silver eagles for January, and the month isn’t even over yet. This means that however low the short sellers push the metal, more buyers are coming in. James Turk maintains the physical market for silver is incredibly tight, and there are all kinds of reports about how silver is not currently available in large volume. It is impossible for this situation to continue much longer without resulting in a short squeeze. Basic supply and demand factors will then force the prices for silver higher. And as I have pointed out before, gold and silver travel in tandem, so as silver moves higher, gold will follow.

As Rick Rule has discussed on King World News, we should expect to see wild swings to the upside and downside for both gold and silver. Jim Sinclair believes $100 - $300 moves in a single day are possible for gold moving forward. These new levels of volatility can cause headaches for many investors, especially initially. Until fall of last year, silver mostly traded sideways, meaning it didn’t move much to the upside or downside. By late August, however, both gold and silver started impressive ascents, underwent a couple of significant price corrections, and finished strong by the end of 2010. I expect the same pattern to continue this year, albeit with increase volatility. For those of you who invest in physical metals, you can take advantage of the dips and stock up on gold and silver. In a few years, you’ll be glad you did.

Next I’d like to respond to a question from one of my followers. For some reason, I’m having difficulty adding a comment, so I’ll use this forum instead to write a longer response. JB asks, “So I'm curious what you think of the stiff technical resistance we are seeing in gold at $1424. Is this just resistance breaking to a new high? These troughs present good buying opportunities, but I'm concerned that gold is losing it's shine as the equities continue to defy logic and gravity. From Jesse's: http://1.bp.blogspot.com/_H2DePAZe2gA/TSzM7sWHH6I/AAAAAAAAPjk/BrObAxavzy0/s1600/golddaily2.PNG

First, JB, thanks for your question and for the link; I subscribe to Jesse’s Café as well and look to it often for information.

Yes, gold & silver will meet with resistance as they struggle to make new highs. I agree that the current equities markets continue to defy logic, and Richard Russell believes this is a significant reason to invest in precious metals. In addition, Zero Hedge has done a good job of proving that the Fed is propping up the stock market, and this situation is not sustainable. Yes, equities are rising, but would they rise if the Fed wasn't pumping money into the system?

It also may help to remember that gold's high of $1431 in 2010 was more than 16% higher than it's high of $1226 in 2009. As the bull market picks up steam, we will see higher highs and higher lows.

During the winter of 2010, silver hit an annual low just below $15 an ounce, and I would be surprised if it fell to that level in 2011. If it does, it will be because significant deflationary forces are weighing down the economy, ie another real estate crash.

But if we see deflation, I believe it will be temporary. The Fed has announced rather uniquely that it will print until it gets the inflation it desires. As it continues to do so, the value of the dollar will be comprised, and gold & silver will continue their ascent. We can already see the dollar losing its value with rising food and energy prices. I hope this answers your question and addresses your concern.

Laura Gross

(Laura Gross is a writer, precious metals investor, and the founder of Best Bullion Prices (BBP). Visit www.bestbullionprices.com to follow her research.)

Source: Best Bullion Blog

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