23
Oct
2008

Gold Investments Market Update – Astute Contrarians Buy Physical Bullion at Firesale Prices

COMEX gold’s recent sharp selloff has continued and even the most ardent gold bulls are getting nervous. Bearish sentiment is very prominent and the level of fear in the precious metal markets suggests that a low is likely in the coming days. Leveraged players in the futures market are dumping paper positions wholesale while astute contrarians are using this as an opportunity to buy physical bullion at firesale prices.

Both COMEX gold and silver are off another 2% and 1.6% today after their sharp falls yesterday when they fell as much as losses of 4.1% and 5.6% respectively. Losses on stock markets were even more brutal with falls of 5.7% and 6.1% on the Dow and S&P and more sharp falls in Asia and Europe today.

Wholesale panic selling in all markets on massive deleveraging is leading to gold (and silver) prices way below their fundamental value and smart money continues to accumulate gold and silver bullion on this most recent correction. While inflation risk has indeed abated and deflation is currently feared by the market, the hugely inflationary implications of the Federal Reserve and Treasury’s injections of billions and billions of dollars into the international financial system will be realised in the coming months.

Gold and Silver Investments remain confident that gold and silver remain in bull markets and this is just another counter trend sell off (a very sharp one nevertheless). We believe that that once the election is over, we will see a sharp rally in gold as the dollar’s recent strength and oil’s recent sell off comes to an end.

Speculators will continue to be decimated by the current and likely to continue massive volatility and market turmoil. Investors who continue to focus on real value and the medium to long term will be richly rewarded in the coming months and years.

We always caution our clients that while gold is an essential asset in a properly diversified portfolio, it should only remain a component and deserves an allocation of some 10%. A 5% minimum allocation in a benign macroeconomic and systemic environment and maybe as much as 20% given the current unprecedented volatility and uncertainty.

Many of our clients do not care what happens to the gold price in the short term as they see it as financial insurance and not as a speculation or money making exercise. The old Wall Street adage to hold 10% of your portfolio in gold and hope it does not work remains more than valid.

Those who deny gold is a safe haven asset given the precarious state of the international financial and monetary system show a remarkable lack of understanding of financial and monetary history and of our modern financial and monetary system.

Paying lip service to diversification is a dangerous thing to do in these unprecedented financial and economic times.

Mark O'Byrne
Executive Director