Gold & Silver Prices Drop Into Severely Oversold Area

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How do you feel when the price of gold or silver drops like a rock as today (or even worse, over the past 8 trading sessions)? Well, as a reader of a precious metals site, we probably have the answer. On downdays an increasing number of “long investors” reach out looking for evidence that their “investment” is a good one. The wise thing to do is to stick to the facts. This article attempts to be as factual as possible.

First, the gold and silver price drop is significant. We would say it is out of proportion, although the latter does not matter (it is an opinion, like so many other opinions out there). The fact of the matter is, the gold and silver price charts reveal a waterfall decline over the past two weeks, that’s a fact. Although they are oversold, they can go even lower.



Second, in terms of sentiment, the ravage is even more significant. The next chart shows the public opinion of gold since 2008, as measured by “The data show that sentiment on gold dropped markedly with its latest push lower.  Bullish opinion is under 42% for only the 2nd week in more than a decade (February 11th, 2005 was the other week).” The second chart shows the daily sentiment since 2001 (courtesy No additional comments needed on these charts, except that we are at a significant long term bottom. Could it go lower? Always. But the downside in “normal circumstances” seems limited for now.



Coming back to the above comment that the gold and silver price drops are out of proportion, there is no real macro economic driver visible that could have triggered this sell off. As Michael Pento from PentoPort points out in today’s update to his subscribers: “The reading on last quarter’s GDP growth was negative, while the January unemployment rate actually increased.” There has been a good news show at the economic top at Davos though. The equity markets are at historic tops as well. Dan Norcini points out that speculation could be taking place in anticipation of the Fed minutes which are released later today.

In the physical market, no specific data were released that contributed to a price drop. No reports on the US Mint figures or ETF holdings.

The only option left? A sell off in the paper market, in particular the COMEX futures market. The traders (hedge funds, large bullion banks like JP Morgan or Citi Group) brought the price down to levels below key moving averages, which resulted in technical selling.

Why is it important to have that information? Because there is a fundamental difference between trading gold and owning gold. Traders do their thing in the paper market. Obviously they have power over the short term price setting. The focus for owners of (physical) gold should be on the longer term. Down days are hard to stomach, but the bigger picture and the fundamental reasons to own gold, did not change. Jim Sinclair wrote to his subscribers today:

You can be active in the gold and gold investment market by simply doing nothing. The gold bank destroyers of good efforts are working hard to create a waterfall in gold and gold shares that can only happen if you are foolish enough to shift your decision making to your emotions. If you want to fight back, do not under any circumstances panic now. If you do not panic they will be beaten as this is the last significant reaction before gold roars higher. If you want to be in the fight and not simply a spectator, you simply have to do nothing whatsoever.

Those are words of wisdom, at least in our opinion. Jim Sinclair, being one of the most experienced people in the gold business both as an investor and a trader, laid out that Gold is on its way “to balance the balance sheets of the sovereign balance sheet disasters [which is the result of QE to infinity]. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold.” The world cannot continue forever on this QE sponsored illusion of solvency.

Meantime, with or without fundamentals, everyone who believes in the benefits of gold needs to control emotions. As an owner of physical gold, the price drop should not be of a concern as the world is moving towards a currency war of global scale. By contrast, for traders the critical support zone down the $1,500 or €1,100 area will be of utmost importance.

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