Wednesday, December 8, 2010

Always Volatile: Follow Up

Last night I provided some reasons that the Precious Metal market is the most volatile, and today has proved to be an example of this volatility.  The trade today was sandwiched by investor liquidation (presumably by Hedge Funds who are going for broke, after being broke), rumors of financial war (Chinese Rate Hikes), and JPM capitulating (Yes I see the bank as in its death throes). 

I was somewhat surprised by the price action today, as I had called for consolidation between $1395-$1405, but in this market always expect the unexpected.  When the Market Manipulators smell the slightest fear, they will mobilize their collective and gather dollars in the face of the precious metals.  There is no better analogy than sharks smelling blood in the water.

It is not fair that real assets can trade based on the lack of knowledge that most have concerning the PMs, but then, so is life.  If you had the opportunity to buy today, I hope you did.  Current trends look to have PMs have a great move up soon.  Let me detail some of the new reasons.

First, it is important to understand how gold could rise while interest rates rise.  Case in point, look no further to Volker's term as Fed Chair.  If you can put a chart of interest rates next to the price of gold, do so.  You will see that the two moved in lockstep.  Why is this?  Because while interest rates are being raised, a lack of  faith enters into the market.  This is based on 1) the fact that the Fed has admitted inflation is a distinct possibility 2) the Fed has admitted it is behind the (inflation) curve.  Rising interest rates will also, or at least is suppossed to, stem inflation.  Lately I have noticed speculation talk gold up vs. inflation.  It is also true that gold is a great hedge against deflation.

Precious metals (I realize I sometimes use the word gold in place of PM, you will have to excuse that) value is also at the whim of the market's expectations.  If there is faith in economic and fiscal policy, as well as faith in the market itself, then PMs maintain their value.  Once that faith is lost is when cash moves into PMs.  Once again, this is true in times of inflation, but especially in times of deflation.

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