Gold And Silver: The Good, The Bad And The Ugly

After the recent notable decline in gold and silver prices, many precious metals investors are questioning whether or not to continue to hold their long positions.

At this point, it may make sense to take a step back to gain some perspective on the matter by looking at the past, present and likely projected future for the prices of silver and gold.

Where the PM Market has Been

Macro sentiment still seems to be living in fantasy land. It tends to assumes that stock market corrections are cyclical and not secular in nature.

There also seems to be an assumption being made that the Federal Reserve will step in to support a falling bond market.

A housing market recovery seems to be happening, despite a clogged foreclosure pipeline creating considerable shadow inventory. There has also been a hedge fund investor pull back from the PMs and lumber prices are falling.

Where the PM Market is Now

The Fed’s Advisory Committee or FAC and the Bank for International Settlements or BIS have already turned the political direction. By publicly criticizing the Fed’s monetary policy, they have positioned themselves for the aftermath.

Bernanke effectively quits and is unofficially terminated by Obama, clears the way for new doves to enter. Will the new boss be essentially the same as the old boss?

Gold and silver prices are already down, and sentiment in the PM market is horrible. On the other hand, physical PM demand has surged, yet the mainstream does not see this, nor do they seem to know the difference between physical and paper.

How close is the PM market to experiencing an industrial shortage? Well, the last inventory clean out came after a bout of lower PM prices. Just imagine what fear and greed will do to the remaining inventory and production.

Considerable damage to the mining sector has already been done — in addition to the decades long damage the sector had previously suffered. Ramping production in the midst of yet another liquidity or equity panic now seems like a pipe dream. Collective memories are too short.

Where the PM Market is Headed

The United States increasingly cannot afford its debt service. A Treasury bond market crash will likely ensue after signs of a pending default become clearer and clearer to investors. More pressure will be placed on the Fed to monetize, as the U.S. Dollar crashes hard.

China could also be facing a liquidity crisis, and Japan is probably looking at a sovereign bond crisis somewhere down the line, as well.

Scared investors will very likely rush out of bonds and equities to real stores of value like the precious metals, although some may return to those markets seeking value and buying low.