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29 December 2011

Gold And Silver Test the Faith

Investors ask what has gone so wrong for precious metals as Gold breaks 6 month low

As time of writing, precious metals are having a torrid end to 2011. Gold in the wholesale market is currently at $1533 per troy ounce, having broken a six month low, with its sister metal Silver sitting at $27.09. It is all a far cry from the heady $1,900 per ounce we were seeing in back in September 2011 when $2,000 Gold and $50 Silver seemed like such a sure bet.

So what is going so wrong for precious metals? The answer is largely liquidity. The seizing up of the credit markets, even in the face of massive intervention by central banks to prevent just that, is forcing many institutions to sell assets into the market to raise cash, and all at the same time. With this kind of abnormal selling pressure prices can only ever go one way.

However holders of Gold might do well to remember that even with this late slump in prices, Gold is about to complete its 11th consecutive annual gain in US dollar terms, recording a 11% gain for 2011. So with all the talk of Golds safe haven status having been eroded, Gold has done a pretty good job in 2011 of protecting investors. You would have been hard pressed to find many winning asset classes in 2011. The MSCI index of stock markets has seen a 8% fall. Base metals are significantly down, though Oil has returned a gain about equal with Gold.

It is also important to remember that all of the reasons for Bullions ascent over the last 11 years are as present now as ever. The European debt crisis is still nowhere near a long term solution. Central banks all over the world are printing money like it is going out of fashion. The chances of a serious shock to the financial system in 2012 seem as great now as ever.

Lower prices in Gold and Silver, may well see smaller investors tempted back into the Bullion coin market from which many buyers have been absent of late. At where prices and premiums on major Gold and Silver bullion coins are compared in Secondary markets, traffic and click-through and completed transactions are all significantly up since the price falls. Though it has to be said that focus of buyers attention in terms of serious buying activity seems to be very much focused on Silver.

On Friday morning, 100 Ounce Silver bars were trading at around 11% premium over the silver fix in the US.

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