Precious Metals and Fear Premium


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This week, we will have another discussion with The Bullion Report about "Precious Metals and Fear Premium". Whenever you care about metals, I think you will like this topic. Let's see what the expert shares!

Precious Metals and Fear Premium

Fear can often be a great motivator to buyers of precious metals, and it is subject matter I have explored before. Fear of the unknown and fear of the worst-case have contributed to some epic price highs in gold, silver, and even platinum group metals. But what happens when the worst is over? What should you make of a market in the midst of resolutions?



Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Sometimes one of the trickiest things for markets moving like gold and silver have been for the last several months is in deciding when to call a top, if at all. More than a few analysts might call it a precious metals bubble, likening it to other stocks or markets that ran to extremes, only to deflate rapidly on some kind of calamity or another. Is this what is in store for gold and silver? Well, before you can answer that, take a look at some of the things that have added money to the market.

By far, the biggest catalyst for gold’s historic price run has been the breakdown of the global financial situation. Lower credit ratings for sovereign nations, credit crises in some of the largest Western powers, the fallout for developing nations that provide manufactured goods to said national powers – the list goes on. And silver, never mind silver’s latest meteoric rise. It was apparently sluggish out of the gate but the last several weeks have seen a pop in silver prices not seen since the 1980s. In fact, as a whole, investors have been big on gold and silver in a way not seen since that decade.

The real bullet point on most of the fundamental reasoning behind the uptrend has been the investment jitters that stemmed from the financial crisis that began in 2008. No one could have predicted how long or how deep the recession would be, so there have been ups and downs along the way. At first, it looked like stimulus efforts and a handsomely lowered prime interest rate would provide just the kick-start needed to keep things from complete disaster. But as each new economic report, housing report, and generally bad piece of news hit the airwaves it was apparent that this was no flash in the pan crisis.

Enter the even lower interest rate and quantitative easing plans.

Once the US dollar began to get undermined, the threat of hyperinflation and general currency devaluation helped to light another fire under metals. That fear premium is what investors appear to be ready to pay in an effort to preserve wealth in a climate of complete uncertainty. Now the markets get to grapple with fresh concerns as Japan tries to head off nuclear disaster, allies flex their foreign aid muscle in Libya and the Middle East erupts in protests and renewed tensions. Not particularly comforting for the average portfolio. The fear premium does come with some costs, namely the potential for a sell off as weaker longs breathe a collective sigh of relief every time there is a fresh comforting moment.

These moments can include any betterment of an economic report, like home sales or pricing reports. These have often come out with slightly better performance, prompting a happy return to stocks or other financial instruments, usually resulting in a liquidation of precious metals holdings. The key to these kinds of reports is in noticing how much better the report really is. Remember, many things like housing and employment are coming off of record lows and the worst performances in years. Improvements on some numbers just might mean ‘less bad’ and not necessarily better.

Inflation is another catalyst for buying, and dismissal of the notion of rising prices can be a weak point for metals. Gold and silver are seen as inflation hedges as much as asset preservers, so when the Federal Reserve goes on record with statements that indicate they believe inflation is controlled or temporary, it affects metal prices. As fear of inflation ebbs so does the precious metals market.
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