Are Gold and Silver at Bargain Prices Again?


"We have another possible great buying opportunity in gold and silver."

Gold and silver bulls have been pushed back against the wall recently. The Dow Jones Industrial Average suffered its worst quarter since 2009, and caused many investors to liquidate their winning gold positions. Meanwhile, more economic slowdown fears seem to surface everyday, causing silver to be more volatile than gold. While gold gained roughly 8% in Q311, silver fell about 13%. Now, true gold and silver bulls are bargain hunting in precious metals.

Although precious metals have been correlated to equity markets recently, history shows that this is likely to be a short-term relationship. Gold and silver declined with equities during 2008, but diverged later in the year to head higher while equities slumped. This was largely made possible because gold and silver bottomed before equities when the credit crisis hit. Gold and silver bottomed in October 2008, but the Dow Jones Industrial Average and the S&P 500 did not bottom until March 2009. Gold declined from roughly $1,020 in March 2008, to $720 in October 2008, representing a 29% decline. Silver fell from $21 in March 2008, to only $9 in October 2008, representing a 57% decline. Although many critics claimed the gold/silver bubble popped, these prices proved to be great bargains, as both metals would go on to outperform equities in the following years, and even make new highs.

Today, we have another possible great buying opportunity in gold and silver. After reaching $1,900, gold has pulled back to about $1,600, representing a 16% decline. Since last month, silver has pulled back from $41 to $29, representing a 29% decline. Gold and silver die-hards continue to buy the dips, because it has worked well in the past and the fundamental reasons for investing in precious metals remain. The economy does not appear to be in any better shape than it was in 2008, despite bailout and stimulus programs. The unemployment rate is higher, the housing recovery looks to be years away, and proposed solutions involve more staggering debt. In his testimony to Congress, Federal Reserve Chairman, Ben Bernanke acknowledged on Tuesday that the "recovery is close to faltering."

Another fundamental reason for investing in precious metals is to preserve wealth against a devaluing currency. Although the U.S. dollar has shown strength in recent weeks, more stimulus could question the current dollar rally. Many investors expect more stimulus to come from the Federal Reserve due to recent statements. Ben Bernanke explained on Tuesday that the central bank is prepared to take additional steps to boost U.S. economic growth, while he cautioned lawmakers against making moves to balance the budget that would harm recovery efforts. The Fed "will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability," said Bernanke when giving testimony before Congress' Joint Economic Committee in Washington this morning.

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