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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold and Silver Caught in Credit Crunch Downdrift

Commodities / Gold & Silver Aug 19, 2007 - 11:45 PM GMT

By: Roland_Watson

Commodities At the time of writing this, the Dow Jones Industrial Average is down 9% from its record closing high of 14,000 set on the 19th of July. Since then, fears over defaulting sub-prime funds spilling into main markets has had large numbers bailing out of higher risk assets into the relative safety of government bonds and cash.


Needless to say, this correction has taken on a life of its own as questionable mortgage loans have now been joined by fears over funds failing due to lack of redemption liquidity. The problem is now in the domain of herd mentality and we await fear-driven prices to fall and meet the bottom feeders below. Where that might be is the main question and we can hazard a guess later on.

But silver and gold have also been caught in this downdraft, which has perhaps surprised some safe haven investors. Suffice to say that people flee to high-grade government debt during financial tropical storms but turn to gold and silver during financial hurricanes. The crowd is betting on a tropical storm just now.

But how are the various precious metals measures fairing during this stock market correction? The table below gives the percentage drops since the Dow topped out at 14,000 to the end of the 16th August.

NAME 19th July 16th August CHANGE
DJIA
14000
12852
-8.9%
SP500
1555
1411
-10.2%
Nasdaq
2720
2451
-11.0%
Russell 3000
902
812
-11.1%
Wilshire 5000
15695
14192
-10.6%
US Dollar Index
80.42
81.70
+1.60%
SASC
7.19
5.08
-41.5%
Silver
13.25
11.40
-16.2%
Gold
676.8
648
-4.4%
Copper
8000
7051
-13.5%
HUI
371
300.14
-23.7%

General indices are down about 10% while precious metals stocks have taken a 23% bath going by the HUI. The newsletter I write has its own silver stocks index called the SASC, which has fared even worse with a 41% drop since July 19th. Subscribers will shortly receive a ranking of the silver stocks that have fared best during this correction. This is normally a sign of which ones are the most favoured when the bull resumes.

Silver itself has fared somewhat worse than stock markets with a 16% drop. In other words, you didn't do much worse holding silver bullion. The surprise however is gold which has performed admirably in losing only 4.4% during this Dow downdraft. It seems that although investors do not regard these events as our financial hurricane, enough are seeing a hurricane to shore up gold prices with their precautionary buying and holding.

Where will all this end? Some are expecting at least a 20% drop from these highs, which takes us to Dow 11200. My take is that we are correcting the entire move that the stock markets have enjoyed since March 2003. Elliott Wave analysis confirms this using the British FTSE100 as the best example of this completed impulse wave structure.

If this is the case we can expect the Dow and other indices to retrace at least 38% of their entire moves since March 2003. In the case of the Dow this means dropping to about 11500 or an absolute drop of about 20% from 14000.

For gold, silver and their stocks we see them being caught in the initial downdraft but as this correction ensues (I suggest it could last over a year), speculative money should begin to flow back to the precious metals as hope of an immediate Dow returns fade.

Further comments can be had by going to my silver blog at http://silveranalyst.blogspot.com where readers can obtain a free issue of The Silver Analyst and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk

By Roland Watson
http://silveranalyst.blogspot.com

Further analysis of the SLI indicator and more can be obtained by going to our silver blog at http://silveranalyst.blogspot.com where readers can obtain the first issue of The Silver Analyst free and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk .

Roland Watson Archive

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