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Gold Wakes Up, and Totally Falls out of Bed
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(October 25, 2008) Last week, seemingly everything went down in price versus the dollar – US stocks, oil, most commodities, and spectacularly, gold, falling some 14% from the $801 London morning fix on 10/17/08 to $692.50 just a week later.
This past Friday’s action was particularly telling, in that world-wide jitters and early US equities trading looked as if a rout was on. Pre-opening indications on stock-index futures indicated something approaching a total wash-out capitulation for the already beaten-down US stock market. Paradoxically, gold followed suit, trading as low as $681 in New York early Friday morning.

All in all, on Friday October 24th, the average Joe eating his Wheaties and watching CNBC (or the average Jane checking her Blackberry while driving through a Starbucks), were left with the impression that nothing, absolutely nothing at all, was worth what it used to be.

Perhaps Barron’s Alan Abelson best expressed the extraordinary mood of the world investor markets early Friday morning in his “Up and Down Wall Street” column of 10/27/08:

“What roused them was the revelation that the nightmare of imploding economies was no nightmare. It was real and it was imminent. The great awakening, in short, triggered an orgy of dumping, right across the board: commodities and currencies, as well as stocks and bonds and their myriad derivatives, got tossed helter-skelter into the dumpster…. And the global rush to unload assets, hard, liquid, soft and paper alike, came despite efforts by governments virtually everywhere to stem the tide of offerings. One might ever argue that the strenuous exertions to thaw the credit markets and shore up economies in recent months might have added to the frantic rush to sell by intimating that officialdom was a heck more worried than it professed to be.”

Later on Friday, both stocks and gold rallied. The Dow ended the day losing only 312 points, which is a veritable walk in the park by the standards of the past few weeks of plunging equities prices and unprecedented volatility. Gold rallied some $50 from its morning low, with the most active Comex contract, December, closing at $730.30.

So, while an interesting day, it was not the end of the world. Yet.

Coincidentally, there is some speculation being bandied about that trading in the December gold contract may end with an unusually high number of contract-holders taking delivery, in a ‘test’ of the viability of the Comex as an honest price discovery mechanism. Such a move could put those who are short the December contract in a bit of a bind, if deliverable gold is actually in as short a supply as is argued by those who maintain that there is an insurmountable gap between the price of ‘paper gold’ versus the actual demand for ‘physical gold.’

Silver bulls have made much the same argument, most loudly in the present time of greatly reduced prices on the silver futures exchanges and a distinct shortage of convenient silver bullion out there in the market. Arguments that silver futures prices are a ‘fiction’ have grown out of just such disparities between futures prices and the actual retail prices of bullion silver in the forms of coins and bars.

But, this being a free country, the past few weeks have seen many different entrepreneurs buying up the 1000-ounce .999 silver bullion ‘delivery’ bars, melting them down, and starting to produce one-ounce silver coin rounds, and 100-ounce silver .999 bullion bars for sale to the retail physical silver bullion market.

In the next few weeks, those looking for convenient retail forms of bullion silver will see more and more of these new products being offered, much of them struck or poured by refiners and coiners that you probably haven’t yet heard of.

We might even offer some of them ourselves when they become available. Silver prices, like those of the other industrial precious metals, platinum and palladium, have gotten clobbered over the past seven months. Silver, which on Friday fixed at $8.88 in London, is now trading for 57% less than its March 17th high of $20.92.

At some point in the silver market, perhaps when the economy shows signs of being a little healthier, there will start to be a legitimate value argument for the ‘poor man’s gold.’

 

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