GOLD : Huge buying opportunity will emerge soon

The sell off in precious metals (PM) has been impressive, especially silver, down from US$ 40.760 when it opened last week to a low of 29.77 and a close Friday at 30.75.

What is going on here is quite simple. And you’ve seen it before. Back in 2008. Same dynamics at work :-

1. The Economic/financial crisis leads to asset liquidation and dollar shortage. This time it is Europe’s fault.

2. The Dollar shortage leads to dollar appreciation and gold depreciation (in dollar terms). Hard not to notice the rebound and indeed trend breaking move on the USD Index this past week. (Baht closed 30.91)

3. One form of asset liquidation – forced gold and PM’s  selling – and this leads to gold depreciation (in all currencies).

4. Eventually the western governments will come up with a monetary response which will create a surplus of dollars (and Euros, CNY  and Yen too) Think QE3…when the Dow goes under 10,000 and Bernanke thinks the carnage on the markets will allow him to print more and get away with it….think QE2 in the UK, think lots and lots of EUR printing. This is when GOLD and PM’s will take off again.

5. The Surplus of dollars causes dollar depreciation and gold and PM appreciation, not to mention emerging market stocks, commodities and the good old risk trade and the blowing of new bubbles.

We will see more downside on the markets, but first there may be 2-3 days of rebounding prices.

We talked about gold a few days ago when it was trading at 1750. Now if continued selling takes place over the next week or two (after maybe a small technical bounce) then the next leg down for GOLD could be 1575 or so, maybe 1540-1550, with a breach of support at around 1616 likely to accelerate short term downside.

We think the 1520 to 1550 range offers excellent value to buy gold, and hope for a fall to such depths. We think the markets will remain weak with a downside bias for about 6 weeks – in to mid November, with extreme volatility on the way. For GOLD this could see it swing back to 1720-1750 only to fail and come off again. Indeed only a very strong close above 1750 will convince us the worst is over and downside risk has been thoroughly sold out of the market.

Last week saw some European banks selling gold, and this could spread. They can force prices down a lot further, so unless the Europeans announce they are printing Euros and happy to give it to any bank or central bank in the EZ, risk of more bank selling in gold and PM’s will persist as they have little choice because most of them need to raise cash, and raise it fast.

Get ready, prepare to buy gold, platinum and silver, just wait for signs of a reversal in the dollar, more monetary priming this time from the ECB, and then buy.

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