You can look pretty foolish when you make bold predictions about the future price of precious metals. Gold and silver will truly breakout to the upside in a big way when corporate earnings start to disappoint and the stock market enters a major correction. It is not a question of if the Dow Jones or S&P 500 will drop by twenty percent or more; it is a question of when the correction will begin.
Remember former Federal Reserve Chief Alan Greenspan’s famous “irrational exuberance” characterization of the market? People used to joke about his warning and the market did not drop immediately after he uttered those words. It took some time for the “dot-com” crash to hit investors hard – but it was ugly when it happened. The same scenario is replaying itself today in the year 2014.
The overwhelming driving force that will propel precious metals to a sustained increase in price is the behavior of the stock market. Once quantitative easing by the Fed comes to a complete stop in October, easy money will start to dry up. Before you know it, the Consumer Price Index (CPI) will show inflation is for real, and interest rates will start to rise.
Once equity investors start to see their investments drop in value, they will look to lighten-up on their stock portfolios and shift some of their money to safer investments. As more people get interested in gold and silver bullion, supply will not be able to keep up with demand and that will send gold and silver prices higher. For the precious metals market, this is great news!
Technical Indicators for Precious Metals
One of the technical indicators that suggests that precious metal prices in general, and gold prices in particular, may be heading higher in the not too distant future is the historical Dow to Gold Price Ratio.
The chart shows the number of ounces of gold that would equal the popular stock index. A high ratio may indicate conditions are ripe for higher gold prices, while a low ratio may predict a rising stock market. In September of 2011, the Dow to Gold ratio was 6.74, the economy was awful, and gold hit historic highs of just over $1,900 per ounce. Contrast that with the July 2014 Dow/Gold ratio of 12.99 and you can see that even a 50 percent drop in that number could send gold and precious metal prices higher.
Technical analysis is but one of the indicators of the direction and strength of individual markets. Both the stock market and the precious metals market are also influenced by the emotional responses of investors. While the professional hedge fund and institutional investors may have less of an emotional connection to their investments, the same is not true for the small, individual investor. It is hard for anyone to ignore the chaos in the world and not have at least some trepidation about a major stock market correction.
Now is not the time to panic. Review the investments in your portfolio. It may be time to reduce the percentage of equities in your portfolio. Take gains in your stocks and use those profits to add to your physical gold and silver holdings. Be smart and prepare for what could be a major stock market correction.
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