So much for the silver bubble-ette. After rising 84 percent last year, the price of silver suffered its worst one-day fall Tuesday in 30 years, a decline of 7.6 percent. Today, it was down another 3.6 percent, or $1.516, to $41.060 per troy ounce on the New York Mercantile Exchange. According to the Wall Street Journal, a big for the drop is, essentially, that some major investors are getting out while the gettin’ is good.
Herein lies the trouble with average investors getting into precious metals, commodities, options, etc., especially with borrowed money. Even more than the way the Wall Street playerz affect your mutual funds, they totally own the corner of these more complex and volatile investments. Silver may have risen as a hedge against a weaker dollar, but pretty quickly it turned into a mania working on the greater-fool theory. In other words, buying based on the belief there’s a greater fool who will buy it from you at a higher price, or further bid up the price, before the roof falls in. It’s a dangerous hobby, but who knows how many cubicle proles are getting margin calls today from their brokers? (Or watching their precious metals mutual funds further decline, and not paying attention to the load fees, etc.).
Gold is down a bit, but holds an aura that silver lacks. I know that nobody ever lost money underestimating the intelligence of the American people, but even we and our elected representatives are not stupid enough to return to the gold standard or let the dollar slip away as the world’s reserve currency.
So apocalyptic reasons for holding gold aren’t as persuasive as the currency-hedge reasons employed by the playerz. There’s money to me made, including in protecting against inflation, but returns are not guaranteed to average folks. Mexico’s central bank purchased 100 metric tons of gold today. But this is part of a rebalancing out of holding too much foreign currency, and protecting the peso from any 1994-like runs if growth slows. Complicated? Yes.
The question facing the precious metals rally, stoked in no small part by easy money by the Fed, is what happens when the Fed starts raising interest rates?
Today’s Econ Haiku:
Deutsche Bank gets sued
Over ‘reckless’ mortgage con
Too little, too late?