Gold and Silver Correct After Reaching All-time Highs in January
Gold and silver continued their unprecedented rally for most of January with higher prices accelerating in the last two weeks. It was an unsustainable path. Precious metals were overdue for a correction, but it was the magnitude of the decline on the last trading day of the month that was shocking. It began with a wild swing up and down on the 29th. Silver closed nearly even with the prior day and gold turned in a slightly positive close after moving down and back up.
On the 30th it was a different story. The price decline in gold and silver that day was something for the history books. Now, everyone wants to know why. Why did precious metals turn around and tumble in a free fall on January 30th after racing higher and higher in the last two weeks of the month? The only newsworthy event that day was President Trump’s nomination to replace outgoing Chairman Powell of the Federal Reserve, so the media latched on to that bit of news and suggested it precipitated the massive decline in precious metal prices. That doesn’t make sense. We think something else was most likely responsible.
Some investors got over their skis on this one. The sharp rise in price in the last few months was indicative of excessive buying and extreme leveraging was involved. The most likely scenario is over-leveraged buyers pushed the price of gold and silver higher and higher for weeks. When the price began to pull back after this long successful run, leveraged investors received margin calls and automated selling took over. Selling begets selling, and the one day decline was severe. For those who were late to the party, those buying at recent high prices, the losses were devastating. Those who have owned precious metals for months and even a few years gave back some of their January gains.
It is important to maintain perspective in the midst of chaos. News outlets thrive on events like this. A lot of the reporting has been reckless and inaccurate. Resist the media reports and look at the facts. Precious metals were due for a correction. Higher and higher prices do not continue forever without some consolidation.
On Tuesday buyers stepped in and pushed prices up. As the week comes to a close, gold is trading slightly above its average price for January. Silver is trading at the 50-day moving average which represents the last 2 ½ months. It would not be a surprise to see prices test Monday’s low again. If that low were to hold, it would be positive for any future recovery.
The factors in place which have supported a rally in commodities and precious metals remain unchanged. As of this writing, the long term uptrend is still in place.
If you have questions, please contact us. We are happy to talk with you and share our perspective.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.