Off of MineWeb this evening - interesting article, that confirms the unexpected, ridiculous downward trend of metals in the face of many events that normally drive metal prices higher, cannot last:

Should you be worried about the gold price fall? And what about silver?

The very sharp fall in the gold and silver prices of last week were mostly unexpected by the market, but there is a feeling that falls may have been overdone as demand is picking up rapidly at these price levels in some key markets.

Author: Lawrence Williams
Posted: Monday , 18 Aug 2008

LONDON -

Investors in gold, and in gold mining stocks in particular, have taken quite a hit in the past month and the question to ask is should they be worried that the price will not recover - at least in the short to medium term? One suspects that the answer is not yet! August is typically a weak month for the gold price - indeed it has fallen during August in virtually all of the past five years - and in most of those years it has made a strong recovery throughout the autumn, or fall. The question is will this year be any different?

In recent weeks, the sharp downturn in the gold price has been mirrored by an equally sharp uptick in the dollar's fortunes against the accepted basket of other currencies. This is not, as we have said before, because the U.S. economy is in reality any stronger than it has been through the period of the declining dollar - indeed it may be weaker than ever - but because the economic malaise that began in the U.S. has been exported to other countries and their currencies are now perceived as being even more weak than the dollar, at least for the time being. Whether this is a reality, or perhaps a scenario drummed up by the world's currency traders which will play itself out as the market finds equilibrium, one hesitates to predict. But to the non-economist outsider it looks as though, as usual, the recent dollar uptrend may have been overdone with the movement outweighing the fundamental position of the U.S. economy vis-a-vis the general global outlook.

What must be encouraging for the gold investor, though, particularly for those coming in at the current price level, is that a surge of buying coming in from India, the world's largest gold consumer, seems to be underpinning prices when they below $800 an ounce. We have seen reports over the past few weeks that there had already been a strong turn around in buying interest as the Festival and wedding seasons there approached, and as gold plunged down through the $800 mark the buying accelerated and, according to the Times of India the sales volume has almost doubled in the past four days alone as the local price got down to Rs 11,000 per 10 grams (approx $800 per ounce at current exchange rates).

Indeed the strength of Indian buying almost certainly contributed to gold's price stabilisation at the end of the week as demand exceeded supply and buyers were coming into the market worried about a gold price surge, but while Indian, and similar demand in other major gold trading centres is almost certainly having an impact, this may not be quite enough to counter global factors and unwind gold from following the oil price and in reverse correlation with the perhaps unwarranted strength in the U.S. dollar.

Elsewhere there are also signs of a shortage of physical gold for investment purposes. The U.S. Mint has had to halt sales of one ounce gold American Eagles and Gold Buffalos due to a shortage of supply and gold dealer Blanchard & Co notes that South African Krugerrands are also very hard to come by in the U.S., so there is an underlying demand swell at these prices.

But there is yet a danger that gold could fall further if the oil price slips back to say $100 a barrel, but one suspects that the dollar, and oil are getting ever closer to stabilisation and if current gold demand levels are sustained it is possible that the bottom in the gold price is close, if indeed it hasn't been reached already in the sharp downturn last week. It is still moving more or less with oil though and if the oil price should fall substantially further over the next few days it could still drag gold further down with it to test the assumed $750 support level. But then support levels on both the way up and way down seem to have been relatively easy to breach of late.

The silver investor has perhaps even more cause for gloom for the moment, but does this perhaps represent a major opportunity too? From its peak of over $20 an ounce it has fallen back some 40 percent to its current levels as compared with around 23 percent fall from its peak for gold. Silver is demonstratedly a more volatile market than gold and, just as it has fallen much faster in the downturn, it could also rise much faster should the precious metals price recovery, expected by many, materialise during the last quarter of the year.

But one thing which will be affecting investor sentiment for both gold and silver is that the seemingly inexorable rises of the past couple of years have been seen to be a little fragile at the least which may prevent a rush back if, and when, the dollar and oil stabilise. Many of those who have been dragged in to buy precious metals for their safe haven status will feel it's once bitten, twice shy and will be slower to return which could stifle short term increases.

So, fundamentals suggest there should be a recovery in precious metals prices at some stage. The problem is picking when - ever the problem with trying to judge when to buy back in in what is an apparent bear market.

http://www.mineweb.com/mineweb/view/...