It’s difficult to downplay the severity of the sell-off in gold. Just a week ago, the yellow metal closed at $1,805 an ounce. Since then, it’s fallen as low as $1,540 – a loss of 14 percent. Silver prices have performed even more dismally dropping 35 percent from a peak of $40 an ounce.
After the sell-off, gold is still up 15 percent on the year while silver’s just about flat. The scary part is (as Eric Fry at Daily Reckoning points out), U.S. Treasuries have actually out-performed precious metals! The 20+ Year Treasury Bond ETF (NYSE:TLT), for instance, is up nearly 25 percent since Jan. 1.
“That’s right,” Fry writes, “the debt securities of the now-AA-rated and heavily indebted US government remain the safest safe haven around.”
That’s a sign that investors are losing faith that the recovery we’ve been promised – despite the near-zero interest rates and the $2.3 trillion the U.S. government has pumped into the economy since 2008 – isn’t coming.
Fears of a 2008-style global financial meltdown feel almost palpable. In the words of Nouriel Roubini, we’re facing “unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”
It’s hard to stand by your investments when you hear economists telling you to stock up on food and make sure you have access to an isolated safe house. The moves in gold prices have even hardened gold bugs wondering whether or not they should stick with the metal.
And no one seems to know for sure where prices are going to go in the near-term. Daily Reckoning’s founder Bill Bonner sees the potential for gold to tumble as low as $1,000. Momentum traders see gold prices touching $1,517 an ounce and silver hitting $22.45.
“Following this rebound (in gold prices), which I expect to get underway this week, there will be a longer slowdown,” GloomBoomDoom analyst Marc Faber told CNBC Tuesday. He says the metal could fall as low as $1,100 an ounce.
Famed commodities trader Jim Rogers seems to concur. “I have no idea what is going to happen this year. I doubt if it will go to $2000 an ounce in 2011, it is more likely to have a correction which will last for several weeks, several months,” he told India’s Economic Times.
Despite their dire warnings about gold prices in the near-term, though, all of the traders mentioned above are unanimous in arguing that this is just a temporary set-back for precious metals.
“Silver has been one of your favourites, but that is down 24% in the past week,” the Economic Times asked Rogers. “Are you still buying?”
“Not yet,” Rogers replied, “but if silver continues to go down as we have discussed before, I will buy more silver too. Do not sell your silver, do not sell your gold unless you are a short-term trader, but anybody who is in this for a long term, silver and gold will both go much higher over the next few years.”
While the pros haven’t started down-grading their gold price targets for 2012 yet, they’re certainly not saying we’re going to hit $2,500 an ounce anytime soon. One ominous research fact points that it could be a long time before we even see gold at $1,800 an ounce again: The gold market has only dropped 20 percent peak-to-trough twice in the past 10 years (per the Financial Times). It happened once in 2006 and once in 2008. In both instances, it took about 18 months for prices to re-touch their highs.
We’ll eventually see gold at $2,000 an ounce (reference my post 10 reasons why we’ll see gold over $2,000 an ounce). These dips are painful, but they’re definitely buying opportunities for patient and disciplined investors.
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4) A brand new jobs package. Tax cuts in President Obama’s proposed $447 billion jobs plan have the potential to significantly boost consumer spending (which accounts for two-thirds of the national economy). Obama argues that the plan shouldn’t cost the government any money, but it’s yet to be seen how such a large decrease in Federal tax receipts will be covered. More than likely, the costs will be deferred, which will increase the strain on the Federal budget and dampen the prospects that the country can organically grow its way out of stagnation.
Markets are jumpy right now. Investors are positioning themselves for an announcement from Fed Chairman Ben Bernanke on Friday morning. Bernanke will speak from his annual pow-wow with several others central bankers in Jackson Hole, Wyoming. While many were anticipating Bernanke would announce more economic stimulus (just as he did last year after the Jackson Hole meeting), that notion seems to have gained a lot less traction in recent days. That’s lent some strength to an otherwise ailing dollar and pushed investors into riskier trades – particularly equities.
FastMarkets research analyst James Moore told 
As governments around the world quietly inflate their currencies, they are – in effect – reaching into our bank accounts and skimming some coin off the top. They do it quietly and most of us are none the wiser. 
What’s bad for the economy is good for silver – and the economy doesn’t look great. Cases in point:
1) Slow and steady wins the race. The fundamental case for gold and silver hasn’t changed, but investor perception has. Whatever the cause of silver’s violent 30 percent plunge, the aftershocks of that move will likely continue for several months. Meanwhile, gold’s proven that its support won’t be knocked out so easily. Over the past month, the iShares Silver Trust ETF (NYSE:SLV) has shed nearly 18 percent of its value. The SPDR Gold Trust ETF (NYSE:GLD) has actually appreciated 0.4 percent during the same time span. That shows unflappable support for the yellow metal even as panic seemed to set in for commodities across the board. When the muck truly hits the fan, there’s nowhere safer than gold.
Futures prices for the white metal got massacred at the start of Asian trading – tumbling 13 percent in a near vertical decline that can’t help but remind investors of Silver Thursday. Or maybe it should just remind us of 2008. Double-digit price swings in silver were the norm during the height of the banking crisis just three years ago (and silver prices are four times higher today!). 
