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What would the market for gold and silver look like if we were approaching the top?

October 7, 2012 - 8:36am

What would the market for precious metals look like if we were approaching the top of this decade-long bull market? You would almost certainly see a price spike of some significance, say a doubling of prices in 12 months.

Have we seen anything like that? The surge in silver to almost $50 an ounce some 18 months ago is the closest we have come to it, and the silver price has not collapsed since then. Far from it, the price chart is one of consolidation for another surge.

Ruff timing

Gold topped out at $1,923 almost a year ago and just tip-toed above $1,800 for the first time since then last week. It is hardly a blow-off, although prices are now up three-fold on seven years ago when Howard Ruff published his ‘Little Book of Big Fortunes in Gold & Silver’ with $2,000 then predicted as the market top. Gold was $600 an ounce and silver $10.

Howard Ruff sold out within two weeks of the market top in 1980, the last great gold bull market. In his latest ‘Ruff Times’ newsletter he seems nowhere near to capitulation now. Indeed, he is still recommending investment in physical gold and silver, particularly bullion coins and is wary of big gold and silver stocks, let alone the junior explorers.

If the precious metals’ market was really high then he would surely be recommending the leverage of the stock market for this asset class. He is not as yet. In fact he is taking the sort of very cautious approach that you might expect to see before a price correction.

Back in 2005 Mr. Ruff argued that we would need to have another Paul Volcker at the Fed for him to get worried about the gold price. It was Mr. Volcker who jacked up interest rates in the early 80s to crush inflation and that crushed the gold price too.

President Romney?

Perhaps if President Romney is elected he will make good on his promise to sack Ben Bernanke in two years’ time when his contract is up. But that still leaves open a wide window of opportunity for inflation and much higher precious metal prices, and of course President Obama is still actually ahead in the polls.

Before the bull market for gold and silver is over we will see several things that have not yet happened, if history is any guide and it is the same this time…

The silver:gold ratio will decline further, meaning silver prices will be rising faster than gold prices; speculators will rotate out of the physical metals and futures and into the more risky but higher return gold and silver stocks; penultimately the junior exploration stocks will catch fire; the price of gold will double within 12 months; and everybody down your road will be invested in gold and silver, knowing this is a surefire thing.

How far are we away from this final spike for gold and silver? Well looking back at the base that has been established for this surge over the past decade it cannot be that far away, though a nasty correction or two along the way will be par for this course.

Same this time?

So far the gold:silver ratio has closed up but is nowhere near its historic lows; speculators are staying long the metals and short stocks; the junior exploration stocks have only just touched rock bottom in a savage bear market; gold prices are level pegging over 12 months; and while plenty of folk are talking about buying gold and silver only a few are actually doing so and then not in any great quantity.

Still things could be about to get very much more interesting for gold and silver investors. We can tell from the page view totals for our gold and silver section. Any article will get ten times as many views as Dubai real estate which is also back in vogue.

Readers who want more advice on our approach to leveraging up in the gold and silver market should subscribe to our modestly priced newsletter (click here) for actionable investment ideas that we do not give out for free on this website.

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About Peter Cooper / Commentary Author

Peter Cooper is the editor and publisher of the ArabianMoney investment newsletter and the popular financial comment website www.arabianmoney.net.

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