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One more big precious metals fall?

In the first two days of May, gold and silver prices dropped sharply. By mid May, silver had fallen about one-third from its end of April peak, while gold lost about 10 percent.

These moves were a greater percentage fast decline than had been experienced in the previous two years. The size of the drop and the subsequent price volatility has left a number of our customers concerned that there may be one more major price drop before prices resume their overall upward trend.

In April and May, my own companies sold so much physical precious metals, especially silver, that those months were among the highest sales volume months in our 40 years in business. Dealers and wholesalers around the country told me similar stories of their high level of activity.

2012 U.S. Coin Digest: Bullion

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As prices dropped in the first two days of May, both buying and selling activity declined. Then high volume returned, with almost all of it customers purchasing from us at levels near what we experienced in the prior two months. Volume again temporarily dipped in the third week of May after prices touched bottom, then picked up again the following week.

In the most recent week in early June, however, volume has again tapered off. In many years, there has been a summer lull in activity, where prices were relatively stable until the manufacturers started stocking up metal in late August and September to produce jewelry for the Christmas sales season. Will this again happen in 2011?

My crystal ball is a little cloudy on that question.  However, I can report that my own company has a surprising number of established customers who are waiting for a possible one more large price drop before they jump in to purchase. In some instances, customers have sent us funds in advance so that they can move quickly when the market hits their target price. In total, between established customers who have sent us up-front funds and those who are checking periodically to see if now is the right time for them to buy, we have the largest pool of potential demand in 40 years.

There are some important points to draw from this situation. First, the potential demand to purchase is very high while we have comparatively few customers waiting for gold and silver prices to rise a bit so they can sell off their positions.

Second, the recent price volatility has scared a large quantity of people enough that they fear another significant decline before prices resume rising. This is in contrast to only a handful of customers who think that markets have peaked and it is only downhill from here.

Third, the major price declines were not associated with any financial or economic developments that point to an improving economy in the United States.  The U.S. dollar has enjoyed some temporary strength during the latest European financial crisis, but that seems largely to have passed now. As a matter of fact, the continuing financial reports point to continuing bad news over next few years, not a recovery as President Obama and other top federal officials are trying to proclaim.

In my judgment, we are not facing a question of whether the U.S. dollar and economy are destined to decline in the coming months. The politicians and bureaucrats have boxed themselves in so that future declines are inevitable. The question in the minds of many of our customers is will there be one more sharp drop before gold and silver establish price levels much higher than today?

I cannot give you a flat out answer.  Instead, let me give you two possible scenarios of how prices may play out over the summer. If gold and silver slowly trend upward, I don’t think there is much prospect of a major sudden decline. On the other hand, the financial markets have lots of sizeable potential disasters waiting to explode. If one or more of these were to erupt, then we could see a concerted effort to suppress precious metals prices.

I want to be clear about one thing. At most, I foresee the prospect of just one major price drop at anywhere near current gold and silver price levels. So, should this decline come to pass, don’t wait any longer to load up on your precious metals. If there isn’t any unusually large fall in prices, I think those waiting should take action by mid August at the latest.

Here’s one more point to ponder. If you are looking at gold and silver prices at least doubling or tripling from today’s levels, as I do, do you really want to risk prices rising while you wait for a possible 10 percent price drop? I advocate taking the long term view, where you will be happy having purchased silver at a price in the $30s, and not really concerned whether it was $37, $36, $35, $34, $33, or $32. As long as your purchase point is below $38, I am confident you will be happy in the long run.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects.  Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at CoinUpdate (http://www.coinupdate.com. He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

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