Precious Metals - Where is the Ceiling?
About the middle of this past week, I got a call from friend and fellow blogger, Dave Kranz. Dave wanted to let me know that gold had broken a new high, just in case I wanted to report this in my blog. I thanked him and we talked a while about precious metals, but honestly, I felt no compulsion to blog about another bump in a continual uphill climb.
The more interesting notion for me is wondering where is the ceiling? Where is the floor? How strong are these barriers?
My gut tells me that no matter what happens Gold has a new permanent floor of $650. I cannot anticipate a set of circumstances where Gold would fall below $650 again, given the high volume of investment dollars in at this $950 level. The ceiling, on the other hand, is a mystery to me, as I do not fully understand the strength of driving forces.
It is a strange combination of industrial, retail and investment, combined with anticipations of supply, which hold most sway over todays precious metals boom. Minor changes in any of these factors create major changes in both futures and spot price.
Platinum exploded this past week because of fears of supply limitations. This, independent of any realization that industrial or retail demand will certainly be slacking off in the near future as car production falls and jewelry demand lessens. It's as if single factors have an immediate effect and long term thinking comes much later to bring about the sell-off. Seems an odd way to do business, but that is what becomes of a market driven most heartily by speculative investment dollars, rather than being ruled by actual production uses.
And speaking of jewelry, friend Dave mentioned that he had read about dropping sales in that retail sector. This is something I had anticipated. But still, the manufacturers of jewelry are trying to keep their supply levels high, which in turn keeps demand high, which keeps futures and spot prices high. Why? That is what will be asked eventually. Why?
In my experience, I would guess that it is simply because, each year a business must grow. Budget projectings never shrink, even when a market is shrinking. So jewlery manufacturers are looking to grow, even though their retail trade is beginning to shrink.
If retail demand for jewelry and automobiles is slacking off because of high costs and the serious economic concerns of consumers, then actual support of the metals market is on the down slide. That leaves investment support alone to drive the boom, and while it is a very strong factor right now, the artificial nature of investment support cannot drive indefinitely without a physical counterpart. In the end, it is always the simple laws of supply and demand which rule out.
So where is the ceiling for precious metals? Your guess is as good as mine I suppose, but the real point is to keep in the back of your mind that there is a ceiling. Each of the four precious metals we numismatists track will eventually reach it's own ceiling and the market will experience bolder corrections than we have seen over the past months. Watch for the signs, study the underlying factors and enjoy the challenge of anticipation.