Mar 5, 2007

Lemming week! Markets, gold and silver plunge

Lemming week! Markets, gold and silver plunge
Lawrence Williams
'04-MAR-07 01:00'

TORONTO ( --Jittery markets for precious metals and stocks in general saw huge sell-offs following an 8 percent plus fall in the Shanghai Stock market Tuesday. Together with other data, this precipitated one of the biggest sell-offs seen in recent years with firstly Wall Street and London droppinging dramatically, followed by a big dip in gold and silver prices on Friday, just as the world’s major stock markets appeared to be stabilising.

Was there any logic behind the falls? Not really but maybe! The Shanghai market, which had been rising at an unsustainable rate, was almost certainly due a correction. But whether Western markets should logically have followed it down is definitely debatable. Whether gold and silver should have followed suit is even harder to understand.

The nervousness which affected the markets seemed to be because of the apparent dependence of the markets on the health or otherwise of the Chinese economy these days. The Chinese fall was seen, not as a correction, but perhaps as an indicator that there was something deep rootedly insecure about the state of the Chinese marketplace.

Yet market indicators in China suggest nothing of the sort! There seems to be no fundamental change in the state of the Chinese economy at all and its rise in consumerism and metals demand seems unaltered. Perhaps the big Chinese fall was just a correction brought on by profit taking after all, with spooked Western markets just following it down. Technicalities mean that when markets fall, stop-loss sales can be triggered automatically and these falls are exacerbated, triggering more stop-loss sales. Dealers follow the market down like lemmings over a cliff-edge (although apparently there is no truth in that particular old wives tale.)

Some analysts feel that the gold price sell-off at the end of the week was due to investors who had gold as part of their portfolio, needing to sell to cover their positions in the stock market in general. Silver just followed the gold price down.

Interestingly, base metal prices, which should have been most affected if there was a real Chinese downturn ahead, were largely unmoved by the general declines, although the same could not be said for base metals stocks. There were some falls on Friday, but on nothing like the same scale of the gold and silver price declines. Of course there could be some delayed reaction in base metal prices this coming week.

So does this signify a buying opportunity. Logic says yes. The Chinese market had already regained some of its losses by the end of the week, although Western markets have so far failed to follow suit to any significant extent. There are few fundamental reasons for the market falls, let alone for the falls in gold, silver and base metal mining stocks. Even the superheated Chinese market only lost a couple of months of gains. These things need to be put in perspective.

I would personally expect markets and metals prices to recover rather rapidly – the only problem being that if the market is that easily spooked then similar large corrections could happen at any time. But these may all be buying opportunities for those who have missed the earlier runups – particularly for those base metals mining stocks which fall back. Until fundamentals change, markets should keep moving up overall. The key is to spot a true change in pattern occurring before the bear-oriented lemmings take control again.

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