After Pullback, “Paper Bugs” Pounce on Opportunity to Belittle Gold & Silver

Well, with the big selloff in gold and silver following a monster rally since Labor Day, a Saxo Bank analyst says the metals are no longer technically overbought, but they are still under-owned.

After peaking near $4,400 an ounce earlier this week, gold got hammered lower on Tuesday and Wednesday, falling close to $4,000 before stabilizing at around $4,100 later in the week. Silver dropped even more substantially in percentage terms, plunging from over $54 to the $48 range.

Currently silver comes in at $49.05, down just over $3 an ounce or 5.9% since last Friday’s close. Gold is checking in at $4,137, off 3.0% during this high-volatility week. Barring a massive late day rise this will mark the end of 9-week winning streaks for both gold and silver.

The PGMs have seen less movement here this week, with platinum down 0.4% to trade at $1,623, while palladium is off 1.0% to come in at $1,467 as of this Friday midday recording.

Back to Saxo Bank, their Head of Commodity Strategy Ole Hansen said that after the much-needed correction, gold and silver are no longer overbought.

From a technical standpoint, an asset is overbought when the price runs up extremely fast relative to the recent trend. Technical analysts use various metrics to determine whether an asset is overbought. Those metrics have unwound.

However, looking at the bigger picture, Hansen said the metals are still under-owned in portfolios and the structural drivers behind the precious metals rally remain fully intact.

That means the bulls likely have more legs.

It remains unclear exactly what triggered the recent selloff. There is a saying in investing – bull markets climb a wall of worry. Given the rapid price rally, it is likely that nervousness had in fact gripped the market.

As we reported previously, Morgan Stanley CIO Michael Wilson recently came out with an investment strategy that includes a 20 percent allocation to gold, and the idea has started to gain traction on mainstream financial networks.

Pushing precious metals allocations to 20 percent will require a lot of additional buying. Currently, investors with “significant” allocations to gold don’t generally hold more than 5 percent in their portfolio.

This leaves plenty of room for additional investment demand.

And in the silver market, a shortage of metal drove recent price gains. While some of this pressure was relieved by moving silver from New York to London, this didn’t alleviate the fundamental problem – demand exceeds supply. There isn’t enough metal. And you can’t print silver.

Meanwhile, the naysayers on Wall Street – who totally missed the huge rally in both gold and silver since Labor Day – have boldly declared that the top is in.

They further claim the dollar "debasement trade" has ended... and the U.S. dollar is set to strengthen.

At Money Metals, we believe this is wishful thinking by the "paper bugs" who always seem to find a new excuse to bash gold and silver – and ridicule those who buy it.

As we're now 25 years into a secular bull run that has seen precious metals outperform U.S. stock indexes, you'd think these Wall Street sharpies would have finally changed their tune.

But the mainstream financial industry in America has a dollar-centric frame of reference – and they generally compare the dollar to other fiat currencies. Versus those other currencies, sometimes the Federal Reserve note dollar strengthens, sometimes it weakens.

It's better to view gold versus fiat currencies as a whole. They are ALL being debased – just at varying rates.

Twenty years ago, the Dollar Index (DXY) was trading at 80; today it's trading at 99.

When using this "dollar" frame of reference, the dollar appears "stronger" than most of its fiat currency peers. But that's ridiculous.

In reality, the purchasing power of the dollar has dramatically declined over that same 20-year span. In 2005, gold was trading around $500, and the DXY was roughly 80. Today, gold is roughly $4,100 while the DXY is only at 99.

That means gold is up over 8-fold measured in those supposedly "stronger" dollars.

Put another way, the dollar has declined 88% versus gold over the last 20 years. Talk about dollar debasement!

Folks are buying gold – including central bankers – in order to reduce exposure to fiat currencies.

But most investors in the Western world are still massively underexposed to real money, and dangerously overexposed to paper money. This will change.

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