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In our weekly, free Thoughts, two of the three October issues so far (here and here) have focused intensively on Gold and Silver. We wanted to show that both precious metals are facing consolidation – and that they are among the most emotional asset classes of all. Where emotions prevail, volatility is never far away – in both directions. This week’s correction hurt, no question about it. Nevertheless, Gold is still trading 57% above its level at the beginning of the year, and Silver as much as 70% higher.

It is interesting to note that since the interim recovery in April, Silver has reached exactly the Fibonacci ratio of 1:1.618 in its second wave of buying – the legendary “Phi” or “Golden Ratio” that fascinates mathematicians and natural scientists alike.

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According to the Fibonacci numbers, which play a central role in our analyses, corrections of 38%, 50% or even 62% are completely normal in the markets. Currently, we have digested a narrow 38% of the second wave of buying. With another asset, we would call this a mini-correction.

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Unsurprisingly, a familiar discussion that has been flaring up regularly for around 30 years is heating up again: Was the correction triggered by manipulation? This cannot be completely ruled out. It seems strange, to say the least, when futures are sold in volumes equivalent to almost 700 million ounces of Silver in annual production within a very short period of time. There is only one plausible motivation for this: someone wants to push the price down.

It is difficult to determine exactly who sold – and it does not help investors either. Manipulation or market mechanics? It’s a gray area. The fact is that everyone is allowed to act as aggressively as the rules permit in the market.

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However, what is crucial for assessing the precious metals markets is that the current correction was driven primarily by futures sales, not by a lack of physical demand. The aggressive sellers’ goal was apparently to dampen investors’ appetite for physical purchases – a strategy that has often worked in the past.

The Comex futures exchange also recently attempted to cool the market by raising margin requirements. The principle is well known: when margins rise, some investors are forced to close their positions, and the market calms down. This is what happened 45 years ago when the legendary Hunt brothers failed in their Silver offensive – precisely because of margins.

But the current rally is based on different factors: it is fueled by the unbroken interest of Asian buyers in physical material – and by Western investors who, in view of global uncertainties, also prefer to hold bars rather than paper. In China, ETFs with physical Gold coverage have recently exploded.

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Remarkably, physical buyers have remained completely unimpressed by the increased margins. This is because they are not involved in the futures market at all. The investments of non-commercials, big investors, are only slightly above average – a telling indication.

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This is underscored by the still high lease rates: even after the sharp setback, borrowing Silver still costs around 20%. Obviously, and for understandable reasons, hardly anyone is willing to lend out their physical metal.

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Bottom line: The recent correction may have dampened the spirits of some investors. But those who remain rational recognize that nothing has changed in terms of the fundamental arguments for precious metals. On the contrary – it has simply become cheaper to invest more. Demand for physical material is likely to remain high: the geopolitical situation has not changed, the debt problem remains present, and supply bottlenecks have hardly been resolved. In short: emotions out, eyes open. Gold remains Gold – and Silver remains the temperamental child of the market.

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