The sharp decline in the US Stock Market and the steep drop in oil prices last week seem to have impacted the price of gold futures and silver futures with both precious metals closing modestly down once again on Monday. The gold market’s retreat extends the losses that occurred last week with many gold traders reluctant to take long term positions for fear of a wave of panic selling if there is additional bad news regarding the subprime lending market and or from the hegde fund market. The weakness in oil prices more than likely contributed to gold’s slight decline and the silver market following suit. Conversely, the platinum and palladium futures markets have been gaining ground while the other precious metals drop indicating a possible shift amongst larger portfolio holders from less to more precious metals.

Mark O’Byrne, director of Gold & Silver Investments Ltd. stated in emailed comments “Given the clear and present danger in the global financial system, we believe that some 10% to 15% of a portfolio should be allocated to precious metals and to precious metal related investments”. However, given the historical data on gold from the period of 1995 until present, the market has seen the price of gold fluctuate between a low of $250 per troy ounce in December 2000 all the way up to $700 per ounce in December 2006 (as evidenced by the Kitco chart below).

If you follow the chart from December 2002 until present, it’s apparent that large scale gold investors have doubled their initial investment in five short years despite other economic trends and the impact of oil prices escalating to record highs. For comparison sake, the average price of a barrel of crude oil in 1995 was USD $14.62 and in 2006, the average price per barrel was USD $58.30. By comparison, the Dow Jones Industrial Index (^DJI) has seen a historical rise from 5,074.49 in December 1995 up to a high of 13,756.69 in June 2007 ². Comparing all three would make a reasonable assumption that investing across the precious metals market, “blue chip” stocks found on the Dow Jones Industrial Average and the S&P 500 and Crude Oil Futures would strike a well balanced portfolio capable of handling various economic and or political financial destabalizers. A more interesting chart to view is the historical gold prices from 1975 until present (once again courtesy of Kitco³).

Notice the spike in the value of gold starting in 1979 and then hitting an all-time high of $850 per troy ounce in 1980 and then plummeting back down to $350 per ounce by 1982. What happened to cause such a spike in the price of gold in 1979? Many economists conclude that the Soviet invasion of Afghanistan, which began around Christmas 1979, was a terrible global shock and a huge slap in the face to a cold war America who was already economically weakened by high inflation, high unemployment and high energy prices. Gold, often seen as a safe haven in times of panic and strife, simply reflected that fear. This marked the beginning of a 22 year bear market in gold futures that ended in 2002 when gold began to rise steadily again. Quite obviously, based on the events triggering 1980’s gold spike, it is quite easy to figure out what world events triggered gold’s steady bull market rise in 2002. The question is, if and when will the current bull market run it’s course and at what price will gold stabalize at if and when it enters another bear market?

Sources:

¹ Exerpted from : Historical Crude Oil Prices Table at InflationData.com
² Exerpted from : ^DJI: Historical Prices for DOW JONES INDUSTRIAL AVERAGE IN - Yahoo! Finance
³ Historical Gold charts courtesy of : Kitco - Gold Precious Metals