For gold and silver investors this has been one of those weeks when you just wanted to bury your head in the sand, weep, then re-emerge in six months time.

Many of the most unemotional traders I know have been wailing like bereaved heroines from a Greek tragedy, while others have been seen approaching strangers in the street and asking them for a hug.

In typical fashion, gold and silver have not been playing to the script. A war breaks out between Russia and Georgia. You’d expect gold to rise. But the opposite happens: we get one of the most violent sell-offs in recent memory. Gold breaks virtually every technical support level. Those on margin are forced to liquidate and the decline accelerates.

Where will it end? Is the bull market over? It could be.

Then again, it could also be the daddy of all buying opportunities…

What triggered the violent sell off in precious metals

$850 an ounce was a huge number for gold, both technically and psychologically. Many traders will have had stops just below that level. It held for the weekend then on Monday gold went through it like a sharp knife through warm butter. The dam bust and a sea of stops were triggered. Worryingly, key support has now been broken.

Silver, meanwhile, as it sometimes will, has plunged to the downside with a violence that is shocking. Full dollar daily moves have become the norm. Silver never behaved with much respect for conventional technical indicators – she has regularly broken key support levels to the downside, throughout this bull run – but this last week she has been gesticulating at them like some sort of taunting leprechaun with an ASBO.

This sell-off will have hit precious metals investors in two different ways. Those who hold only physical will have raised a weary eyebrow and observed, “Oh, another August sell-off” before returning to their beach read, possibly Ian Fleming’s Goldfinger. But those who spreadbet or use CFDs or other forms of margin, if they were long, will have been bleeding behind the eyes. They won’t need any lecturing on the dangers of attempting to trade gold with margin. It is a notoriously difficult thing to do. And to trade silver with margin, as I have said before, is nigh on impossible.

But, speaking of bleeding, didn’t Baron Rothschild say that the time to buy is “when there is blood on the streets”? Well, there is blood on Margin Street.

Before we consider what should be our next move, let’s just remind ourselves what has triggered this one.

Firstly, the US dollar broke out to the upside (see below). Gold will often trade in an inverse pattern.

What caused that sudden turnaround? The dollar had reached its lowest point since April. There was no change in policy or rise in interest rates. According to James Turk, Federal Reserve reserves of US government paper, held in custody for central banks, grew by an annual equivalent of 38.4%, when the normal growth rate is 17.3%. For whatever reason, central banks – no doubt followed by speculators – had been accumulating dollars.

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Source: Four Reasons to Buy Gold Now