What the Hell is Happening With the Gold & Silver Prices?

For those of you that don't follow the precious metal markets, depending on which dates you choose, prices at present are about 15% - 30% down on the highs that they made around March. Although it certainly isn't news at all for markets to go up and down, what surprises me about the current state of the precious metals market is that prices appear to be rather disconnected or unrelated to the demand and supply of the metals themselves.

How in blazes can this happen you say? Well, it turns out that the total market for say gold or silver (or pretty much all commodities I'd expect) is comprised of the physical market and the deriviative market. The fact is (and how this can happen this simple guy from Freo still struggles to understand), the deriviative market for these commodities is significantly larger than the market for the actual physical stuff! What this means is that the supply or demand for the actual metal doesn't have a significant impact on prices, and it is the deriviative market that is far more important when it comes to prices.

One of the tenets that truly good traders follow (apparently, this is what I've read!) is that it's important to trade the market, and not to trade what the market should be doing. Although it's productive to have a logical view of how you see the market could / should / will unfold over time, it's even more productive to pay attention to what the market is doing, no matter what we think. A number of writers and pundits these days believe that silver and gold are massively undervalued and poised for explosive growth, (and they've been believing this for some years now), however I don't know that many have truly read the market's recent movements for what they have been - opportunities to take stock and re-evaluate ideas.

I do still believe that the precious metals are fantastic assets to own, and have a place in anyone's portfolio, particularly in a time when other asset classes such as property and equities are performing gyrations and are subject to uncertainty. I'm quite comfortable thank you very much owning gold and silver both through my business and personally. Does that mean though it should hold an overwhelming position in a portfolio? I base my own trading decisions on what I believe are the opportunities and costs of going either way - what opportunties will I miss out on if I load up on or increase my exposure to gold & silver now? What risks will I expose myself to if I stay out of gold & silver to a degree?

Slavishly putting an entire portfolio into metals, or keeping it all out of metals just isnt a sensible way to go in my book. Given that gold & silver are now a fair bit cheaper than they were a few months back, it is relevant to ask is now the or a time to buy in to get ready for a major move up? Indeed, is now a or the time to sell out in order to miss the rest of the drop? I think silver is ridiculously cheap at current prices given how hard the physical metal is to obtain, however I'm not about to sell up Chez Crellin to get into it!