Editor's Picks: Gold and Silver Prices Hit New Highs, Then Drop — What's Next?

Gold and silver are wrapping up a record-setting week once again.

Starting with gold, the yellow metal left market participants hanging last week after finishing just shy of US$5,000 per ounce. However, it made up for it in spades this week, breaking through that level and continuing on up to smash through US$5,500.

Silver was no slouch either. After hitting triple digits at the end of last week it moved even higher this week, spending time above US$121 per ounce.

Silver's push past US$100 and gold's rise past US$5,000 happened during the Vancouver Resource Investment Conference (VRIC), creating excitement for attendees, but also raising questions about whether a pullback was coming. Unfortunately, it didn't take long for those questions to be answered.

Gold and silver prices dropped precipitously as the week drew to a close, with the yellow metal finishing Friday (January 30) just below US$4,900 and silver sitting at about the US$85 level.

What's going on, and more importantly, what should investors do?

Let's tackle what's going on first. The broad consensus from the experts I spoke to at VRIC was that gold and silver prices continue to be driven by elements that have been in play for years, such as strong central bank gold buying and silver's persistent deficit.

But both metals have new factors contributing to their gains. For example, Adrian Day of Adrian Day Asset Management highlighted two points that have changed for gold:

"What's new, I think, are two things. One is the — can we say chaos? I think we can. But certainly the uncertainty generated by the current administration in the US has added to the gold buying. No question about that. It's not one particular thing. It's not Venezuela, it's not Gaza. It's just a general sense of uncertainty and not knowing what's next. And then the other thing that's incredibly important is Tether."

On the silver side, Willem Middelkoop of Commodity Discovery Fund summed it up like this:

"I call this move a silver short squeeze, which is a technical term known within financial markets and trading. You get a violent, vicious short squeeze when certain actors in the market are short a position and they need to buy it back in the market because the price starts to rise, and they're losing money every day. Once you have a short squeeze developing, nobody knows where the top will be."

So how should investors approach this environment? Personalization was a major theme among the people I talked to at VRIC, with many emphasizing the importance of understanding why you own the assets in your portfolio and what circumstances would lead you to sell.

Here's Lobo Tiggre of IndependentSpeculator.com on how that could look right now:

"If you're convinced that we're going in that blow-off top and it hasn't peaked yet, the thing to do is actually to buy the blue chips, to buy the biggest, most well-known names. I don't need to spell them out, you know who they are.

"Because the Johnny-come-latelies, the people who are hearing about gold for the first time on CNBC and all these generalist investors, they come piling in. They will go to, as Doug Casey used to say, those go-to stocks. They will go to those top royalty and gold producers, and that will be where that money goes first."

With that said, two key themes emerged when it comes to what experts are doing now.

The first is silver stocks. Multiple market watchers, including Rick Rule of Rule Investment Media, believe silver stocks are set to move higher now that the metal itself has broken out.

Rule said he recently sold 80 percent of his physical silver and used around half of the money to buy silver companies. This is why he made that choice:

"I took about half the money, not quite half the money, but about half the money, and I put it in high-, high-, high-quality silver stocks.

"My reasoning being as follows: If silver goes nowhere for a year, if it stays rangebound, the best silver producers are discounting US$45 silver. A year from now, if the price is at US$75 or US$80, they'll be discounting US$75 or US$80 silver, which means the stock will be up 50, 60, 70 percent. The speculative outlook for the silver stocks seemed to be better than the speculative outcome for silver."

The second place people are rotating to is oil and gas stocks. You may remember that I touched on this in last week's update, and the theme strengthened at VRIC — Rule himself took 25 percent of the money he made selling physical silver and put it in oil and gas stocks.

While opinions differ on whether now is the exact right time to buy, I heard multiple times that senior dividend-paying oil and gas companies are a play to consider for those who have taken profits in the gold and silver sector and are looking for the next "buy low" opportunity.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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