Gold is Monetary Value

We preface the post with a statement that has not changed since I began public writing nearly 10 years ago: Gold is not about price; gold is about value. This point was hammered home to me 11 years ago by a person who had much influence upon my viewpoint toward the financial system and its various diseased components at a time when I was ready to listen and understand.

So whether we are talking about 2013′s epic price crash or a new bull trend in 2014, the simple fact is that physical gold itself is a store of monetary value. That applied last year as the value was marked down by greed and confidence and it will apply this year as it is marked up in the face of a likely unwinding of those things. Humans, what funny and hyper kinetic animals.

Precious Metals Speculation

Ah, but this post is about the fun part, the speculative part where we humans can make gains from gaming the simple store of value and its wild little brother, silver. As asset market speculators we care about prices, right? How about the share prices of the completely blown to bits miners that dig the stuff out of the ground?

There is a reason we put so much effort (i.e. risk management) into not letting the declines of the last 2+ years hurt us, and that reason was to be fully intact for when it is time to speculate. Now, a bottoming process has been ongoing since last spring, believe it or not.

The Inverted Head & Shoulders scenario may or may not be the ultimate outcome of the weekly chart above, but NFTRH has been operating to its potential for months now as the grind in gold stocks has well, ground on. In fact, a grinding bottom would provide a better basis or platform for the rally (or baby cyclical bull) than the vertical thing that failed in 2012 off a ‘W’ bottom attempt.

Weekly MACD triggered up back in the summer and when it was confirmed by the slower TRIX we had our two most important bigger picture bottoming signals. These have kept us in the gold stocks game – whether substantially positioned or ready to be – since the TRIX signal. But again, the bottoming process has been a real grinder for the better part of a year now. Time flies when you’re having fun!

Not… this bottom has been grinding peoples’ nerves every step of the way and as noted to NFTRH subscribers along the way, this is a good thing. A grinding, painful and highly doubted bottom is a better bottom.

But it takes a new daily trend to even begin moving from a potential bull phase to an actual bull phase. Several weeks ago NFTRH was noting that a bull signal (for a rally at least) would be indicated by a rise above the 50 day moving averages in tandem with MACD going green (0+). While I personally positioned during the false breakdown below 200, it was advised in NFTRH that conservative investors and traders might wish to wait for the above noted signals. Check.

As to whether this is a new cyclical bull market or just a rally, the weekly chart above will eventually decide that question. There is no need to define it yet, because a bull phase is a bull phase as far as speculators are concerned. If it is a bull market, there will be plenty of time for late comers to jump in and mark it up later.

As for staying aboard the rally in the meantime, here is where the fundamentals will come into play, joining the technicals. During much of 2013 we were treated to much railing from within the gold ‘community’ that gold’s fundamentals had never been better. But in reality, gold’s fundamentals as NFTRH views them – which are beyond the scope of this post (ref: Gold Mining is Counter Cyclical), but are definitely not what you read in the mainstream financial media or hear touted by certain gold bug analyses – degraded consistently in 2013.

It can be argued (I for one have argued it) that these fundamentals were jimmied and rigged by all too cynical policy making, but just because something is rigged, you as a speculator, do not stand in front of it. In fact, as a speculator you put your dogma on a leash* and trade what is, not what your inner most convictions tell you should be. In other words, trade your brain not your heart.

Bottom Line

The daily trend in the precious metals and in particular gold and silver stocks, which have led the metals as we would like to see in a real bull phase, has turned up. A new bull market is still a ways from being indicated, but for now we’ll take a rally and realize that with the bearishness of the last 2+ years and the grind that the recent bottoming activity has been, a new cyclical bull market could also be in play.

Do not listen to the hype. The macro fundamentals have begun to improve for the gold sector and this will need to continue. NFTRH will manage these fundamentals every step of the way, as well as keep a running tab on the technicals. There will be hysterical rises and challenging declines going forward, but sector fundamentals and support parameters will successfully guide us.

Our big picture theme for 2014 has been a ‘macro pivot’ away from the trends of the last couple of years. Give the affordable NFTRH (weekly report and detailed ‘in-week’ updates) a try and you will likely not be disappointed (see subscribers’ thoughts). We are as we have been since the service’s launch in 2008, ready to speculate and/or manage risk as the market deems appropriate.

Biiwii.com | Notes From the Rabbit Hole | Free eLetter | Twitter

The moment gold passed the $1,300 mark yesterday silver woke up and sprinted ahead with a larger percentage gain. That’s the way it works with these monetary metal twins.

But how can any investment adviser really recommend something as volatile and difficult to time as silver? It often seems more trouble than it is worth because its long-term outperformance against gold comes at the price of short-term volatility.

Take the experience of 2008-11. Silver went on a huge roller-coaster. Down 60 per cent in the crash and then rallying 600 per cent from the bottom of the sell-off. Buy-and-hold guys tripled their money by the market top in April 2011.

Quite a roll!

Despite the collapse from almost $50 back to $18.50 since then and the recent rally this year, silver remains in a long-term secular bull market that started in 2000. What looks like a price disaster is actually an amazing buying opportunity.

For the prospect of another very strong rally in precious metal prices is growing by the day. An imminent stock market crash will transform the outlook for prices which has already confounded gloomy predictions for 2014 with a New Year rally while share prices have fallen.

The big change coming for gold and silver is a complete reassessment by markets about the outlook for money printing around the world. They have started the year believing that QE will be over by October and that the Chinese authorities are also committed to deflating their overblown credit markets.

Once stock markets tumble further the central banks will have to alter tack and flood markets with liquidity again to offet the deflationary impact. Gold and silver will be the most immediate beneficiaries of this volte face, and silver always tends to outperform gold when prices are going up. It’s a smaller and more tightly held market and so price reactions are more violent.

Precious metal rebound

This is exactly what we saw in 2009. After the stock market bottomed out in March it was gold and silver that led the charge back higher in financial markets. How far will they go this time before a top and a correction?

It took silver two years to top out last time. We have also seen a major correction in silver before the stock market correction this time around, so the two may not go down together. It is different this time to the extent that silver prices have already been through a crash.

So if the rebound of the last market was repeated silver prices of $100 an ounce would be on the cards. If you are looking for an investment with a low downside and a huge upside for the next couple of years silver stands out.

Gold has already priced in a lot of good news. Good news for everything else, that is…

SO GOLD in January did what it tends to do, and rose as equities fell.

That uptrend drew in “momentum traders” in Feb, pushing gold higher by backing gold’s 2014 rally to run further.

But this hot money perhaps ran into resistance this morning, just below $1300 per ounce. And for all gold’s new-found love (check the flood of bullish stories from Barron’s magazine, for instance), a couple of senior bank analysts say 2013’s sell-off isn’t done yet.

Both Tom Kendall at Credit Suisse and Edel Tully at fellow Swiss bullion bank UBS warn of “stale longs“. This old, tired money in gold wishes it had got out already…and is now waiting for the chance to sell at better prices from here.

In particular, says Kendall, some of the big-money wealth management crowdstill feels over-invested in gold. And as 2013 proved, those “real money” investors are the kind of participants who really move prices when they buy, or sell.

But how much stale money now sits with its finger on the trigger? The biggest ETF gold fund, the New York-listed SPDR trust, has offered a useful proxy for broader wealth-management exposure to gold in the past. Yet looking at its holdings now, there doesn’t seem much room for another big sell-off just yet.

Not after last year’s horror show…

Now down to 800 tonnes of metal, held in trust by HSBC somewhere in London, GLD shareholders have already liquidated the 150 tonnes of gold bought at prices north of today’s level (back between mid-2010 and end-2012).

Plus they sold another 400 tonnes on top, however. So gold would now have to drop another 35% in price before another tonne of GLD metal slips under water.

Put another way (and putting aside the fact that today’s GLD shareholders might be different people, who bought at different prices, from those whose demand first brought that tonne of gold into HSBC’s vault), gold would need to repeat 2013’s drop and more to drive more money out of GLD at a loss.

Tom Kendall’s bang on the money in saying that sentiment amongst fund managers needs to turn right around if gold is to keep rising in 2014. But how big a task would that be? The scale of ETF selling in 2013, and the size (and shock) of the price drop, means gold has already priced in an awful lot of good news.

Good news for the economy…for the stock market…real estate…and for investors wanting a decent return from interest rates.

They might get it, of course. But put the hot money aside. The stale money in gold might yet prove smart, and hold on…or buy more…if prices keep rising from here. Because that’s likely to signal trouble in other financial assets.

Just the kind of trouble gold helps investors protect against.

Adrian Ash

BullionVault

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich for just 0.5% commission.

(c) BullionVault 2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.