Over the past week or so, gold cracked through support at the $1,583 level, then bounced back up, and then plunged anew.
Now, gold is dangerously close to giving a MAJOR sell signal. Once it closes below the $1,527 level — you can kiss gold goodbye. It will plunge to $1,380 an ounce — and possibly lower.
Ditto for silver. Once it closes below $26.40 — kiss it goodbye too. It will fall to at least $20.47 — and probably lower.
Why do I keep harping on gold and silver in this column? Because I know there are scores and scores of investors who are getting bad advice that will result in terrible losses.
Look, gold IS the ultimate store of value. That is true. And someday, gold will head north of $5,000 an ounce.
But if you want to avoid losing money in the precious metals market and instead make the most amount of money you can, you simply must get your timing right.
Just as important, you must have an open mind when investing in gold and silver. You can’t get married to your metal (or any investment for that matter) — as if investing in precious metals was some sort of religion.
For instance, you have to realize that sometimes gold is money … and sometimes it’s not.
Right now, gold is not money. Just consider what’s happening in Japan. The wicked and aggressive devaluation of the Japanese yen is setting off a massive stampede OUT of gold and into cash and other assets.
If you don’t believe me, then read this recent article in The Wall Street Journal.
Why are the Japanese dumping gold, especially when their currency is being devalued?
It’s simple. The fall in the Japanese yen caused the price of gold in yen to spike sharply higher. So Japanese investors are cashing in their profits.
In addition, Japanese investors want to either spend their gold proceeds, or move it into other assets. They need liquidity. And holding on to gold is not a liquid situation.
It’s very easy to understand. This sort of thing is also happening in Europe, where gold demand is also down.
Why? Because if you have money in a bank, Cyprus has proven that European leaders will stop at nothing to try to solve Europe’s crisis, even if it means confiscating your money from your bank.
Gold’s not going to do you much good in that situation. If you take your money out of the bank and buy gold, how are you going to pay for the basic necessities in life?
Moreover, how are you going to move your gold out of the country, if that’s what you wish to do (which many Europeans are indeed doing)?
Moving physical gold around isn’t so easy either. It takes time and money to move your gold. And even then, you won’t know how safe it is, because in the back of your mind there’s always that fear that your gold could be confiscated.
The bottom line: While gold is indeed the ultimate long-term store of value against depreciating currencies and failing governments, there are times when forces that are seemingly bullish for gold are actually bearish.
I call it the yin and yang of gold, and for that matter, all markets. There are always two sides to a coin, two sides to a market, two sides to every piece of fundamental news out there.
Knowing which side is prevailing, why and when — are the keys to successful investing. That requires an open mind, no biases, and lots of experience with technical and cyclical analysis.
If this sounds a bit too theoretical or complex in any way, I assure you it’s not.
All you have to do is put yourself in the shoes of a Japanese investor who owns gold. The price of gold is spiking higher. Meanwhile, you know you have to get your money out of the yen because the yen’s only going to be further devalued.
You’re also frightened that North Korea’s crackpot leader, Kim Jong-un, may soon drop a bomb on Tokyo.
So you know you need cash, lots of it. Simple decision: Take advantage of the yen’s spike higher in gold, dump your gold and get liquid with cash.
Then, either pay some bills (before the yen becomes worth even less) … or get your money out of yen and into another country with a currency that’s at least losing value less quickly.
Or even better, into an investment that has a decent return, decent profit potential, and in a country and a currency in better shape than Japan’s.
Demand Falling in Europe, Too
Now put yourself in the shoes of an investor in Europe. You now know that European leaders may confiscate money from your bank account. You also are pretty much convinced that the euro is destined to fail.
Therefore you need to move your cash out of the European banking system. To do that, you have to sell your gold for U.S. dollars, and move your money, most likely to either Asia or the U.S.
I think it’s pretty easy to understand.
Later, in the not-too-distant future, the same fears of confiscation of wealth and further devaluation will hit the United States. And at that time you’ll need to move your money yet again.
There won’t be many safe-havens left at that point. So you’ll probably want to go back into gold. The new bull market in gold will then begin.
So you see, none of this is all that hard to understand provided you keep an open mind, question the conventional, and think independently.
You’ll be surprised how doing that can turn you into a successful investor.
I repeat my warnings of last week …
Do NOT look to gold and silver for safety right now. Ditto for mining shares.
If you are loaded up with gold, silver, or mining shares and don’t want to sell, for whatever reason, then at least consider hedging.
My favorite vehicles for hedging are the ProShares UltraShort Gold (GLL) and the ProShares UltraShort Silver (ZSL). For mining shares, I suggest the Direxion Daily Gold Miners Bear 3x Shares (DUST).
Stay mostly in the dollar now. The greenback is in an intermediate-term bull market as the euro is at the beginning of its end, and the Japanese yen is going to be aggressively devalued.
Consider purchasing the PowerShares DB US Dollar Index Bullish Fund (UUP) for a speculative long dollar play.
Don’t be afraid to buy U.S. stocks. Though a pullback is overdue, the U.S. equity markets are very strong.
Just keep in mind that the new bull market in stocks really has nothing to do with corporate earnings or the economy. The strength in our equity markets is largely due to capital flight out of Europe and Japan, and out of European and U.S. sovereign bond markets.
Best wishes, as always …
Larry
Related posts: Important Update On Gold and Silver!
Whistleblower Andrew Maguire told King World News that more than a stunning 500 tons of paper gold was sold in friday’s takedown in the gold market. Maguire also spoke to KWN about the staggering Chinese physical gold purchases. Read what Maguire had to say in this remarkable and exclusive interview HERE
The cyclical bear market in Silver is serving its purpose. Its correcting and digesting the 6-fold advance that took place in less than two and a half years. A similar correction took place in the mid 1970s that led to the parabolic move to $50. Amazingly, if you line up Silver’s performance from its 1971 low to 1980 high with Silver’s performance since its 2008 bottom, you’ll notice strong parallels.
(Note that the blue prices are rescaled). The initial bull run was stronger, lasted a few more months and that could be why the current correction is slightly deeper. Nevertheless, look at how similar the two are!
Its important to note that huge moves require long periods of digestion and correction. Commodities typically encounter near vertical moves that are sprung from deeply oversold conditions or multi-year consolidations. The two initial advances on the chart are quite similar and that is a reason why the ensuing corrections are similar.
Moving along, Silver is at an interesting juncture as it continues to hang above multi-year support at $26 amid persistent extreme bearish sentiment. This chart from Tiho Brkan shows that gross speculative short positions are at their highest levels in decades. The short positions are potential fuel for a sharp rebound.
Furthermore, last week public opinion (an amalgamation of a handful of surveys courtesy ofsentimentrader.com) reached the lowest level since at least 2004.
Following its run in the early 1970s, it took Silver three and a half years to begin its next run and five years to make its next high. It has been about two years since Silver’s last peak. Huge advances require quarters and years of digestion. This is how markets work. It’s not manipulation or a fake market as some say.
The good news is the short-term outlook is favorable. Precious metals markets have yet to put in a bottom but each new day brings us closer. While Silver won’t touch $50 anytime soon (or even $40), a rebound to $35 would be quite substantial in percentage terms. Most Silver stocks would rise well over 50%.
The long-term trend and fundamentals remain intact for both Silver and Gold. Day traders and reporters will tell you there is no sovereign debt bubble or threat of inflation but, as Kyle Bass recently pointed out that can change very quickly. Remember the financial crisis? Look at the charts of financial stocks. They were fine for many years and then fell off a cliff within a year. There were people who, in the middle of 2008 thought we weren’t even going to have a recession! Most never learn.
I suspect the major catalyst will occur when governments lose control of their own bond markets. They have to continue to print money for years and it will be a major catalyst for Gold & Silver when bond markets go the other way. This could be the catalyst for Silver eventually breaking $50 and reaching triple digits. Currently, quality gold and silver miners (mostly not in GDX or GDX) are trading well off their highs and at their lowest valuations in quite a while. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains in the next few years then we invite you to learn more about our service.
Most chartists use daily or weekly charts. Few look at monthly charts. I don’t know of anyone (myself included) who pays any attention to quarterly charts. We decided to take a look at the quarterly chart of the HUI gold bugs index. It is below and we note the two big downturns in the market. Also note the importance of 300, which has been support for the past seven years.
Some have chided your humble author for saying that the gold stocks are still in a bull market. After all, these two big downturns invalidate any assertion of a bull market. Right? Well, the previous bull market in gold stocks also included two large downturns. Within the 1960 to 1980 bull market, the first correction was 61% and lasted about two years. The next correction was 68% and also lasted about two years.
Even more intriguing is the similarities between the gold stocks over the past five years and the Nasdaq from 1987 to 1990. Both markets crashed and then quickly recovered to a new marginal high. Furthermore, note the price action in the Nasdaq during late 1989 to 1990 and compare it to the price action of the gold stocks over the past 15 months.
Like the Nasdaq, the HUI formed a bullish double bottom (A,B) and advanced quickly and strongly. Both markets then fell apart. The Nasdaq declined 31% in only a few months. That was almost as bad as the first crash! The gold stocks have declined about 40% in the last six months.
After its bottom in 1990 the Nasdaq gained nearly 16-fold over the next 10 years. Following its second massive downturn within the 1960-1980 secular bull market, the Barron’s Gold Mining Index advanced nearly 7-fold in the next six years. This is not to say that the gold stocks are likely to repeat the same pattern. This is to show that there is a strong historical precedent for the current downturn to occur in the context of a major bull market.
Ok, I know what you thinking. Jordan, why didn’t you provide this analysis weeks or months ago? The answer is, we’ve been aware of these charts and that is one of many reasons why we’ve slowly “scaled into” positions. We’ve told premium subscribers what our favorites are and how we plan to scale into and build those positions over the spring and summer months. On March 1 we wrote: As for the short-term, we began scaling into positions last week but maintain plenty of cash to be deployed (potentially) at our strong targets of HUI 336 and HUI 300.
Currently, the market remains in a bottoming process. We don’t know if Thursday’s low at 317 marked the bottom or not. Judging from the quarterly chart it looks like we could see a test of 300 or a temporary break of that level. On the other hand, Wednesday’s selloff occurred on record volume and Thursday’s reversal was quite strong. There is a chance a small head and shoulders bottom could be developing. Strong follow through on Friday would certainly raise the odds that 317 was an important low.
In any event, we are moving closer and closer to a major bottom and a large rebound in percentage terms. Weeks ago we noted the extreme pessimism in Gold was beyond the 2008 low by most metrics. Sentiment towards gold stocks is even worse. Traders and momentum players think the sector is one big joke. Mainstream funds who have the slightest interest in the sector are focusing on the metals and not the shares. I can’t recall a sector that has ever been this hated within a secular bear market. It is quite amazing. That aside, we are quite confident that the sector is days to a few weeks away from the start of a very strong rebound. Be advised that there are hundreds of mining stocks and stock selection is critical to achieving strong returns.
Good Luck!
Jordan Roy-Byrne, CMT
Is it time for the Federal Reserve (Fed) to stop printing money? Today, we focus on what might be going through Fed Chair Bernanke’s mind and the possible implications for the U.S. dollar and investors.
This week, the casual observer could come to the conclusion that the Fed wants to phase out printing additional money. The Federal Open Market Committee (FOMC) Minutes to be released this Wednesday might strike a comparatively optimistic tone. The only caveat being that the FOMC meeting statement included the language: “The Committee continues to see downside risks to the economic outlook”1 which may be elaborated on in the Minutes.
Since then, even historically dovish2 members of the FOMC have presented a view in public speeches that the Fed might gradually phase out printing more money. This suggests that the Minutes will have a broad discussion of such a gradual “exit,” even if a phasing out of additional monetary easing can hardly be characterized as such. Later in the day on Wednesday, two “hawkish” Fed Presidents are scheduled to give speeches. Taken together, investors might be excused to think an “exit” might be coming closer.
But in many ways, those Minutes are rather dated. Most notably, last Friday’s payroll report suggested the economy may be sputtering once again. That, in turn, suggests the printing press should keep running at high speed. “Printing” is figurative, as the Fed creates money out of thin air, through the stroke of a keyboard, crediting the accounts of large banks in return for buying Treasury and Mortgage Backed Securities (MBS).
Will the printing presses in the rest of the world influence the Fed back home? Not reflected in the Minutes is the new era in Japan, where the Bank of Japan has promised it will do “whatever it takes” to beat deflation (for an in-depth look on Japan, including our prediction that the yen will be worthless, please see our recent analysis “Monetary Madness in Times of Unsustainable Deficits”. Also keep in mind that in the not-too-distant future, Mark Carney will take the reins at the Bank of England, likely introducing a higher inflation target and/or nominal GDP targeting. With Japan greasing the wheels, the Fed might be inclined to be less generous. Indeed, the Fed has applauded Japan’s monetary largesse, possibly because it provides the Fed cover for its own actions. It’s a relief for Bernanke, who in recent times had to look with frustration at Europe, where mopping up liquidity is the modus operandi: correct, the balance sheet of the European Central Bank (ECB) has been shrinking of late, as ECB loan facilities are less in demand. The ECB’s relative frugality is a key reason why the Eurozone has been experiencing so much strain, as countries actually have to try to fix their problems rather than rely on free money to continue with unsustainable habits.
Ultimately, while the Fed does get concerned when strains in the rest of the world risk affecting the U.S., the Fed is primarily concerned about the U.S. economy. And within the U.S. economy, Bernanke is foremost concerned with the housing market. In our reading of Bernanke, he strongly believes that as long as millions of homeowners are underwater in their mortgage, consumers will be reluctant to spend. To fix the problem, consumers could downsize to homes they can afford (read: foreclosures, bankruptcies); could pay off their debt (good luck on that one with real wages not going anywhere); or, alternatively, and this is where the printing press can be of help, the Fed can help push up price levels.
At the same time, Bernanke’s worst fear appears to be a premature tightening; he has indicated on many occasions his conviction that the biggest policy mistake during the Great Depression may well have been that interest rates were raised too early. Trouble is that, historically anyway; the market is in charge of longer-term interest rates (the “long-end” of the yield curve). To contain the long-end of the yield curve the Fed has: promised to keep rates low, purchased longer dated Treasury Bonds and MBS, engaged in Operation Twist, and finally inched from a focus on inflation to a focus on unemployment. All of this, in our assessment, to prevent the bond market from selling off should economic growth pick up. Indeed, we believe the biggest threat we are facing might be economic growth, as it puts the bond market at risk. A key looming problem: questions about the sustainability of US government debt will rise as long-term interest rates rise.
But for the time being, the economy may be sputtering once again. So, in a nutshell, an “exit” is, in our assessment, off the table in the short-term. No matter what the FOMC Minutes are going to say. In the medium-term, Bernanke is hoping that Japan’s monetary easing, even if contained to government securities, will encourage Japanese private investors to buy government bonds overseas to make his own life easier.
For now, the price of gold appears glued to the Fed “exit” question. But as we believe there is too much government debt in the developed world, we expect the Fed, BoJ and BoE to continue printing money on a grand scale. As we move on to new stages, the price of gold may once again become a good reflection of where we are heading. Incidentally, during the peak of the Eurozone crisis, of the major currencies, the euro had the highest correlation to the price of gold; few gold bugs would have wanted to hold the euro as a substitute for gold, but to the casual observer, their price movements had a lot in common. Of late, gold appeared to do well when the yen performed poorly – a price action that’s closer to the heart of gold bugs.
The greenback itself has had a rough ride of late: giving up most of its gains for the year versus the euro as the ECB is structurally far less likely to deploy its printing press to fix non-monetary challenges, such as excessive government debt or an undercapitalized banking system. By the way, few may be aware that the euro was up almost 2% versus the dollar in 2012: that’s what the U.S. dollar was able to achieve during a period of great stress in the Eurozone.
More broadly speaking, we have seen the U.S. dollar attempt to rally whenever there’s a crisis. I note “attempt” as it also appears that such rallies have become less and less pronounced. There may be two key drivers for this: first, the U.S. government’s balance sheet is deteriorating at a faster pace than the balance sheets in much of the rest of the world; and second, wherever there is a crisis, it is being patched up. That doesn’t make the rest of the world “safe”, but it may be perceived to be less risky than before the patch was applied. As such, when the pendulum swings towards risky assets, more money may be staying there. Having said that, it’s also not the same “risky” asset each swing of the pendulum; last August, when ECB head Draghi imposed a new process on the Eurozone (see our analysis Draghi’s Genius), money wasn’t flowing towards commodity currencies and precious metals, but into the euro.
Should the FOMC Minutes trigger a rally in the U.S. dollar, it might provide a good opportunity to diversify out of the greenback. We will give an updated on specific currencies and gold in our upcoming analysis; please sign up for our newsletter to be notified. As we continue this discussion, we invite you to register to join us for our webinar on Thursday, April 18, 2013.
Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.
1The Minutes refer to the March 19/20 FOMC meeting, held a few days after the market confusion created by the proposal to “tax” insured bank deposits in Cyprus, ahead of the government’s U-turn where, after some chaos, Cyprus backed off from the idea again. Despite the perceived turmoil, however, the market noted no “contagion”, with Spain holding a very successful Treasury bill auction on March 19. Also note preceding U.S. unemployment reports had been rather positive.
2 “Dovish” FOMC members are considered those typically associated with policies favoring more monetary accommodation; in contrast, “hawkish” FOMC members are typically associated with policies favoring monetary restraint.
I know Mike is a very solid investor and respect his opinions very much. So if he says pay attention to this or that - I will.
~ Dale G.
I've started managing my own investments so view Michael's site as a one-stop shop from which to get information and perspectives.
~ Dave E.
Michael offers easy reading, honest, common sense information that anyone can use in a practical manner.
~ der_al.
A sane voice in a scrambled investment world.
~ Ed R.
Greg Weldon
Josef Schachter
Tyler Bollhorn
Ryan Irvine
Paul Beattie
Martin Straith
Patrick Ceresna
Dane Eitel
James Thorne
Victor Adair