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Is Gold at a Turning Point?

Precious metals investors' heartbreak may soon be over
Wednesday, June 12, 2013, 8:18 PM

There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so.

In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.

A Hard Look in the Mirror

The past two years have not been kind to holders of the precious metals. The price of gold is down over $500/oz since the record high (nominal) price it hit in August of 2011. That's a decline of 28%. Silver has seen a decline of 56% over the same period.

A healthy amount of that decline came in the past seven months, which have pretty much seen a steady price deflation punctuated by sharp (and historic) downdrafts:

On top of these grim charts, daily headlines touting, often with delight, the demise of gold appear nearly everywhere in the media.

And forget about PM mining stocks. They have been absolute widow-makers for investors:

(Source)

It's hard to argue that PM mining stocks aren't the most hated sector in today's markets. The chart below shows that last month, the bullish sentiment on gold miners dropped to 0%. Can't go any lower than that:

Wasn't reckless central-bank money printing going to flood the world with paper currency, sending gold prices and those of its "poor man's" sister, silver to the moon? Weren't the markets going to crack as the unresolved economic and financial rot in the U.S., EU, and Japanese systems became further exposed, sending capital fleeing into the bullion market and driving prices much, much higher? Weren't escalating mining costs going to march up the price floor for the precious metals?

Why haven't any of these scenarios happened? Were we wrong in our reasons for purchasing gold and silver?

Are we the clueless patsy at the poker table?

The Way of the World

These are very understandable questions to be asking. You wouldn't be human if you didn't.

So, it's wise to return to the #1 lesson of investing: Never fall in love with your positions. Be sure to question your rationale regularly and often. Remove emotion from your decision-making, look to what the data tells you, and continually ask yourself: Ignoring my past decisions, would I purchase this investment today? If the answer is no, lightening up your position is almost always the right decision.

Chris and I follow the precious metals markets on a daily basis, and we frequently challenge the logic behind our support of them. But at this time, we can find nothing nothing that has happened over the past two years that invalidates the principal reasons we've laid out for owning precious metals. You can review these reasons in detail on our foundational report, The Screaming Fundamentals for Owning Gold & Silver.

The hard truth for us investors is that secular market trends take time to play out. Nothing moves in a straight line. And they are many false signals along the way. There are no sure bets, no risk-free winning options to pick.

But the good news is that the laws of physics and rationality always prevail in the end. If you can identify the right endgame and position yourself for it patiently, the messy volatility along the way really won't mean much in the big picture.

But Has Anything Really Changed?

Let's look at the key reasons why we originally recommended that investors look to the precious metals as a safeguard:

  • Negative real interest rates
  • Fiscal deficit spending and unserviceable sovereign debts
  • Loose, if not reckless, monetary policies
  • The price of newly mined ounces continues to climb higher and higher, due both to reduced ore grades and higher costs for fuel and equipment.

Negative real interest rates have always been supportive of gold prices. While admittedly that's not been the case for the past two years, we now see that historic relationship re-expressing itself.

After all, when the return on cash savings is virtually nothing and the money printers are running, inflation eats away at fiat purchasing power. Gold, as money, offers protection from this.

Perhaps things are different this time, but we're thinking not.

The degree of fiscal and monetary recklessness has taken us by surprise, both for the intensity of the actions already taken, but also for the fact that financial markets have adjusted to the practices and now treat them as normal, if not desirable. While the U.S. deficit has been declining from its record highs, much of that is due to accounting shenanigans, all while our dangerously high debt-to-GDP ratio (as well as those of most other developed countries) continues to worsen.

Mining costs have been on a steady march upwards over the past decade, setting an average "all-in" cost floor now very close to the current price of gold:

Even exploration costs have skyrocketed, which, importantly, is happening in parallel with a marked decrease in discovery volumes: 

(Source)

Gold, it seems, is getting both harder to find and harder to get out of the ground.

And to the above list of original fundamentals, we must sadly add several new drivers:

  • MF Global proving that client accounts can be looted and then drawn into a lengthy and unsatisfying bankruptcy/creditor process
  • Cyprus proving that the banking system intends to make depositors pay for its mistakes
  • Politicians openly calling for various wealth taxes to be levied on anybody who has managed (dared? bothered?) to save up funds

And one last big one: a new secular change in rising interest rates that threatens to create havoc in world economies and financial markets across the world.

(Source)

After a decade of low and declining interest rates, yields are back on the rise. The low cost of debt that the markets have become used to has created a worldwide bubble in bond prices, about which experts like Bill Gross have been increasingly vocal in issuing dire warnings. A popping of this bubble will increase borrowing rates for governments/business/consumers, depress home prices, make mortgages more expensive, and basically act like kryptonite to any "recovery" in the world economy.

Wall Street has certainly taken notice. And it's worried about the implications:

In a Shift, Interest Rates Are Rising (The New York Times)

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.
 
As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil.

Bond bubble threatens financial system, Bank of England director warns (the guardian)

A key Bank of England policymaker has warned of the risks to global financial stability when "the biggest bond bubble in history" bursts.
"Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted."

60% chance of global recession: Pimco (CNN Money)

Pimco's founder and co-chief investment officer, Bill Gross, argued last month that central banks' ultra low interest rate policies and ongoing bond-buying programs have resulted in a financial system that is "beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions."

Lastly, there is the wild-card possibility improbable, but certainly worth considering because of the gains to be had of gold being re-monetized as a means of balancing and settling international accounts.  Should that transpire, gold will be worth many multiples of today's value.

The Light at the End of the Tunnel

For all the reasons above, the bruised precious metal investors out there should still sleep well at night, secure that the foundational rationale for holding gold and silver remains intact.

But, excitingly, there are numerous new compelling new reasons to hold on to or add to your precious metals stack. 

In Part II: The New Game Changers for Gold & Silver, we delve into the very positive, very noteworthy developments afoot, including:

  • A seismic change in the commercial trader positions, returning to a bullish stance not seen since 2004 (and changing the incentives for any potential price manipulators)
  • "Unprecedented' retail investor appetite for bullion
  • Accelerating East-to-West demand for physical gold and silver
  • Continued accumulation by world central banks
  • Shockingly depleted Comex inventories available for delivery

And we revisit the signals to watch for that will indicate that the secular bull market has run its course (none of which are remotely visible at this time.)

Trying times like these are designed to wear you down and force weaker hands to capitulate before reversing. We remain steadfast in our conviction that the precious metals investment thesis remains healthily intact, and that the real price action in the gold and silver story has yet to be seen. And we see increasing evidence indicating that the next big upward reversal is near at hand.

Stay disciplined.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

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32 Comments

Wantingtoretire's picture
Wantingtoretire
Status: Member (Offline)
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Posts: 5
You are not dealing with the laws of physics

You are not dealing with the laws of physics. You are dealing human psychology and behavorial economics.

SPAM_ferralhen's picture
SPAM_ferralhen
Status: Silver Member (Offline)
Joined: Oct 14 2009
Posts: 151
other thoughts about staying alive

i don't know all the fancy reasons about charts etc..so count me stupid if you so choose.

when i do invest my money in things based on the current "news/logic/reasonings" i lose money every time.

when i buy in at lows...in a solid investment...i make money only if i sell at a higher amount than i paid.but always. i bought silver around 1999 for $5 an ounce and sold at $45/ounce a little while back.....no reasoning other than oh, oh oh, look...a 9 fold increase...grab it.so i did. i ran not walked to the local dealer who cheated  me quit a bit on weight and going rate...but i factored that in.... it peaked a few days later at $49 and then ...well you know what it is today. i will buy in when i see it at $8-11 an ounce.and i will see thatin my lifetime i believe.silver will lose it's manufacturing value as that all falls off.

perceived value: if people believe something has worth, then for a time it does act that way.

re: gold....remember we are talking about it's value in us dollars. that doesn't mean gold is worth more, it only means the markets say it's worth more in  us dollars....gold theoretically stays the same as it is

.so it is more a marker of us dollars than the value of gold.

us dollars are actually worthless....we are just waiting for that idea to catch hold.

gold is fiat just like paper us dollars are, and digital us dollars. it's all perceived value. and right now the perceived value is that they all have buying power. i don't think this will remain so for very much longer. either paper or gold having value...digital value is setting up to get a run....roasting chickens are looking more valueable....i can eat them and definitely trade for something or a favor...or fire wood....but then we get back into the future again.  it's how we are. we discount the future for a hamburger today. thanks wimpy for the model.

i think in the immediate aftermath of a collapse(which i believe we are in process of) none of the fiat currencies will be deemed valuable--gold, paper, digital...seaschelles....tulips..stocks ,bonds to a populace that is out of touch with reality and definitely not in pocession of life sustaining skills, or resources. so at this point in all articles, vague negative terms get used ...like "then the bottom falls out, or what awful things will occure etc etc etc...it leaves your mind to conjure your worsest fears...take the time to think things through folks...instead think of what you need not what you will lose..and you will be ok

we are talking worthless right now for all of the above currencies..however, perceptions on them are fluctuating and so the movement fools people into thinking value or worth....not so. it's pretty much worthless ....all of it.  there i said it.

having said that scary thought...now i can prepare and adapt where i need to. i can focus on having what i need to stay alive vs have worth 200 years from now.. oil era is on the way out..fathom that or think what you need now to live to be satisfied.

i'm sorry to you all to say this, but the idea to try to carry wealth into the next phase/dark age...is again only for a select few, the 5% if you will. i know i am not that greedy to be one of the  5% or that inside the loop.

history shows that mankind swirls in this fallacy for only so long and then it tanks and starts over...maybe not at zero but damn close enough. simplicity ensues.

re gold: i think for me  it's best to follow the drift of the administratiion(us govt)ic. if the west is selling to the east then i shall too. this is not an age where fundamentals apply....it's haywire out there  and senseless.

in a matter of a couple of weeks, i will be self sufficient and not longer online.  the internet, cell phones, and the dollare are all complexities that i can't relie on. oh yes...electricity from the grid  and gasoline...

in a few weeks i will be free of the system....i've worked hard on small money to do this...while i've had the opportunity to do so.

gold, soil any of it...is not a savior so don't look for it to be that.

SeniorD's picture
SeniorD
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Posts: 32
PM Manipulation By The Central Banks?
If you don't think that PM's are now being manipulated by the Central Banks, then I think that you should not be investing in buying additional PM's!
BUT
If you believe that the Central Banks cannot continue to keep printing paper money forever then what is happening now is nothing but a huge buying opportunity!
 
Consider: As the Central Banks further restrict credit and loans to us, what other options besides selling PM's (at a large discount )do small investors have, if they want to grow what is left of their portfolios?  This is a move to drive a stake into the hearts of all those that are still holding PM's; while at the very same time, these same Central Banks (who are in on the deal) are scooping PM's up (using their own printed paper money) at very low prices.
 
My gut feeling is that when the PM "reversal" happens, it will be so extreme that most small investors will not be able to jump on-board before the prices have skyrocketed relative to where they are currently, due to the market dynamics that favor the really big investors.
 
Here is a great PM question for you:
Are the Central Banks still buying Gold, and if so why?
 
I look forward to your comments!
 
timeandtide's picture
timeandtide
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Posts: 54
Cash and Courage

First and foremost, I think the weakness in gold is a forecast of the deflation to come. Banks and financial institutions worldwide are still sitting on many severely impaired or worthless "assets". In the US, it would appear that some of the rubbish has been off-loaded onto the Federal Reserve but that is really no more than a sweeping under the carpet exercise. The US banks are part of the Federal Reserve system. Essentially, they own it and are resposible for bailing out the Fed if it gets into trouble (light-hearted joke - it is in trouble)..

The hope has always been that things would pick up, growth would return and those assets would either start performing again or could slowly be written off. That is not happening. Banks have gone quite a long way towards restoring their balance sheets by taking huge bets with more or less free funding. In the equity markets it has been quite successful with one short squeeze after another. The wonder is that the shorts have kept coming back for more punishment. Without the shorts that game will be over.

In other markets I doubt there have been many successes for the large institutions. At some point the holders equity, as opposed to shorts who borrow stock, will lose their faith in the Bernanke "printing" machine and so will those on the Fed committee. The same resolve is no longer there and they can hardly have not noticed that the Japanese attempt at quantitive easing has backfired with rates rising (as they are in the US).

We are now on countdown to a major deflationary episode. Values will be decimated while, ironically, dollar value will rise as trillions of those make-believe digital dollars just disappear. Dollar value will rise because there will be less of them so their purchasing power will be greater - hence, the nominal dollar value of gold will fall.

All the talk about gold market manipulation is true as it is for every market. That is the nature of markets. Whether manipulation has any effect on the longer term direction of any market is very doubtful. Derivatives such as futures may have originally had a hedging purpose but today the myriad of derivatives are there to get an edge on a market, to twist and manipulate in your favour. The bigger you are, the more effective  your manipulations can be. Go back to any major market top and there is always more talk of manipulation for the obvious reason that there is more manipulation at market tops. The strongest, largest and most successful are in a better position to manipulate and their success also leads to complacency. That is why sentiment is always most bullish at tops.

Trying to gain out of this is a Quixotic quest. It will be hard enough just to maintain your capital. Remaining in cash seems the safest option for me and paying off all debt. Do whatever it takes to hold onto your job or to remain in business. When the dust settles, you may find that you are no worse off than before. Nominal values of many or most things may be crushed but relative values will probably be similar. If you have cash and courage, you will be in a great position to buy assets at or near the bottom. But you have to have cash so liquidate anything now that gives you doubt or that you do not need. Best of luck to all.

Doug's picture
Doug
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plummet point

Today the turning point looks more like a plummet.  The question is, is there a bottom somewhere above negligible?  How many of you brave souls are buying at these new lows?

Doug

Adam Taggart's picture
Adam Taggart
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Posts: 1909
Painful

These are certainly trying times for owners of the precious metals.

Why are gold and silver selling off so spectacularly vs everything else? Especially after an already-ugly run in the past few months?

I spoke with a number of PM analysts (both macro & technical) and dealers when writing the fundamentals review above. I've been on the phone with many of them this morning, as well.

All agree there are no good reasons for the current price action beyond the animal spirits of markets where sentiment runs roughshod over sanity.

Here's a chart of gold sentiment from late April (the most recent I can find). It was even lower than scores seen during the 2008 bashing (and has likely dropped further since this chart was published):

(source)

Some see today's downspike as yet another raid engineered by the big banks with concentrated positions, a likely-final capitulation of the levered longs ("shaking the last fruit from the tree"). The charts mentioned in Part II of the article above show that these big banks are switching from net short to net long, so they very well may be trying to get everyone out of the PM pool before allowing prices to recover.

The technical side sees today's action as potentially positive if prices stablize here. Technicians like to see a capitulation downspike to mark a botton, before getting comfortable calling a trend change in the other direction.

I realize none of this likely soothes the pain PM holders (Chris and myself included) are feeling right now. Precious metals are volatile, today's markets are often irrational (and broken), and there are a lot of forces coming to a head right now (which Chris will write about later today) that are creating a lot of thrash and turmoil.

During these times, we need to remind ourselves of why we own what we own, revisit our investment theses (which is the purpose of the orginal post above), and act with the courage of our convictions. We still think the fundamentals for gold & silver are as strong as they ever were. In fact, today's lower prices make them even more compelling.

If you're wondering what we're doing, we're staying the course.

Time2help's picture
Time2help
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2 cents

BTFD

thc0655's picture
thc0655
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Posts: 660
Downspikes

I agree with you Adam:

The technical side sees today's action as potentially positive if prices stablize here. Technicians like to see a capitulation downspike to mark a botton, before getting comfortable calling a trend change in the other direction.

One of these downspikes will mark the bottom and then I'm expecting a huge rally upward.  I can imagine such a rally making it very difficult for small retail buyers like me to get ANY gold/silver at ANY price. If not that dramatic, gold/silver may only be available at some near future period at very large premiums.  (My local dealer ran out of product on April 15-16 as people rushed in to buy at that bottom, raised his premiums, and waited for deliveries.  Premiums have since come back down.) So, I'm with you and others: every downspike is a buying opportunity and each one may be the last before we see $2000 gold in the rearview mirror.
 
I timed it well and bought at the bottom of the last downspike on April 15 and I don't regret it one little bit today.  I'm watching today's action and will be buying again as soon as I think it's bottomed and starts back up. One of these days the downtrend will reverse and I don't want to regret not buying even a few ounces at this level.
 
Unlike some people, I have years to go before I will want or need to convert PM's back into currency.  That gives me the luxury today of not having to panic. I'm keeping my eyes on the fundamentals and the all the fundamentals are saying the best days for gold and silver are ahead of us.
dickd's picture
dickd
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I hope thc0655 is correct in

I hope thc0655 is correct in saying:

"Unlike some people, I have years to go before I will want or need to convert PM's back into currency.  That gives me the luxury today of not having to panic. I'm keeping my eyes on the fundamentals and the all the fundamentals are saying the best days for gold and silver are ahead of us."

because I'm in the same boat but it sure takes a lot of courage to be a "brave soul" as Doug calls us!

I continue to buy on the way down!

dickd

Nervous Nelly's picture
Nervous Nelly
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Posts: 209
SHTF

Two weeks ago I moved most of my investments in cash.....Money Market. 

I told my boyfriend yesterday morning that things are going to get real ugly in the next few days and beyond..  It's happening and it ain't finished!  My guts are good at that. 

My gold investment is melting away $ but I'm not selling. I still believe that when people really realize what's going on, the panic will appear. 

Hold on.

NN

davefairtex's picture
davefairtex
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Posts: 1494
no reason for price action?

Let me try and give some reasons - other than animal spirits, that is.

Everything is getting hammered today, literally everything.  Every asset class in every country is getting sold - equities, bonds, commodities - practically the only thing up today is the US dollar.  Gold and especially silver happen to get the worst of it.  And nobody is "buying the dip."  Based on price charts, my guess is that money is going to very short term instruments and/or cash.

So why are gold and silver beat on the hardest?  First, they're leveraged by the nature of futures, which means they move both up and down faster than other things.  Also, their price charts were looking particularly horrid prior to yesterday's open - gold had a descending triangle, a series of lower highs which often ends with a drop off the cliff similar to what we saw yesterday.  Horrid price charts make the shorts more enthusiastic, more willing to take risks, and it makes the longs more nervous and more ready to bail out.  Usually when a trend is in place, its tough to change it.  Unfortunately after that bottom on April 21, gold never moved high enough to get the shorts to cover.  And silver's chart was even weaker.

The PM miners for a time outperformed gold & silver, but now most of them are also either forming new lows, or are perilously close to doing so.  Some of them started today all right, but then just were sold the whole day long, and are now looking really awful, with nary a bounce to be seen.

For what its worth, I am not seeing the same sort of PM price action I saw during the April gold smash.   Its hard to explain exactly how its different - it just is.  Nowhere near as much power was used to force the market lower.  And the volume isn't as high.  The number of stops getting triggered is much lower.  My guess is, a bunch of leveraged longs just decided to bail after the Fed press conference which weakened things, and then there was a 3-hour pounding that happened in the afternoon in asia that moved the price from 1340 down through 1321 support to 1290.  Support at 1321 wasn't very impressive.  It just feels like nobody is showing up to buy.

If the thesis is "money printing causes inflation, so buy gold", then the lack of interest in buying gold makes complete sense.  Money printing is going on, it has been going on for years now, but there really is zero inflation except in the bond market - and now even that is being unwound.  And what happens when money printing stops?  More inflation?  Not likely.  So all the general inflation-based gold buyers are losing faith and bailing out, especially when credit tightening happens to kick them in the butt.

My gut is telling me, money is being sucked out of the system, likely in several different places.  Europe already has credit deflation (banks shrinking their loan book) and from what I read, now that's happening in China as well in a big way.  And we know money is fleeing peripheral countries - Brazil, India, Thailand.  There's lots of stuff happening now, lots of money being moved around.  And with two big players deflating credit and then Ben hints that he might do so as well - well, its the snowflake that sets off the avalanche.  You never know which snowflake will do it. 

There have to be other people buying - big guys - for a bottom to form in a commodity like gold or silver.  It can't simply be you and me buying silver coins at our local store.  That means leveraged money has to come in and decide its cheap enough, and that its not likely to continue going down.  I'm not seeing these guys showing up right now.  They might, by end of day, but it's not looking so good now.  If I were to bet, I'd bet on another leg down tomorrow.  The credit situation (or perhaps its just the perception of the credit situation) adds emphasis to this.

I still think all those factors (the COT report, the sentiment, etc) should eventually bring about a rebound.  Heck, I thought the bottom was in at 1321.  That's why they call it a market though, not "a sure thing."  But this credit-tightening is going to cause problems.  Everything with any leverage in it will be hosed as long as credit continues to shrink.  And that includes gold & silver.

I don't know how much farther it will go.  If the credit tightening continues, things will continue to drop until the leverage is mostly wrung out of the market.  Commodities will be hit the hardest, and then equities and bonds.  

rapunzel's picture
rapunzel
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Posts: 4
gold

There is too much risk in buying gold yet.  Gold bugs always talk up gold even as it falls.  Gold has had a great run over the last decade but it will now suffer with the general loss of liquidity that is coming.  We should all wish for a wash out in gold back down to support around 800.  THEN may be the time to load up for the long haul.

johnr801's picture
johnr801
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Gold - interest rates

All else being equal won't higher interest rates lead to lower gold prices?

In order words, if interest rates spike, causing the stock market to fall, I suspect there would be a flee to cash, not gold.  Any thoughts?

Thank you,

John R.

wisepickball's picture
wisepickball
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wow, to be free of the system is a serious business.

i am in awe of what you've written it set me thinking, thanks.

Jim H's picture
Jim H
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So Rapunzel...

if two futures exchanges, Comex and Shanghai, are already delivering more physical than is mined yearly.... and that does not speak to OTC London deliveries, coins sales, etc... then what makes you think that we get down to $800?  How do you know how far beyond fundamental supply:demand contstraints the bullion banks/FED/BIS can push this futures-based system before it breaks?  With the Comex bleeding down Gold, COT showing bullion banks getting longer and longer, the GLD bleeding down Gold, and mining becoming less profitable... I can't see the price getting that low before the shelves are bare and the commecial signal failures occur.      

certifiedgoldexchangecom's picture
certifiedgoldex...
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Excellent article. Thank you

Excellent article. Thank you for these charts.

http://www.certifiedgoldexchange.com

Oliveoilguy's picture
Oliveoilguy
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Posts: 403
I agree

Nervous Nelly wrote:

Two weeks ago I moved most of my investments in cash.....Money Market. 

I told my boyfriend yesterday morning that things are going to get real ugly in the next few days and beyond..  It's happening and it ain't finished!  My guts are good at that. 

My gold investment is melting away $ but I'm not selling. I still believe that when people really realize what's going on, the panic will appear. 

Hold on.

NN

I like the way you are positioned and agree not to sell Gold/Silver. I actually bought a few shares of CEF today. Cash and Gold are good places to be.

Oliveoilguy's picture
Oliveoilguy
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Posts: 403
Not all Money Markets Are the Same

Nervous Nelly wrote:

Two weeks ago I moved most of my investments in cash.....Money Market. 

Just a quick thought. We have our Money Market Funds in "Treasury Only" Money Market Funds. In this day and age of chasing yield, even Money Market managers can go out on the risk curve and invest in risky things. Remember "breaking the buck" during the Lehman crisis?

Yes...I know that Treasuries are not risk free, but it's all relative.

davefairtex's picture
davefairtex
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cost to produce - the lower limit on gold price?

Jim wrote:

With the Comex bleeding down Gold, COT showing bullion banks getting longer and longer, the GLD bleeding down Gold, and mining becoming less profitable... I can't see the price getting that low before the shelves are bare and the commecial signal failures occur.

I certainly hope he is right.  However, if we look back on oil in 2008, we notice that it dropped from 140 down to 30 during the 2008 crash.  Now $30/barrel was clearly below the marginal price to produce, and yet it stayed down there for months until it finally rebounded.

Another example: houses that were selling below their cost of construction after the US housing bubble pop.  It didn't last forever, but the cost of production provided no "short term" floor on the price.

Cost of production is not a lower limit on the price of gold.  In the long term, the price of gold should be higher than the cost to produce, or else it won't get produced.  But prices currently engaged in a downtrend can sometimes go down further than the price to produce.

 
davefairtex's picture
davefairtex
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Posts: 1494
what's in a money market?

I agree with Olive.  Its a good idea for you to poke your nose inside your money market fund, to see what it currently owns.  In the past, they lent money to banks and corporations - short term 30 day "repos" - which means you are exposed to any bad things that happen to that bank or corporation.

The Reserve money market fund (been around since the 1980s) lost money in th 2008 crash and eventually went under because their money market fund lent money to Lehman, and then of course Lehman died.  I think they eventually paid off 97 cents on the dollar, but the money was frozen for a very long time.  Think "months".

Treasury-only short term money funds are safer.  Buying a treasury itself - through Treasury Direct - even safer.  And if you can somehow deposit your money on reserve at the Fed, you get paid 0.25% AND its the safest place possible for US dollar deposits.  But since we aren't member banks, we don't get that privilege, so that option is just a big tease.  But that's why there are so many excess reserves.  Super safe, and 0.25% returns.

Here's what Fidelity says about what's in SPRXX - one of their money market funds.

https://fundresearch.fidelity.com/mutual-funds/composition/31617H201

Morningstar has the top 5 holdings in the section linked to below.  Note: 4 of the 5 top holdings are loans to banks: Sumitomo, Bank of Tokyo-Mitsubishi, National Australia Bank, and Royal Bank of Canada.  My gut feeling says those are higher risk entities than the US Treasury.

http://quotes.morningstar.com/fund/SPRXX/f?t=SPRXX

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SPAM_whipperbubba
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Posts: 6
Gold/Silver

It seems like we are close to a bottom in both silver and gold.  If you purchase gold/silver coins; www.spoteagles.com is offering silver eagles at spot silver prices and gold eagles at a discount to other dealers.

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Arthur Robey
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Posts: 2541
The Apple of My Eye. (or a Tax Free Tour)

Paid your fair share of taxes? Been a good little boy?

Well done. You deserve your reward.

Come with me on Tax Free Tour.

ex Max Keyser.

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Grover
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Posts: 507
Another Floor Gives Way

Gold (and silver) just took another hit today. It is at $1230 as I write this. In April, the price drop brought out lots of physical buyers around the world. The premium charged by dealers increased as demand outstripped supply. There is a slight increase in silver premia, but not like it was in April. Gold premia haven't increased much if any (over last week.)

I'm trying to wrap my head around this and trying to determine a strategy to capitalize a bit on it. So, what is different now?

1) China has been trying to tighten credit to wound the shadow banking industry. China is the biggest consumer of gold. Without credit, speculators have to use their own money to buy. Those who used up dry powder in April are now underwater in their investment. How willing are they to take advantage of these lower prices when prices could go lower?

2) Sovereign bonds are dropping. The yields on bonds therefore are increasing. Higher yields attracts new money, but the leverage used (when previously buying overpriced bonds) has to be brought back within margins. That means that something must be sold and gold is a liquid item to sell.

3) The big investment banks have been steadily lowering forecast prices for PMs as the year progresses. Are they talking their books? Do they really have any way to analyze what the actual value of PMs should be? If it is just the retail investors who listen to it, it would be a minor impact. Does this constant hammering influence the hedge funds who flit fro and to for profit? Is JPM still long or is their long position now a source for shorting?

4) Bernanke said that with an improving economy, QE may taper this year. Their forecast for growth is extremely optimistic. I can't see that we'll get "growth" approaching their assumptions. The housing market is very dependant on mortgage rates, and rates are increasing in line with bond yields. There are still folks in the market at these low rates who want to lock-in before rates increase further, but that will pass as rates creep higher.

I'm going to watch China's credit markets for a clue as to when the bottom is near. Rising bond yields should signal a deeper problem to the big boyz. At some point, they'll realize the game is changing. Again, their only loyalty is to higher returns. The forecasters are really just projecting trends. They didn't see the last top and likely won't see this bottom. Bernanke may be trying to reduce some froth in the markets so he can smooth it out and appear to be the hero as he exits the chairmanship.

I'd appreciate any thoughts.

Grover

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Nate
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Posts: 461
my 2 cents worth

Just got off the phone with a PM dealer.  When he purchases gold he protects himself with puts.  He just removed the last of the puts and feels we are near the bottom.  He acknowledges he may be wrong, but feels we are close enough to the bottom that it won't matter.  This is the most concerned I have heard him - is this blood in the streets time?

Grover's thoughts are looking at economic trends - tightening credit, sovereign bonds, and big Ben.  Another angle is cost of production.  I have read it costs about $1200 to produce one ounce of gold.  This means a decent % of mines are running deficits at these levels.   If prices go lower and stay there for any lenght of time, many mines will suspend operations and many juniors will be done. 

My current thought at this time is that in 3 years many on this site will be kicking themselves for not at least starting to purchase PM's at these levels.

Nate

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davefairtex
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PM futures - no buyers

So Grover, from my intraday observations of futures PM markets, there simply just aren't many buyers out there.  It used to be that moves down were met with buying, a nice rebound, and (ultimately) decay.  These days, the metal gets pounded, and the rebound (if any) is anemic.  Nobody is buying the bounce.  What's more, when a support level gets cracked, the number of stops hit is a lot less than it was previously.  There just appear to be a whole lot fewer longs in the market - and a whole lot fewer people willing to enter.

The open interest doesn't look to be dramatically lower - perhaps 10% - but the feel of the market is different to me.  And here I'm talking about the futures markets, not about the physical market.  It feels to me that a bunch of people have just taken their marbles and gone home.  Perhaps its just summertime.

We can speculate as to why this is [and I will, naturally] but its just a guess.

For the past month or two we appear to be going through a "financial deflationary period" - which means that money borrowed to speculate with is being paid back, and the stuff bought with the borrowed money is being sold.  [We'll be able to verify this a bit better when the NYSE margin data arrives, but it always comes a month late]

We can see at least some evidence of this by the price action in the USD, in the emerging markets currencies, and in longer dated bonds, equities, and many commodities.  So with things moving in reverse in general, with this rapid financial market deflation occurring, traders aren't looking to put on new long positions.  Perhaps their risk managers have said "reduce your position sizes."  The price action feels (in fits and starts) a bit like it did back in 2008 - some days are just sell sell sell.  Perhaps some funds are liquidating too, which wouldn't help.  I've seen signs of that too, in the mining shares here and there.

At some point all that unwinding will stop when "enough" of that dollar borrowing is paid off, but until it does, everything will be caught in the downdraft.  And it appears that gold is being hit particularly hard.  Perhaps more of the long-side gold players are off the field than the shorts, for some reason.

None of this helps to answer the question "when will the beatings end."  Today we might get a pause.  We saw money come back at least a bit into bonds and equities, although the dollar is still rising.  1200-1220 should be a decent support level for gold.  And its possible that this phase of the overall risk off move is done now.  Watch the USD, and bonds for clues as to overall conditions.  However if we imagine that bonds and stocks and things overall will continue to be sold and the dollar will continue to rise, we could go down further from here.  Think: "oil in 2008/2009."  How far below production cost did oil drop before it finally rebounded?  Answer: really, really far.  I hope its not the case, I really do.

I have to say the PM price charts still look horrible, no dip-buying is apparent, and gold today closed at its low, which is never a good sign.  The modest intraday bounce today was treated as an opportunity to sell.  Even though the COT report and sentiment indicators suggest good things are in the offing, the price still hasn't responded at all.  I can't tell you why this is, or when it might change.

I don't pay any attention at all to what pundits or the banks say, except perhaps as a contrary indicator.  If I saw a rash of goldminer downgrades around this level, I'd take that as a very positive sign.  From what I've seen, no bottom happens without a few big bank analysts suggesting you SELL within a few percent of the low.

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Grover
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I'll Keep Watching ... for now

Nate, Dave,

Thanks for your insights. Always a pleasure to read.

First, Nate, I've heard lots of people saying the bottom is in. Buying puts would hedge against further price declines, but there is a chance that you'd miss the bottom based on the duration of the put. I wholeheartedly agree that 3 years out, we'll be glad we bought at this time! Last week, I was looking for an opportunity to buy around $1300. Now, I'm not sure that I couldn't do better waiting a bit. When do you grab a falling knife? If it gets back to $1300 before I buy, I'm not really out anything.

I don't put much stock into the cost of mining as a basis for a floor. As Dave pointed out with oil in 08/09, the price can drop below the cost of extraction. There is another concern. Unlike oil, gold isn't used up. Mining adds about 2% to the overall stock each year. If all the mining suddenly stopped, we'd still have lots of above ground gold to trade. It is bad for the miners who need higher prices to make a profit, but not for already refined gold.

Dave, I agree that nobody is buying at these prices. It is also telling that gold ended the day at the lows. The after hours trading is meandering lower. Your summertime comment makes sense. I've seen charts showing monthly percentage changes compiled over many years have shown June and August to be typical loser months. Yearly lows are usually found around here. Buying for the Indian wedding season seems to be the impetus for higher prices in the Fall. When prices plummeted in April, Indians may have used up lots of dry powder and can't buy at these lower prices or are waiting (like me) for further reductions.

I'm not sure how to relate bond prices or the dollar index into gold prices. Granted that the dollar index is up sharply since gold hit $1900, but this year, it seems to be meandering and gold is solidly down. Bonds got ridiculously expensive and have corrected slightly, but again, gold is down consistently over these fluctuations. Today, sovereign bonds rose (slightly to +5%) and gold got hammered.

I agree that the banks forecasts are a longer term contrarian indicator. Shorter term, they may influence traders who are just trying to front run everyone else. As such, these forecasts are another piece to the puzzle.

I read a piece on MarketWatch about gold getting hit so hard and read the comment section for fun. Geez, insults were flying against the bulls and wild speculations were rampant. Each poster was trying to outdo the others on what a worthless speculation gold has been and how low it will go. Again, I consider this to be a contrarian indication for gold and a measure of how much of the MSM pablum has been internalized. It can't help but influence those on the fence.

I'll keep watching the price line and premium changes at the on-line dealers. I'm also keeping my eye open on China's borrowing rates. When overnight rates drop back to reasonable levels, that might be the end of the correction. The rear view mirror will tell us for sure.

Grover

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markjr
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Posts: 15
I still don't think the secular bull is over

I have always said that secular bulls end in denial and that bears in derision. In other words, I'm not worried about the gold bull being "over" until a major sell off is widely greeted as a buying opportunity. Now that would give me pause (if I wasn't out already).

To me, the fact that every opportunity is taken to call the gold bull dead is telling me the opposite. Look at the period between 1974 and 1976 when gold pulled back 50%. I think we are in that sort of situation - a mind wrenching shake out whose job it is is to make sure that as many people miss the third and final bull crescendo. (After the 1976 cyclical gold bear, real interest rates quadrupled while gold went up > 700%)

Templeton could teach us all investing in one sentence: buy at the point of maximum pessimism. I think this applies here, we are not talking about some single stock that could conceivably go to zero (a la Enron) - we're talking gold and silver here, the most durable form of money in existance, now trading for below it's average cash cost of mining (http://www.zerohedge.com/news/2013-06-26/gold-drops-below-its-average-ca...)

I have been invested in gold and silver since 1999, one of my RRSP accounts is nearly 100% invested in gold and silver mining stocks. At the bottom of the 2008 it was down 60% or 70% and I didn't do anything, except (and I have to admit, this was pure luck) I doubled down on Silver Wheaton right at the lows, which has since proven to be my single best trade ever. I do remember looking at that drawdown and wondering if it was possible I had been completely wrong about gold after all. Maybe I should sell out and preserve what was left? I remember the doubts creeping in toward the bottom. I hung on and that account went on to gain over 450% in the ensuing up leg.

That said, this latest selloff has me experiencing doubt. This is not the first time I've started to wonder if maybe I'm wrong about gold, the people I've been following and reading, maybe they're all wrong. Maybe we're all wrong and the top has been and gone....

In the past, when this has happened, I've basically held the course because I realize that when even I am experiencing doubt, apprehension and fear, we are sitting in the trough of maximum pessimism. At which point I suck it up and buy some more.

I remember that after the last high I had an inkling that before the next leg there would be a pullback so brutal, so vicious it would be "common knowledge" that the bull is over.

My take on this is is that we're closer to the end of this cyclical gold bear within a secular gold bull, similar to 1974 - 1976.

The legendary value investors say that it's always really hard to buy at these moments but it's buying at times like this when fortunes are made.

It's pretty damn scary though. It's weird to be simultaneously salivating and crapping my pants.

Jim H's picture
Jim H
Status: Diamond Member (Online)
Joined: Jun 8 2009
Posts: 1593
How to get cheap physical Gold

1)  Be a bullion bank and an authorized participant in GLD   https://www.spdrs.com/library-content/public/Gold%20FAQs.pdf

2)  Dump paper shares to create a waterfall decline... buy back your shorts, and then some, after the decline starts.

3)  Buy up GLD shares that are being dumped in the market as the price drops

4)  Convert GLD shares to physical, as only an AP can do................  NICE!

http://harveyorgan.blogspot.com/2013/06/massive-raid-on-goldsilver-today...

The GLD  reported another massive loss in inventory of 16.23 tonnes of gold inventory.

And from Jesse today;

http://jessescrossroadscafe.blogspot.com/2013/06/gold-daily-and-silver-w...

While this most likely had its impetus in the official, in practical implementation it smells like Wall Street asset stripping to me.

That is another term for a stealth confiscation through price manipulation.

But maybe you thought bankers were nice people!  Think again;

http://libertyblitzkrieg.com/2013/06/26/california-man-faces-13-years-in...

eff Olson, a 40-year-old man from San Diego, Calif., will face jail time for charges stemming from anti-big bank messages he scrawled in water-soluble chalk outside Bank of America branches last year.

The San Diego Reader reported Tuesday that a judge had decided to prohibit Olson’s attorney from “mentioning the First Amendment, free speech, free expression, public forum, expressive conduct, or political speech during the trial.”

With that ruling, Olson must now stand trial on 13 counts of vandalism, charges that together carry a potential 13-year jail sentence and fines of up to $13,000.

During one protest outside of a Bank of America branch, they drew the ire of Darell Freeman, vice president of Bank of America’s Global Corporate Security, who accused them of running a business with their demonstration.

The Reader reports that Freeman aggressively pressured city attorneys to bring charges against Olson until they announced that they would do so in April.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1494
money flows

Grover -

I was talking about watching bond prices and currency moves as an indication of the general state of what we might call a financial deflation storm.  We had one of those a while back when the ECB decided to tell its member banks they had to reduce their leverage - and for a month or two, stuff just got sold.  The deflation storm itself happens  in segments (waves?).  Let's pick May 1 as its starting point.  Today for instance the current wave appears to have passed, we have a bounce in SPX, maybe we'll get one in bonds too, and then - will a new wave strike, or will the deflation storm have passed?

Prices which have tended to move in tandem this wave (use stockcharts.com to view symbols):
* China stocks ($SSI, FXI)

* US Long bond (TLT, $USB)

* Australian Dollar ($XAD)

* Canadian Dollar ($CAD)

* Indian Rupee (ICN)

* Thai SET index ($SETI), Thai baht (no symbol, sorry)

* Brazilian Real (BZF), Brazil Equities - with lag (EWZ)

* $GOLD, $SILVER, $PLAT - in fact, $CCI

Its kind of neat to spot the patterns.  Visualize what must have to happen to have all these things happening at the same time.  What gets bought, what gets sold, where the money goes, etc.

Its not so much viewing things on a one-for-one daily basis, this is just looking for money flows overall.  In this storm, money has flowed out of the emerging markets, AUD, CAD, bonds, and commodities.  When that flow stops, likely prices will rebound.  Some things rebound faster, others respond with a lag.  "That's just how things work."

How far will the rebound in PM will go once the deflationary storm passes?  I don't think we get new highs unless we get some new even more exciting reflationary policy along with it, or one of our favorite golden black swans hit.

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Nervous Nelly
Status: Silver Member (Offline)
Joined: Nov 23 2011
Posts: 209
Peter Schiff "Is now the Time to Sell Gold"

I needed a bit of cheering and support. 

I just know that I didn't like the fact that Ben just said that he  MAY  slow QE and the whole market turned. Just words but can he really slow down ?

Markjr I feel like you too. Doubt , fear and a few skid marks. I can't sell now! Kitco' s opening page is about them ready to buy your gold.https://online.kitco.com/?utm_source=New_Store_Tab_Top_Nav&utm_medium=new_button_Buy_Silver_Gold&utm_content=three_coins_graphic&utm_campaign=New_Store_Tab_Top_Nav

Thx to all who contribute good insight on what they think is going on. 

NN....

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markjr
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Posts: 15
I bought some more today

I bought some more today (been nibbling all week, actually)

Except physical silver, I tried to get another 100oz from my bullion dealer this week but he's been cleaned right out.

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Herbert
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Joined: Jun 24 2013
Posts: 5
Impressive analysis, good job

Impressive analysis, good job Adam. Since Monday, July 1st, gold has entered a rally and is climbing up fast to recover earlier losses. No one knows whether this fresh really will culminate into a bull rally or fade out into another price plunge….. None the less, it’s been a great gold buying opportunity for investments and jewelry purchase.

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