Latest views on Gold and Silver

I have written at least 3 times on my views on Gold and Silver over the last 2 years. 

1. http://zpring.blogspot.com/2009/12/why-i-am-still-bullish-on-gold.html
2. http://zpring.blogspot.com/2010/11/gold-and-silver-its-direction.html
3. http://zpring.blogspot.com/2011/04/gold-and-silver.html

 Below is my latest updates on my favorite sector for the last 5 years.

I remain bullish but believe that current price is parabolic and may undergo a correction to 1650 or at the maximum 1500.

However, it really depends on the economic news in the world especially from Europe. Currently, the economy is extremely fragile. While the credit squeeze is not like 2008 but the situation could explode into something more serious. Instead of mortgage default, it is now potential sovereign debt default.

I do not see any improvements in Greece. Bond yields continue to climb. The ECU is trying its best to mend the situation. Today there is the announcement of big Greek mergers - Eurobank and Alpha bank. The combination would create Greece's largest lender, with assets of €150B, but a market cap of just €2B. EU and Greek officials have pressed for such alliances, believing pairing struggling entities can create one strong institution. 

But does it solve the problem. The answer is clearly no. There is no fundamental improvements

Italy, Portugal, Ireland and Spain continues to be fragile and on life support. In my weekend update, I stated that a default of Italy will be equivalent to Lehman's default in 2008 or bigger. 


GDP data for France, Germany, Hong Kong,China  and USA released in the past 2 weeks were weak. France is on the verge of being downgraded. 

Politically, there was little support for Germany to continue to buy ECB bond. Survey results show that 4 out of 5 is against the idea. If there is an election, Merkel will be out.Just received the following report from the Telegraph ( Aug 29) " German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a constitutional crisis in Germany and a fresh eruption of the euro debt saga

Seething discontent in Germany over Europe's debt crisis has spread to all the key institutions.

So there will be a continuation of money printing, bailout and desperate measures of bailing banks and sovereign debts. No way this is going to end soon. It is a wicked spiral. Countries are forced to take austerity measures hindering growth, greater unemployment, bigger interest and debts.


So, gold is the ultimate currency now. Gold went up the last few weeks because it was a "fear" trade.  It was  flight for safety. Gold went up with the market because it was a "currency" trade. As money gets devalued through stimulus, increased money supply, money printing and bailout, gold goes up.

However gold is a manipulated market. There are commercial traders and large speculators.  It goes through wild swings and huge volatility. 


Although over the long term, the trend is up but in the short term, I suspect there may be one more leg down to $1700 or even $1600. But it will bounce back fast. Fundamental conditions support it.


There are talks of gold being in the bubble. Examining the bubble of various sectors and market, gold is still far from being a bubble. But probability is that it should correct.









Seasonally, it is going to be positive for gold. For the last few years, gold goes up after labor day. Thus if gold goes down this week, I will add to my holding

New shorts of commercials drop last week from 249 K to 240K. Net shorts of large speculators were also down. These are short term positives. I suspect the commercials are reducing their huge short positions now.

So gold is NOT in a bubble. If it is in a bubble, it will be verified by weak fundamentals and over euphoria. Jim Cramer mentioned that the typical holding of gold is 5% of total portfolio but not it is about 1.5% of total portfolio.


So the only reason for gold to be down will be some fear and manipulation done by speculators and commercials.

Mining Shares

In this blog, I had commented on some of my favorite mining stocks and also on how I managed the juniors.

http://zpring.blogspot.com/2010/03/my-favourite-precious-metal-stock-slw.html

http://zpring.blogspot.com/2010/03/trading-junior-stocks-and-small-caps.html

http://zpring.blogspot.com/2011/02/my-favourite-gold-stock.html

Whatever, I had written is still valid and more so now.

With the rise in gold price, mining shares is at historic cheap valuation. 

Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this

inexpensive. Only twice—during the Tech bubble in 2000 and the financial crisis of 2008—has

the internal rate of return compared so closely with the price of gold bullion.

RBC says gold companies currently have margins that are at record highs and it believes margins could be approximately $1,200 an ounce for the next 12 to 24 months. This is substantially higher than the 10-year average of $320 an ounce. Comparatively, many current projects were economically sound at $700-$1,000 per ounce gold prices, creating $300-500 an ounce margins.

Right now, BMO calculates the total cost to produce an ounce of gold at roughly $900 an ounce, while the company can turn around and sell that ounce for upwards of $1,400. This puts margins near 40 percent, roughly twice what they were in 2007 and four times higher than in 2000.

I believe gold mining shares are now valued at gold price of around $1200.

From a historical perspective, gold miners also lagged gold price in 1973 and 1980 by about a year. After that it charged up despite the crashing market. Investors have to believe whether the current high price of gold is for real. As a results the miners are undervalued.

Besides GG and SLW, my new favorites for gold stocks are AUY, NGD and RGLD

Also price actions in mining shares are positive. It looks like going for a breakout in a reverse head and shoulder pattern after more than 6 months of consolidation. Also, the 50 MA is cutting the 200 MA soon.  Upon confirmation, I will move to increase my holdings of mining shares providing gold held to its strength.,

Finally, just a warning. Although I do not see a breakdown of the trend in gold soon, I am not a gold bug. It will go down one day.

Throughout a fantastic decade-long advance that saw the metal easily outperform gold’s almost 25-fold price increase into 1980, silver bulls loudly and repeatedly trumpeted the fact that consumption – for coinage and industrial use – annually outstripped total supply by a wide margin. After January 21, 1980 silver lost $10 in a day from a still-standing all-time high in excess of $50/oz. By late March the price had crashed to $10.80 on the way to a final low of $3.50 in the early 1990s. Only this year did silver again make a run at the $50 level.

History will repeat for gold and silver. But I do not believe the time is here yet - not even in the distant future. Gold could see $3000 or even $5000. The world will be in a big mess if it gets to these prices. My projection is gold will be at least $2000 before the end of this quarter. Until it shows signs of bubble like the dot.com in 2000 and housing prices in 2007, I will be holding on to my positive bias on gold.