Gold and Silver - Up or Down?

For those who are invested in gold and silver, you have a bad time! I am in the group although I am suffering less because of my ability to hedge.

Gold and Silver has gone down for almost a year. Gold mining and junior stocks are massacred. 

The question now is whether Gold and silver is in a bubble and on a long term downtrend.

The reality is, for a bubble to occur, you need a number of ingredients that we just don’t have yet. You need prices that are inflated way beyond an asset’s underlying value, which is not the case with gold — based on its role as a counterweight to overprinted fiat currencies worldwide, I’d argue it’s still very undervalued.

I maintain that gold is still in a super bull cycle supported by fundamentals. Short term the price can still go down but the longer term trend remains.



And, you need a sense that absolutely everyone around you is piled into the asset. Right now, that’s not the case, with less than 1 percent of total global financial assets in gold. Contrast that to CPM Group’s figures from 1968, when gold held by individuals for investment purposes was 5 percent; that was 3 percent by 1980; and by 2000, it was only 0.2 percent.


So gold ownership has grown about 0.6 percent since 2000, despite the dramatic rise in bullion’s price from its sub-$300 level back then.


In terms of valuation, mining stocks are now valued at around  $1000 gold. Sentiments is at same level as 2008.


HUI which is the index for measuring gold stock is at 2001 level - a decade ago when it is calculated on a ratio to gold.Technically, it needs to show some support or it will move to a final wash out at 350. At 415 - which is today's level, it is exactly 50% from the retracement since QE 1 was announced back in 2008.

I am not able to predict the short term trend. Technically, it appears weak and may still go down.

When the market is at such a overwhelming negative sentiment and the fundamentals are fully supportive, it is time to “buy when there is fear and sell when there is greed”. A contrarian strategy usually works very well. Price especially mining companies has been cheapest in decade - never has the fundamentals and price gap so wide. In 1-2 years time, you will probably look back and wonder why you have not bought it at such a cheap price. Bigmoney are made when you are able to catch such bottoms. On the other hand, catching the bottom is like catching a falling knife. So a good risk protection strategy is paramount.

The downtrend can continue for a while. This is where a collared strategies work in such market.

Longer term, the I like to simply give just 2 primary reasons that support the long term bullish trend of gold and silver.

1. Money Printing.

The world continues to print money and is going berserk.

There is no way that the debt incurred can be paid.

There is no way the debt incurred can be paid.

There is an accelerated accumulation of physical metals. One day the physical shortage will be acute and that will be the "D" day for the battlefield.

There are overwhelming reasons to be long term bullish for the metal. The contrary views will be as following:

·       The global gold market is free, fair and honest. The smack down of 7500 contracts in 1 minute, 10,000 contracts in 5 minutes and various incidents at precisely the same time, all before critical news on gold such as Swiss Franc pegged to Euro, news of LTRO, gold almost crossing critical point at 1780 were all coincidence. These are free market in actions.

·       The Comex futures market is a true, fair and perfect price discovery vehicle.

·       There is no demand for physical gold and/or silver in size. All of this talk about sovereign nation and central bank buying is simply a tool used to manipulate price higher. It is coincident that just in March, 12 more central banks bought sizeable amount of gold.

·       The Federal Reserve never has, and never will, intervene in gold to manipulate and suppress price. They exists to ensure job growth, currency stability and economic prosperity and they are doing a fantastic jobs. From Greenspan to Bernanke, they have saved the world from a world war II depression.The Federal Reserve never has, and never will, intervene in the equity, treasury and/or currency markets

·       The bullion banks simply engage in selling forward for their mining clients.

·       Gold really is a barbarous relic of another time despite it being used as money for thousands of years.

·       Fiat currency is wonderful because limitless money creation spreads wealth globally. Money are created from nowhere.

·       The Chinese are fools who mindlessly continue to accumulate dollars with no alternative but to reinvest those dollars into U.S. treasuries.Same for the Russians.And the Saudis.And the Japanese.

·       Paul Krugman is a genius.So is Nouriel Roubini.

·       The total debt level of the U.S. is manageable and not a problem, at all. We will pay off all the debts soon with our economic prosperity and productivity     Economic growth will soon return the U.S. to peace and prosperity while allowing for the service of the accumulated national debt.

·       Barack Obama is the most intelligent and supremely qualified Chief Executive that the United States has ever had.

·       TARP was extraordinarily successful and actually turned a profit for the American people. The occupied war street movement are just a bunch of losers.

·       Deficits don't matter. It will take care of itself with growth in the economy.

·       Money printing and quantitative easing is perfectly fine so long as the velocity of money remains low and the printing is nothing more than balances being shifted within Primary Dealer accounts.

·       Transfer programs such as Social Security and Medicare are fully-funded and will always be there to provide a safety net for the elderly, the poor and the disabled. We have unlimited money to spend. If not enough, we have the printing press. You will retire comfortably!

·       Ben Bernanke is an Einstein-level genius. We are very fortunate to have him as Fed Chairman at this critical point in history.

·       Silver is simply an industrial metal. Always has been, always will be. Although it was used as money for centuries but it is outdated. We have now the printing press.

·       As a by product of mining for other base metals, the amount of silver is infinite.

·       Those hoarding silver are mindless robots, fooled by internet charlatans.

·       Those brainless, Austrain economists are totally wrong.  Reducing deficit and austerity will end in a depression.

·       GLD is 100% backed by gold and it's custodian has no conflicts of interest.

·       SLV is 100% backed by silver and it's custodian has no conflicts of interest.

·       Mining stocks, in general, have been in a bear market since 2009 because the fundamentals are lousy.

·       The LBMA is a distinguished group of member firms, which actively promote fair and free pricing of metal.

·       JPMorgan is a benevolent organization which only performs necessary investment banking services for their clients.

·       Goldman Sachs, Deutsche Bank, UBS, HSBC et al are similar, honest companies.

·       High-frequency trading helps in price discovery and provides liquidity.

·       The CME Group is a dispassionate facilitator of markets and clearing which stands ready to eliminate fraud and protect investors.

·       The CFTC is an objective and honest U.S. government agency which regulates the futures markets, always on the lookout for fraud and manipulation so that the regular investor and/or hedger can have confidence in a fair and level playing field.

Any intelligent thinking person will know that most of the above is not true.

But the fundamentals can lag behind the price for a while. It has been said that the market can remains longer than you are solvent.

I do not think I will be wrong.

Strategies

Technically the trend is down. I will aggressively accumulate only when there is a change of trend. Make sure I have enough dry powder to accumulate. A number of indicators for a reversal are:

• Gold has consecutive close above 1680 to 1700
• Silver is above 32.5 and maintain there.
• Market demonstrating a change of sentiments and shorts and awaken to the precious metal fundamentals verified by technical indicators and price patterns
• I continue to accumulate physical metals through buying the metals itself and cautiously increase my positions on PSLV, and CEF which are my proxies for physical gold. These are funds sold by Sprout management.
• I still maintain a base portfolio of gold and gold mining stocks. These are stocks with impeccable fundamentals, good dividends, good cash flow and potentials for 2-3 X gain when gold reverses. However, they are all collared or covered with ITM covered call. Upon a change of trend I will remove the hedges. Meanwhile, do not fight against the trend. Overall, I still lose some money but am confident that I will gain it back once the trend reverses