Are Gold & Silver At a Turning Point?

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.
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.
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.  We see increasing evidence indicating that the next big upward reversal is near at hand.

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Submitted by Peak Prosperity:

A Hard Look in the Mirror

 

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, which we detail in Part II.

Stay disciplined.

 

eagle_sale

Comments

  1. What will create a massive amount of physical buying, and new all-time highs for gold and silver?
    It will be having to do BIG QE in the face of BIG inflation, and so far we are not there yet.
    Right now the QE is manageable, and right now the inflation is very tame, until that changes, we will be in a trading range (1200-1600) at best.
    Are real interest rates still negative today?   Yes, but not enough. We need to see a solid 6-10% real negative interest rate.
    I thought with all of these trillions of currency units created the last 5 years that inflation would be flying, I was wrong.
     

  2. The only thing stopping massive inflation is market meddling, and lack of velocity of money. In terms of the market turning, as I said on the zerohedge thread, bottom line, the turning point will be a collapse or a supply shock from the government forcing the gutting of the mining sectors all over the world.

  3. Reading drivel like this article won’t help anyone understand what’s going on in the PM sector. It misses by a country mile.
     
    Silly and almost meaningless in the face of unprecedented manipulation and intervention.

  4. Well, gee… the dollar price of gold is lower today than it was a few months ago.  So?  I have gold in my savings plan and no need whatever to sell it.  Last time I looked, all 10 oz. were right where I left them and doing just fine.  In fact, it is about time to add another 5 oz. to the stack.  Am I doing this in the hope that it will be a dollar or two higher in the coming days or weeks?  Nope.  I am doing it because it is part of my financial insurance plan.  I buy gold and silver with money that I do not need for 3-4 years or longer.  I fully expect it to move up and down in price over time.  After all, we really only have 5 areas in which to put investment money:  1) stocks; 2) bonds; 3) commodities; 4) real estate; and 5) cash.  Everything else is some variation of these and I surely do not want ALL of my money in any one of these.  I already have enough in stocks, I abhor bonds and all other forms of debt, I sold my REITs in January, and have some cash that needs to be converted into real money… and it will be.  Both gold and silver are very attractive for the long-term at the current prices.  

    • Spoke. Like a wise investor. I throw my lot in with Ed_b in as much.

    • Thanks, Shamus.  In a turbulent world and crazy market it is hard to make sense of most of it.  That saving fiat is a losers game and saving PMs a winners game over extended time periods is reasonably clear.  While there are no guarantees, save death and taxes, I do like the favorable odds of this approach.

  5. Had you asked me at gold’s peak in, what, August 2011, whether I would like to set away $1400 in cash, and commit for mid-2013 to take delivery of an ounce of gold, what do you think I’d have said? Dude, you’ve got youself a deal. Show me the gold in 2013, and I’ll buy! That question would have been asked with a silver/gold ratio around or under 43. Now it’s 63.5.
    So now being offered to choose between $1400 to spend on gold or silver, I would still prefer the silver. But the gold is a great deal for 2011′s standards. And even more for today’s. By lack of unlimited money, I prefer silver. And if I could get it VAT free like gold, platinum/palladium.

  6. the FEDERAL RESERVE BANK & all the scamming & looting that goes with it have gutted this country & it’s citizens of wealth that should have been inherited by future generations.  they’ve stolen, scammed & looted everything that isn’t locked down.    they stole, STOLE, the gold from our grandparents.   i see how people are getting poorer & poorer.   Take that Ben Bernanke !   i’m holding metal just to irritate the central bank. i like the metal better than the worthless paper money & i don’t give a damn what the price is.    that’s what they get for making an old woman angry.  

  7. Are you ready to experience the world of $3000 gold? It won’t be pretty…

  8. Professor Weiner’s article today at … http://news.goldseek.com/GoldSeek/1371219525.php … is relevant here. Among a small handful of other students of Professor Fekete, his analysis of the PM markets on Fekete’s ‘ basis model’ viewpoint has shown to be more ‘prescient’ than other ‘TA’ and ‘FA’ standards most commonly practiced.

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