Gold, Silver, Mining Stocks and Fiat Money

I'm getting a lot of fear-based inquiry about the price action in the precious metals sector this week. And for sure, both the financial bubble media and a lot of blogosphere are helping to fuel this fear. So I wanted to comment on the action.

To begin with, the BEST contrarian indicator out there - Dennis Gartman - confidently announced that he was contemplating shorting SLV. That's the single best indication that this correction may be closer to its end than its start.

Before I make case that this correction could end soon, let me just remind everyone that before the Central Banks ran out of gold to unload in order to manipulate the market, 200 day moving average (dma) corrections in gold,silver,HUI/XAU were not uncommon, especially after a big bull run like we have had since August. We could indeed be in the midst of one of those corrections, although that is not my view (we did set up our fund defensively during the last 2 weeks of December). I'm just saying that this is a volatile, highly manipulated market sector and, from a law of probability standpoint, the market is overdue for some downside volatility.

Having said that, the HUI has corrected down to its 50 dma and I believe that it's likely to hold there. But don't be surprised if we see some days with wild volatility and I've lived through periods where silver and the HUI blow through their 200 dma's to the downside and it feels like a market collapse.

Aside from the Gartman indicator, the physical demand from India, China and Japan on this price correction has accelerated. Historically, the relatively lower physical demand component made Comex paper-induced corrections a lot more savage. But now Central Banks globally have become very large net buyers of gold and the populations in these countries have also stepped up their accumulation, commensurate with their growing level of wealth. Here are some quotes from JB's Gold-jottings report, which can be accessed at www.lemetropolecafe.com: UBS reports “…demand really picked up in the $1380-1390 area. Our physical sales to India yesterday were the highest in 12 months - from a time when gold was trading around $1100;" Reuters adds confirmation: "There is renewed enthusiasm in market after markets crashed by $40 yesterday, I booked deals for 200 kgs from yesterday evening from $1,417 and below," said a dealer with a state-run bank in Mumbai.”

Another interesting data point I picked up on this morning is that yesterday's Comex open interest in gold/silver actually increased. This is a startling contradiction to the usual substantial decline in o/i on big down days. Given that both today and yesterday paper gold/silver went off a cliff exactly on the Comex open, the bullion banks are clearly aggressively attempting a COT open interest liquidation, which historically would take the market down 10-20% on average. But yesterday's o/i report suggests that much stronger hands have moved into the long side of the Comex paper market and are not so easily stopped out of their positions.

Again, I am not willing to say at this point that this price correction has run its course. However we have started to shift our fund into a more neutral posture with regard to our expectations. To be sure, historically these price corrections have been a lot more severe in depth and duration. But, for now, I am leaning toward a view that we are closer to the end of this pullback than historical norms would suggest. Thanks Dennis!

As for the "Fiat Money" part of my title, once again Alisdair Macleod has hit a home run with an extraordinarily well-written essay on the death of fiat money. Here's a snippet:

This is why we might call 2011 the year money starts to die. The central banks are beginning to lose control over bubbles one and two, and also bullion. The destruction of private sector savings has coincided with expanding budget deficits so the expansion of the money bubble will have to continue to contain the situation, because there is no alternative. (emphasis is mine)

And here's the link: Must Read