Friday, February 15, 2013

Starting To Feel Like A Bottom

I can go to sleep at night and know one thing–the Fed will not allow deflation. The reason is simple, according to Harris...Debt based societies cannot absorb a deflationary spiral. - Yra Harris, legendary and longtime commodities trader.
 It's been a rough period of time since the beginning of October for precious metals and mining stock investors.  In fact, its been a rough 22 months, dating back to the end of April 2011, when Sunday night paper ambush on silver started the current price correction cycle in the precious metals sector.

I have to say, while this current bull market correction has been the longest so far since 2001, it hasn't been even close to the worst.  In 2008, the HUI index dropped  70% in the space of 6 months.  Ironically, if you had the courage to buy that drop, you are still sitting on a 250% gain.  The first correction I lived through back in 2002 took the HUI from 148 down  to 95  - 36% - in the space of a little more than a month.  The next one started in December 2003, lasted 18 months, and took the HUI down 34%.   For the current HUI correction (which started after silver peaked) dating to August 2011, the index is currently down 40%.  Please note and to reiterate, if you had bought (or added to positions) near the bottom in 2008, you are up 250% on that capital.

For comparison purposes, the SPX index is up 227% since its bottom in early 2009.  I think the fact that the HUI has outperformed the SPX since both indices' respective bottoms, which heralded the banking system collapse and the subsequent transfer of trillions of dollar of public wealth into the banking system to bail it out.

Before you lose your gold, silver and mining stock positions, you need to ask yourself this question:  Has anything gotten better?   Be honest.  Obviously, if look at the Treasury's balance sheet and the Fed's balance sheet, the fundamentals have deteriorated significantly since late 2008.  How about the Government's income statement?  That's gotten worse too.  Housing market?   If you believe the b.s. being thrown at you by Obama and the complicit media, you should read, or re-read this:  LINK  After you're done with that, read this:  LINK  And then read this:  LINK  The latter article is Obama's promise to transfer more money from the general public to the homebuilding companies and mortgage banks and to home buyers who otherwise can't afford a home.

The bottom line is that the fundamentals underpinning our economic and political system continue to deteriorate, masked only by trillions in funny money coming from the Fed and from complete Orwellian diarrhea of the mouth coming from Obama and both sides of the aisle in Congress (note: both Dems and Republicans).  It's those very fundamentals that vary inversely with same fundamentals driving the price of gold and silver.

Here's the only difference between now and 12 years ago when the bull market in the precious metals sector started?   Back 2001, it was primarily the deteriorating fiscal and economic situation in the U.S. and Europe driving gold and silver;  now, it's the deterioration of those same fundamentals globally that will lift the precious metals sector out of the current price correction and on to even higher price levels than the previous highs.  One more important factor.  Back in 2001, up until 2010, Central Banks globally were selling and leasing out their gold.  Now, except for the U.S., British, and European Central Banks, the rest of the CB's globally are accumulating gold - some of them hand over fist.

Have a great weekend.


  1. Is it not possible, Dave, that the 12-year run in gold, from $250 to $1,900, was in anticipation of the worsening fiscal and monetary imbalances that have played out, and now that anticipatory stage is over? In other words, $1,900 may have been a prescient discounting of QEInfinity before anyone knew it. And $1,600 may be a prescient discounting of forced budget cuts, and eventual sacking of the QE paradigm.

    We don't honestly know what has been discounted, what has been OVER-discounted, or even when. You don't know, I don't know. Nobody does.

    Therefore, for gold bugs like you to just presume gold prices will resume their rise, along with the miners, may simply be wishful thinking and hubris borne of 12-years of being right. Now you are wrong. Will you stay wrong?

    1. Sure. Just like it's possible that the Government (and all Govts) will balance their budgets, start paying down Govt debt, let natural market forces fix their economic systems and reduce their overall size.

      The odds of both your scenario and my scenario have about the same probability of coming to fruition.


    2. Well, by your response, it sounds like your and my scenarios have ZERO chance of coming to fruition. However, my scenario may be more than ZERO. The forced budget cuts would happen with the sequester. Even without sequestration, recently the CBO has estimated this FY budget deficit to drop to $845 billion, already nearly a 50% reduction from the peak deficits of the financial crisis period. They could be wrong, of course. And the sacking of the QE paradigm, while less likely in the year ahead, could actually happen once inflation starts really appearing in the numbers and the economy appears to be overheating. Again, not a LIKELY scenario, but much more than ZERO.

      Or, finally, maybe the weakness of the metals and the miners has everything to do with a loss of fear in the equity markets. After all, gold and gold miners are the "fear trade", holdings people feel they need when markets have gone haywire in a bad way. Now that the equity markets SEEM healthy and money is flowing into equity funds, gold and miners may be a source of funds. Soros may have gotten out for this very reason. Who knows.

      In any event, I think you are being cavalier about the potential for a dramatically changing landscape that is going against your thesis. Enjoy reading your writings, but I think you might have golden colored blinders on. Sorry, that's just my impression. Not trying to be mean or ad-hominem. Sometimes dogma or hubris can be harmful to financial health. Good luck.

    3. I agree don't we always hear what the central banks do is always wrong. Well now they are buying gold.

  2. Hi Dave, I agree that nothing had changed, which is why I can't understand the continuing weakness. I've owned physical since last July and we just seem to drift further down week by week. I must admit I'm starting to loose faith. Keep up the good work. Steve

    1. Told by gold bugs , governments and central banks always wrong , they sell low (Browns bottom) and accumulate when high, Now!. So since they are buying is it time to sell?

    2. Physical gold and silver are the real money without counter-party risk and thus require no faith. Fiat currencies are debt of a central bank backed up by the Treasury and thus require faith in central bankers (not to debase) and politicians (to run sound gov finances).

      Honest Money

  3. The technicals of gold and silver are just ugly if not uglier. $1600 was broken again and $30 was breached. I really can't see anything positive from the technical charts...

    1. In 12 years of studying/trading this market, usually the technical chart picture is a big headfake. That's what manipulation/intervention accomplishes. Charts are pretty much lame anyway, everyone uses them which renders them not useful, for the most part, especially this market. Sell rhino horns (big breakouts) and buy "fishing lines."

    2. I don't know if you have noticed we have heard nothing form the London trader or Andrew McGuire or Ben Davies or anyone else from the London markets at all for some time. That's good.

      My experience is that these London markets talk about a collapse about six months before it happens. The Bank of England then sends it's little gnomes round to talk to all the players 'you better tell your committee if you don't do what I say then we are going to pull your banking license'. This is when everybody shuts up.

      Then everybody sits down works out the positions and the collapse goes through tickety boo. If you don't play the game you have to leave the table and there aren't any other options.

      So when TFMetals says 'For the week, the LargeSpecs reduced their net long by 3,700 contracts and this drops the net long ratio back to a more normal 4.94:1. And the small specs dumped 1,400 net longs, too. All of the action was again in the "Cartel/Commercial" space. They added an astonishing 5,889 longs!!! This brings their total to a has-to-be-a-misprint 52,182. Look back up this post...That is anywhere from 50% to 90% higher than the gross long position they held in 2011. All of this buying precluded any covering by JPM et al. They actually had to add naked shorts...another 740...bringing their total to the 2nd-highest I've ever seen at 98,979.

      Unless JPM can crash price down through $26, I highly doubt that they can shake out very many of the extraordinarily large Cartel gross long position. IF THAT'S THE CASE, this forced beatdown isn't going to go much lower.'

      In this note you have it all either the CTFC and the Fed is going to let JPM take on the other commercials or the silver market is going down. Hence we are not hearing a peep out of London.

    3. Excerpts from Ted Butlers latest:

      "The much anticipated release (by me at least) of the latest short interest statistics for the big silver ETF, SLV, came out late Monday evening. The reason the report was anticipated was because it covered the period of time in which there was an unusual one-day deposit of over 18 million oz into the trust, followed by metal withdrawals of nearly half that amount. ... As indicated in the new data for positions as of Jan 31, short interest in SLV fell an unprecedented (I believe) 10.5 million shares to under 7.3 million shares (oz)

      ... the total short position in SLV is now lower than at any point prior to 2011 and as a percentage of total shares outstanding (2.1%) may never have been lower."

      One explanation of the shorts being moved from LBMA to the COMEX is the Bank of England is forcing JPM to reduce it's positions in London and there is a squeeze on the bank in London like Lehman Bros.

    4. TFMetals also give the other reason for the build up of commercial ling positions,

      "On the surface this is extremely bullish and is most likely indicative of a "civil war" in the silver pit. One thing we must be wary of, though...What if JPM is clandestinely building a massive spread position, like they often do in gold and, just as they manipulate gold, they plan to begin creating air pockets in silver by legging out? Since we have no way of knowing, we must be aware of this possibility."

  4. I'm with you: they cannot stop printing.
    I've bought some this week at 1645 and will buy four times as much early next week, as well as some silver.
    In case of additional drops I'd buy still more, as I have some savings that have not been deployed... Looks like a good opportunity to bring my phyzz to the level I wanted but deemed not achievable.

  5. It sounds like some are disappointed and want to bail out. I'm not an expert like everyone else but Dave is right - eventually the party is over and prices goes up. If you can hang onto your losses short-term, you'll be better off long-term. I have always expected silver and gold to nose-dive before taking off. A lot of investors would then sell off their physical while the bigger investors would be buying it up at bottom prices. Then the prices would just skyrocket.

    The main factor here is "debt" and the inability to create any more shortly. Right now, as long as the global economy can do that by giving cheap credit to countries, it can keep going (China had plans to offer credit cards to its people but Brazil is slowing down from its cheap credit - the last I heard). I wonder if this legalizing immigrants is so that they can receive credit cards, etc. cause everyone is awash in debt and they are not. I am unemployed and my bank has offered me a credit card 15 times in the last year. I told them I was unemployed and they told me, "We don't care". I don't have any good or bad credit but it's a sure bet that I will shortly be hounded on to take on debt. And God Forbid if you should take on a student loan!

    Everything is saddled with debt and evetually soon another bubble, unable to contain any more debt, will pop. People will lose their retirements and savings, investors will be bankrupt, the stock market will be in shambles, and unemployment will be in double digit. Where will Government get the resources for all those "too-big-to-fail"? If the student loan bubble pop, every university in this country will go down. States will find out that they can't pay their pension plans (already happening). Where will people run to? Precious metals will be one place. The demand will send prices up.

    Is there any news from corporate world buying gold and silver? They are hording a lot of cash but I can't see them hanging on to funny money while their very existence in an unstable global environment gets dicey all the time. They would love to see a plunge in precious metals as they would strengthen their financial positions by buying it at bottom prices. They could pay their debts off with US funny money and be way ahead.

    Like I said, I'm not an expect like everyone. I'm not an economist. But I am staying on top of some economics (like here, which feels like a real college education) and this is all so easy to see. But maybe the Feds and Central Banks can keep it going for 10 years? These guys will come out with some strange stuff if they need to go "self-preservation" or forced the US to declare martial law if it will save their necks.

    We live in the most uncertain times there ever was. Even if things were to improve, I still wouldn't trust nor believe in the illusion.

  6. Same old story , different day. Face it , we have to go through this phony market* with gold and silver prices signifying false numbers based on the stink from the gasses that the old stodgy financial empire purports to be truth.

    Those who choose to stack the real stuff and stay the course will realize what the true value and strength of physical silver and gold ownership will be .

    Physical gold and silver will once again take the roll of true money.It owes nothing to anyone unlike paper currency which is ridden with debt.

    And if the excuse "you can't eat it" comes into the argument ~ ignore it !
    Gold and silver is bartering's best friend !

    * Thank You Hunt Bros./ Greenspan / Volker for giving the central bankers of the world one of the best maneuvers of manipulation the world has ever known.

  7. I have been involved in commodities markets for twenty years. The gold and silver markets because of there small size vs. stock and forex markets, are the most easily manipulated. That being said, the Chinese, Russians,South Koreans are all accumulating. The Chinese activly promote gold purchase to their citizens, and sales are rising weekly! As the price of oil increases miners will see imput costs rise and production costs will rise. In my humble opinion if the populations of Pacific rim and Eastern Europe continue their increased purchases, gold will be in short supply by 2015. Also notice that as of Friday gold was in backwardation. Meaning that the shorts want physical to fill for April delivery.

    1. I agree with everything you said except the part about backwardation. Were you basing this on that article that went around the internet by the guy who claimed backwardation?

      He's wrong. Here's the proof:

      That is Friday's Comex settlement prices. You'll see perfect contango.

      You can't use Kitco's price as the spot price. Sometimes there's periods of time when Kitco's quoted spot price might be higher than the current month or front month Comex contract. Kitco's quoted price is a number derived from the term structure of futures prices plus LIBOR (something like that. Jesse's Cafe Americain published the formula a few years ago, you can find it by searching his blog).

      The true spot price is the price set in London at the a.m./p.m. price fixings (at least "true" in the sense of "true" meaning the current paper manipulated price). We can measure backwardation either using the term structure of prices at the Comex settlement OR using the price of the front-month electronic contract price at the time of the a.m./p.m. fixings. Any other argument for observed backwardation is incorrect.

      It will get very interesting when we see true backwardation.

    2. I don't know if you keep an eye on the GOFO. Although gold is not in backwardation at the moment, based on the recent GOFO numbers, it seems gold market is indeed quite tight.

    3. Don't really watch GOFO but I just checked the gold lease rates on Kitco. Lease rates are derived using GOFO. I had not checked them in several weeks. This is the first time in a long time that gold lease rates are positive across all maturities.

      That reinforces your view of the GOFO rates.

    4. I don't know how Kitco got the gold and silver lease rates. In theory, silver lease rates are derived from SOFO rates in the same as gold but the LBMA stopped publishing SOFO rates last November. However, Kitco still publishes silver lease rates every day.

    5. Kitco has always had the gold lease rates. Just noticed that they had numbers for the silver rates. When the LBMA stopped publishing the silver rates, Kitco had it zero'd out for awhile. They seem to have them again. Not sure what that's all about.

  8. British Royal Mint makes 1st gold sovereigns in India in century

    Feb 18 (Reuters) - Britain's Royal Mint has started to manufacture gold sovereign coins in India for the first time in almost 100 years, it said on Monday.

    Indian residents have been unable to buy commemorative sovereigns since 1918, when the Royal Mint operated a branch in the country, producing 1.3 million coins in a single year.

    The first production run will be for 50,000 pieces and will be available in the market immediately, the Royal Mint said in a statement that coincided with British Prime Minister David Cameron's visit to India.

    The commemorative sovereigns will be produced by Indian gold producer MMTC-PAMP using tools and techniques developed by the Royal Mint in its South Wales facility.

    India is the largest consumer of gold, with gold coins playing a key role in wedding ceremonies and festival celebrations throughout the year.

    The country's gold medal market is estimated at around 80 tonnes a year by consultancy Thomson Reuters GFMS. (Reporting by Clara Denina; Editing by Anthony Barker)

  9. Ketchup, not blood, on the trading floor

    That has come down to the lowest level in history, thanks to the Federal Reserve. It costs junk-rated single-B borrowers only 6% on average to issue new 10-year debt. It's hard to compare the yield on single-B securities with prospective earning s on stocks. Single-B borrowers are likely to default. The time value of money argument becomes confusing because the future default rate is unknown.

    But if you are a private equity fund buying a traded company, as Brazil's 3G Capital and Warren Buffett bought Heinz last week, the likelihood of default has a totally different meaning: that's the likelihood that you will default to people who lent money to you. As much as it hurts to default, it hurts a lot more to be on the receiving end of a default. As one industry giant told me years ago: "High yield bonds are there to be sold, not bought."

  10. On Tue, Feb 19, 2013 at 12:14 PM, dlrybch wrote:

    Baubles to bars: India gold culture defies curbs
    February 19, 2013 RSS Feed Print

    By KAY JOHNSON, Associated Press

    MUMBAI, India (AP) — India's steep new tax on gold imports doesn't deter Mousumi Rao as she holds up a glittering $5,000 filigree necklace that could adorn her daughter on her wedding day. Rao's daughter isn't getting married next month or even next year. The 12-year-old is at least several years away from her wedding.

    Since tradition demands a bride practically drip with gold jewelry, it's never too early for an Indian family to start preparing, particularly with the high cost of gold these days.

    "I'm collecting things for her now so when she grows older and marries, I should have enough gold for her," said Rao. "It is very auspicious for us, one of the most auspicious things, to give gold to your daughter."

    Gold has been deeply entwined in Indian culture for thousands of years. Nowadays, India is by far the world's biggest buyer of gold and those imports are an increasing drain on an economy that is growing too slowly to reduce widespread poverty. Last year Indians imported 864 tons of gold, about one fifth of world sales. The cost of 2.5 trillion rupees ($45 billion) was second only to India's bill for imported oil. The unquenchable appetite for gold coins, bars and jewelry has swelled India's trade deficit and weakened its currency, making crucial imports such as fuel more expensive.

    The government can't do much about oil imports — without fuel, the economy would grind to a halt — so in the past year it has tried to rein in gold demand, raising the import duty three times in a year to its current level of 6 percent. The higher tariff is proving little match for age-old tradition.

    "The culture of gold is so strong in India. It's difficult to contain this demand by just tweaking import duties," said Samiran Chakraborty, an economist with Standard Chartered Bank in Mumbai.

    Through centuries of warfare and the shifting borders of regional kingdoms, gold was the safest currency. In some Hindu legends, Brahma, the god who created the universe, was born from a gold egg. In India, gold is spiritual and it is also practical. Parents of the bride give gold as a symbol of their prosperity. But it is also an insurance against a bad marriage, since the jewelry is the wife's, though many men take it anyway.

    The government recently stopped requiring gold-backed exchange-traded funds to hold physical gold in the amount of their sales. Instead, the funds will be allowed to deposit some gold with banks who in turn can lend it to jewelers, which in theory should reduce imports for a time.