Wednesday, January 5, 2011

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

18 comments:

  1. Wathcing Fast Money yesterday was quite a hoot. They will be short at the bottom (again). Shorting SLV might actually work since they have no assets backing the fund. The NAV will plunge to reflect this, making his short money good.

    On the other hand, if he is trying to short SIH1, he will get his necked stepped on by the Asians.

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  2. LOL. Ya I agree that for a long term arb trade going short GLD vs. long GTU or PHYS would be a great trade that you could leverage up.

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  3. Dave, Great blog. Are you totally out of SDRG?

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  4. Yes I am out of it. I want to see what happens with the Fanny Chang lawsuit over in Hong Kong. OR is someone outs Hazout I'll reload.

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  5. For the record, I took a big personal hit on SDRG. It's been my worst mistake ever in the markets. But, that's the way it goes in this business. Thankfully my successes have far outweighed this hit.

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  6. Hi Dave, you mentioned going neutral in PM, does that mean you are lighting up positions or that you see things possibly turning short term bearish?

    Thansk
    AR

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  7. We lightened up starting in mid-december. right now we have some conservative position trades on plus i have been doing some aggressive daytrading from the long side. not sure this correction is over yet but the volatility is tradeable.

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  8. one thing is for sure, while it's on the downside it's a great time to buy physical. :)

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  9. Are you still short BAC? Banks have been rallying pretty hard.

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  10. Hey, buy gold or silver bullion and chunk it into your safe at the house. Jacking around playing the market is like dangling your balls in a bear trap, eventually it's going to snap shut. This $hit is getting to volatile to trade/short.

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  11. My buy was small, but I realize that these moments are opportunities and to make the most of them. We followed the smart money & and we know the lies from the media. Bubble, bubble, bubble!
    Funny how they never mention silver is a commodity and that it's supply is in deficit to it's demand. This is the moment that those who are long will overcome the noise of the many who wish you to sell. Why is it Americans seem to be the last who understand the real value, that the rest of the world grasps. Fiat money is doomed!

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  12. re: BAC - I still have some May 2011 puts on it. The deal that let them transfer $127 billion of liability onto FNM/FRE - and really the Taxpayer balance sheet - removed a big reason to short it. It's a crime against humanity that Geithner did that deal, but hey our country is run by a bunch of nefarious crooks now.

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  13. dave, why are you out of sdrg? you were hazout's biggest supporter.. what happened to change your mind?

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  14. re: Hazout: Myself and a few other very seasoned market professionals were "Madoff'd" by Hazout. He's a crook. Didn't you get the letter sent to shareholders by Fannie Chang? Go read it if you have not. A colleague of mine did some sleuthing and found that several of her allegations were true and then a couple others of us put "2 and 2" together and realized Hazout is a scammmer.

    Having said that, the China equation of the Company is bona fide. Hopefully Ms. Chang can get a legal fence put up around that, which is part of what her lawsuit will do. If that's the case, the stock is very very cheap here. But Hazout needs to be ousted and my fund isn't big enough to spend the time initiating legal action. Someone in this country and in Canada needs to initiate legal action against Hazout to get him ousted.

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  15. US Mint Raises Prices on 2011 Base Metal Products

    http://mintnewsblog.blogspot.com/2011/01/2011-us-mint-product-prices.html

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  16. Some of you who are a little more conservative might consider TGLDX. I have done very well in it managed by John Hathaway. Owned it since December 2009. Too bad about SDRG I have gotten hit in a similar way on a tech stock overstating their orders.

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  17. Dave this is off topic,but I would be interested on your take of this matter.I believe this Index and China's actions have more then great baring on our commodity bull run in 2011.Thanx inadvance. http://www.zerohedge.com/article/baltic-dry-free-fall-continues-4-drop-3rd-consecutive-day-lowest-april-2009

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  18. Good question. The BDI tends to be volatile and, while I think there is some merit to it's use as reflection of economic health, I have obsreved that over time it does not have a lot of longer term predictive power.

    Having said that, commodity inflation is not about economic health anymore. It's about the massive global currency printing war. ALL commodities will be repriced substantially higher because of the extreme devaluation of fiat currencies going on. It's fait accompli and it will get VERY ugly.

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