Correction In Gold and Gold Stocks Spells Opportunity For Long Term Investors

It is no secret that the price of gold has been declining since reaching almost $2,000 per ounce last year.   After rallying in the early part of the year, gold prices have now fallen to $1,556, representing a decline of $42 per ounce or 2.6% below the closing price on the first trading day of 2012.

The devastating declines in the stock prices of major gold mining companies since early 2012 have been far out of proportion to the decline in the price of gold bullion.  Viewing the gold stocks in isolation, one would assume that the price of gold had collapsed by hundreds of dollars per ounce.

While opinions vary on where we go from here, the deeply bearish price action and bearish press articles on gold and gold stocks lead this writer to believe that we are setting the groundwork for a major rally at some point in the future.  Actions by global central banks to prevent a collapse of the financial system via the creation of oceans of newly printed paper currencies leads to the inevitable conclusion that at some point gold and gold stocks will soar far beyond the most bullish gold price forecasts.  As always, however, the question is the timing of gold's ascent.

TDV Golden Trader has examined the current factors impacting the gold market and cautions that a return to new highs in gold, gold stocks and silver, although inevitable, may not be imminent.

Since the speculative highs of 2011, the precious metals are continuing to correct and head lower, even in the face of Operation Twist and the ECB's Long Term Refinancing Operation (LTRO) printing.  And with the elections in France and even more socialism on its way, it looks like Euroland is ready to run the printing press again and the Fed will join the party. But I am not convinced that gold and silver will take off right away.  Everyone knows that the central banksters are running the printing presses on overtime, so in effect, we always had and always will have QE, yet the price of the metals continues to drift lower.

When comparing the 2007-2008 peak and crash to what we are dealing with now, I think we have to look beyond the chart patterns and timing.  Looking at market conditions and sentiment for clues to turning points is just as important.  Back in '08 we had a liquidity event which caused the nose dive in the markets.  Once the system was liquefied by TARP and then QE, the precious metals came bouncing back fairly quickly and then went on to make new highs right after QE2.

We appear to be in a period where the gold price will not run away quickly anytime soon, but we are also in the midst of a long drawn out liquidation of the metals as the central banksters keep accumulating gold at lower prices. Many central banks have been net buyers and importers of gold, and that trend looks sure to continue.  So, where is the selling coming from?

FROM WHERE COMES THE SELLING?

The paper selling we are witnessing is most likely squeezing the weak hands into coughing up their gold. Hopefully it’s only paper gold that is getting liquidated.  Investors in gold and silver may get frustrated and then capitulate into selling as the paper pushers continue to force them out of their positions.  But there are two potential catalysts that could reverse this trend:

1. If the shorts are forced to cover their position and decide to jump on the long side
2. The paper traders are forced to deliver the physical, which will most likely never happen.

Black swans are always lurking in the background, but they have yet to rear their ugly heads and the gold market is not anticipating any of them at the moment.  Until they appear, the precious metals may continue to drift lower.

The metals have been in a great bull run for the last decade.  But, what we haven’t seen yet is a 1974 style peak and trough that lasts for a couple of years. That is where we could be heading with precious metals right now.  In September of 2011, the price of gold peaked over $1900 and ever since then has been correcting lower (now almost nine months later).  During 1974 the peak price was just under $200 at which point it went into a tail spin falling to just above $100 in the summer of 1976.  After the negative trend continued for almost 2 years and then a sideways base during 1977, the gold bull market raced to its 1980 high around $850.

Until we see the fundamental shift back to gold, we are more than likely to continue correcting and then build a base just like in the mid 1970s.  The one thing to note is that gold peaked in early 1974, corrected for about six months and then went on to make a high by the end of 1974 before the major correction started that lasted almost two years. If a similar scenario plays out, then the correction we are currently in may end at the support and third test of the $1550 price range.  If this is the case, we could see a strong rally which would take the price of gold right back up to $1900 or higher before starting another bear phase in the long term bull market.

THE END MAY NOT BE NEAR

This standstill could last for some time still.  Especially since all the “speculators” are getting wrung out of the system as they have been taken to the cleaners in the last year.  More than likely, the average investor will stay away from precious metals until we have a major currency crisis.  Something that is more than just the problems that we currently see in Euroland. Until then we can expect the downtrend to continue and move sideways. If this scenario plays out like it did in the mid 1970s, we could still be in a period of time where the gold price continues to correct lower. This could bring the price of gold towards $1200-$1400 in the coming year.

If gold can hold support at $1530, then this correction may be over and the price of gold will continue higher toward the end of this year or early next year.  If the broader stock market continues to sell off, the Fed may pull the trigger on more easing, which could reverse gold’s negative trend and then we are looking at a target price of around $2100.

There seems to be no consensus among investors or analysts on which way the price of gold will go from here. But if the mid 1970s bull market in gold is any guide, be mentally prepared for a lower price. Then be ready to take advantage of the coming basing period and average down on your physical holdings at these lower prices. If the correction is over and we get a strong bounce from here, expect higher prices and a much better opportunity to sell.  We are currently in the eye of the storm of The End Of The Montetary System As We Know It (TEOTMSAWKI).  The pain is not over yet and neither is this gold bull market, the looming currency and debt crisis will make sure of that.  Just remember that the hardest thing to do as a trader and investor is to stay long for the full extent of the bull market.  This rough patch is again testing the mettle of investors.

THE TDV GOLDEN TRADER STRATEGY AND OUTLOOK

We have been lucky to have played the last six months almost perfectly.  We were strong buyers of the junior gold stocks throughout December and then after they rose significantly on March 2nd we issued a dispatch to TDV Golden Trader subscribers entitled, "Trade Alert: Close Out Many Of Our Trading Positions".  We sold most of our trading positions on that day... something that has worked out tremendously well as shown by the chart of Market Vectors Junior Gold Miners ETF (GDXJ).

Will this be the bottom?  Nobody knows.  But we are remaining patient and waiting until we see the whites of their eyes before we reload and buy back in.  In the meantime we are advising subscribers to do the same and looking for stink bid opportunities to buy some of our favorite gold stocks at ludicrously low prices should a seller need to get out in an illiquid market.

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American Silver Eagle Bullion Sales Soar As Investors Buy At Bargain Prices

The US Mint's latest monthly reports on the sale of American Silver Eagle bullion sales show that investor buying has hit all time record levels.

Total sales of the American Silver Eagle bullion coins in 2010 came in at a record high of 34,662,500.

With over two months remaining in 2011, sales of the American Silver Eagle have already surpassed the record level of 2010 with sales of 36,375,500 ounces.  If sales of the Silver Eagle for November and December match the levels of 2010, total sales for 2011 should total over 42 million ounces or more than 20% above the record breaking sales level of 2010.

A review of sales by month for 2011 indicate solid fundamental buying by silver investors.  Typically, buying of an asset will increase as prices go higher and decrease as prices decline.  This was not the case with the American Silver Eagles - despite a sharp sell off in May and September, monthly sales increased as investors took advantage of bargain prices.

Silver had a volatile year, selling at $30.67 per ounce at the beginning of the year and moving up to a high of $48.70 (as measured by the London PM Fix Price) on April 28th.  Silver closed yesterday at $33.47, up $2.80 or 9.1% on the year.

Based on strong fundamental demand for physical silver, expect silver prices to end the year considerably higher.

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You Know Paper Currencies Are In Trouble When Investors Flock To The “Safety” Of The Yen

Investors in paper currencies are running out of safe havens.  As Europe totters on the brink of a debt implosion and the Dow routinely plunges 1,000 points every other week, holders of paper wealth are desperately searching for a store of stable value.

Ironically, the two currencies viewed as the least risky are the Japanese yen (issued by the country with the highest debt/GDP ratio in the world) and the U.S. dollar (issued by the country with the largest amount of debt in the world).

Investors in U.S. dollars remain forever at risk to the Fed's policies of dollar debasement and money printing, but to seek safe haven in the yen seems like an even more foolhardy proposition.  Consider It's 1987 Without the Bubble In Japan for insights into the fundamental weakness of the economy backing the paper yen.

Japan’s labor force shrank last month to its smallest size since October 1987, when the nation’s stock-market benchmark was 185 percent higher and land prices were 85 percent greater than today.

Employers cut payrolls by 160,000 and a further 200,000 workers retired or abandoned efforts to find a job, leaving the seasonally adjusted number of employed at 59.4 million, the statistics bureau said today in Tokyo. Separate figures showed industrial production rose 0.8 percent from the previous month, less than all but three of 28 forecasts in a Bloomberg survey.

The data deepen concern that Japan’s recovery from the March earthquake will be stunted by manufacturers shifting operations abroad because of gains in the yen, a deterioration in consumer confidence and prospects for higher taxes at home. The challenges add to the burden of an economy already beset by a shrinking and aging population.

The yen traded at 76.59 as of 12:11 p.m. in Tokyo, less than 1 percent from the post-World War II record high of 75.95 on Aug. 19. The Nikkei 225 Stock Average was little changed at 8,723.12, compared with the peak of 38,915.87 when it closed out 1989, capping a four-year run when it soared almost 200 percent.

Japan has been in a contained depression for two decades, propped up by massive deficit spending and BOJ money printing.  A double dip world recession will send Japan's economy into a nosedive since exports account for 15% of GDP.

In order for Japan to service its crushing debt burden, they need rapid economic growth and and a large expansion of their labor force.  Will this happen?  In a word, no.  The world economy has been in a downward spiral since 2007  and massive stimulus efforts by governments and central banks have failed to contain the ongoing depression.  Making matters even worse for Japan is the fact that the Japanese are slowly exterminating themselves.  The birth rate in Japan has been plunging since the early 1970's and has now gone negative.  An economy with a dwindling labor force and an aging population has little hope of servicing a massive debt burden.

Japan population growth: Courtesy google.com

The appreciation of the yen is forcing Japanese companies to fire domestic employees and move operations overseas in order to remain competitive.   The Japanese government has intervened numerous times in the currency markets, trying to force the yen lower without success.  Despite the weak fundamentals of the Japanese economy and a suffocating level of debt, the yen continues to appreciate, suggesting that investors perceive other currencies to be riskier than the yen.   The yen has gained the dubious distinction of being the cleanest shirt in the dirty laundry.

Yen - courtesy stockcharts.com

There is no way of predicting how long the value of the paper yen can defy economic reality.  Markets will eventually price to fundamental values and investors will question the value of all paper currencies.  At this point, gold will rightfully be perceived as the only currency with real value.  What price level gold will soar to during the chaos of collapsing currencies cannot be predicted - what can be predicted is that holders of gold will be the only ones left holding a currency with any value.

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Smart Money Investors Assess Gold Market

Given the recent extreme volatility in worldwide financial markets, Barron's interviewed their Roundtable Panelists for an assessment on where we are headed next.   Three of the smart money investment pros interviewed gave their insights on where they think gold is headed next.

Here's what they had to say:

1.  Investor Felix Zulauf thinks that the stock market will see new lows in the fall and that eventually both the Fed and the European Central Bank will step in to support the financial system.  Although Felix feels that providing additional liquidity is not a solution, "if we don't do it the system will break down."  According to Felix, at some point, as the problems get bigger, central banks may hit the panic button and wind up "like Zimbabwe".  The increasing price of gold reflects the loss of confidence in policy makers, central banks and the currency.  Felix's recommendation for a bleak future - "own a lot of gold, and don't have debt."

2.  Fred Hickey, who is editor of The High-Tech Strategist, also sees the Fed being forced to initiate more quantitative easing as economic conditions deteriorate.  The drawback of more money printing, however, is that "the Fed...can raise the nominal prices of assets - but not the real prices, because inflation will rise."   Hickey, who owns both bullion and gold ETFs think the better play right now is in gold mining stocks since they have lagged the price increase in gold bullion.  Hickey is recommending Agnico-Eagle Mines (AEM), Newmont Mining (NEM) and Yamana Gold (AUY).

3.  Marc Faber, Editor of The Gloom, Boom & Doom Report, sees a short term bounce in stock prices and a possible correction in gold of $100 to $150.  After a rally off oversold levels, Marc thinks stocks will drift lower due to concerns over sovereign defaults, a dollar crisis, continued social upheaval in the Middle East and developed countries in the West, recession, lower corporate profits and the possibility of a "bust in China."   As for the gold market, Faber remains long term bullish saying that "As long as the trio of Obama, Geithner and Bernanke are in power, gold is destined to move higher.  Long term treasuries have no value.  They will default by paying interest in a worthless currency."

Bill Gross, head of investment firm Pimco, while not specifically addressing the gold market, is also bearish on the economic outlook for the the United States and implied that the more quantitative easing is the only option left.  According to Gross, the recent Fed announcement that it will keep interest rates at zero for another two years "indicates that monetary policy has been exhausted, while fiscal policy is hammerlocked by the results of the debt ceiling debate."

Gold is beginning to look more and more like the only safe haven in a dangerous world.

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