Whither Precious Metals: Up or Down
"Truth, like gold, is to be obtained not by its growth,
but by washing away from it
all that is not gold."
The recent correction in the precious metals has left investors shaken. In response to their fears is a litany of opinions as to what awaits the precious metals. The $64 dollar question is will they go up, or will they go down.
We wish we had a definitive answer that addressed both time and magnitude, but alas, we do not. Our crystal ball was broken many years ago attempting such prognostications. From such we have learned that all that is needed, is to know the direction of the primary trend, and to be aligned therewith.
The primary trend of the gold market is bullish. Look at any long-term chart of gold, silver, or the precious metal stocks: the trend is quite clear.
Bull markets have a unique signature illustrating the primary trend as a series of higher lows and higher highs, proceeding from the bottom left hand corner of the chart, upwards to the top right hand corner of the chart: a veritable stairway to heaven if you will.
All bull markets experience corrections - of both short and intermediate term duration. As we have said several times before: there has not been an intermediate term correction since May of 2005. One was due, expected, and has arrived. Of this there is no doubt, nor should there be any surprise.
Intermediate term corrections in the precious metals generally run about four to five months in duration (18-20 weeks). So far, this correction is about 2 months (8 weeks) old.
A significant move down in magnitude is not a given, although it remains a distinct possibility. Without question - time is going to play a major part in this correction. We are more certain of the time factor than the magnitude factor.
We do feel that a fair amount of risk is being ignored, and that many see nothing but blue skies ahead. We see blue skies ahead, but that doesn't mean that storms will not roll in and out as well.
The May 2005 lows were below 170 for the HUI; $425.00 for gold; and below $7 for silver. We've come a long ways baby: 230 points in the HUI; 290 in gold; and 8 in silver (over a doubling in price for silver). The following are just examples of possible retracement levels, or signposts along the way.
HUI = 76 points = 324
GOLD = 96 = 619
SILVER = 2.64 = 12.36
HUI = 115 = 285
GOLD = 145 = 570
SILVER = 4 = 11
HUI = 152 = 248
GOLD = 192 = 523
SILVER = 5.28 = 9.72
As stated above, the general duration of intermediate term corrections is 4 to 5 months. That brings us to September, give or take a few weeks either way. In addition, intermediate term corrections, have on occasion, lasted longer than 4 to 5 months, so caveat emptor.
Between now and then there will be significant moves both up and down, as volatility has become the norm. For those quick on the draw, these moves offer potential. For those that buy and hold, any forthcoming significant lows will offer an opportunity to accumulate new positions at bargain basement prices.
The following are excerpts from our market wrap for the week ending June 30, 2006.
I sold several of my gold stock positions at the end of last week. This is not because I am negative on them - I simply booked profits that were quite significant for the few weeks time I owned them. In addition, I still own several more. The gold stock portfolio below indicates the ones sold and the date and selling price.
I am of the opinion that the pm lows recently put in place will be tested. When they are tested, and hold their lows, I will buy more.
I do not see an intermediate move up occurring in the precious metals at this particular time. A lot of technical damage was done during the recent correction, and there is now significant overhead resistance that needs to be worked off. Time heals all wounds.
I remain very bullish on the precious metals, and still believe they are the investment opportunity of a lifetime. However, even the strongest of bull markets have to have corrections, both short term and intermediate term.
The precious metals have not experienced an intermediate term correction since May of 2005. One was due, is here, and is standard operating procedure. My mantra remains: buy weakness - sell strength. Do the hard trade.
Finally, below are the market indicators for most of the major markets and the gold stock positions. And that's a rap.
Thank God, the FOMC meeting has finally come and gone. The entire world seemed to be on hold - waiting with baited breath to hear the gospel according to the wizards of finance.
Finally, it came, and with it came celebrations in almost every market - except the US Dollar, which turned down while others turned up. It seems the US Dollar has some karma to work out.
The importance of the 25 basis point rate hike was blown way out of proportion, and was not viewed in the proper context. The minutia was insignificant - the full-fledged policy a dead man walking.
Furthermore, and more importantly - the lack of understanding of what is going on regarding monetary policy (or the lack thereof), both here and abroad; and the repercussions such will exact on the economies of the world - is literally scary.
FOMC Press Release
Release Date: June 29, 2006
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.
Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.
Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas.
The markets responded to the rate hike by rallying full steam ahead, all that is except the US dollar, which was once again, hammered down 1.8% for the week.
The experts explained that the markets see the end coming for future rate hikes, so onwards and upwards the markets marched. We disagree in the markets and the experts (most experts - not all) interpretation of the rising tide of interest rates sweeping round the world.
From the BIS 76th Annual Report 2005/06: An Overview
Chapter I: Introduction: resilience to mounting strains
"...Yet, as the year wore on, fears began to grow about prospective inflationary pressures. Concerns also began to mount about the growing imbalances in the global economy, not least the low saving and high investment levels in the United States and China, respectively, and record current account imbalances. Against this backdrop, monetary policy tightened in a number of industrial countries..."
Chapter II: The global economy
"...However, several features of the current global upswing are less positive: fiscal deficits are large; household savings seem unsustainably low in a number of advanced economies; investment levels remain low; and global current account imbalances have reached unprecedented levels..."
"...As deflationary pressures faded, the Bank of Japan announced the end of its unconventional quantitative easing policy but initially left its policy rate unchanged at zero..."
Chapter V: Foreign exchange markets
"...As in previous years, three main factors underpinned exchange rate developments during the period under review: interest rate differentials, the current account deficit and rising net international liabilities of the United States, and continuing reserve accumulation in China limiting the dollar's depreciation against the renminbi..."
Chapter VIII: Conclusion: coping with risks, today and tomorrow
"...Yet there are considerable uncertainties and associated risks, not least concerning inflationary pressures on the one hand, and a possible unwinding of accumulated economic and financial imbalances on the other. These could lead to financial market turbulence or a long period of relatively slower global growth developments, or both..."
We will not bore the reader by going over what the BIS has clearly stated, except to note that they seem to see some problems and imbalances that could have a negative impact on the global financial system. Both the experts and the market are wrong, or the BIS is wrong - take your pick. We will take one from column A, and one from column B, thank you very much.
The critical issue in all this (at least one of them) is liquidity, as in excess global liquidity that has created a boom of never before seen proportions - a virtual bubble bath of credit flooding the world. After booms come busts - it is but the way of natural law.
Because of both the sheer magnitude of the credit expansion, and the lack of experience and track record of the new credit derivatives fueling a large portion of it - we are without a doubt sailing in unchartered waters. We may be up the proverbial creek.
Already many unintended consequences have resulted, it remains to be seen what other collateral damage unintentionally manifests itself. It is much like Pandora's box - better to leave unopened.
So now, the mess of excess secretions is trying to be mopped up. Interest rates around the world are on the rise. However, are the central bankers serious about cleaning up the mess they have made, by inundating the world in a flood of paper fiat credit and debt instruments?
Alternatively, do they even know what such would entail, and how to go about it - or if it is even possible to accomplish, without creating more unintended consequences, resulting in the cure being worse than the disease? The Fed is damned if they do and damned if they do not. The Fed is simply damned, as well it should be. It is an accident looking for a time and place to happen.
We do not believe those responsible for monetary policy understand the complexity of the task that stands before them, nor that they have the means to address it, even if they were aware of it. Greed has blinded many an eye to the light of the day.
We are concerned that either the cure will be worse than the disease, or that when push comes to shove, an addict will do what an addict does - feed his habit with more of the same, trying to kill the pain without first killing himself.
The prognosis does not look favorable. The only solution that has the power to fight such profligate pestilence - is Honest Money of silver and gold.
The problem is the excess liquidity - it cannot be cured with more of the same. However, it is imperative to recognize that the cause of the excesses is inherent within the nature of the beast: the creature known as paper fiat debt-money.
When credit, debt, and money are the same, the only choice is to inflate or die. As we said, the prognosis is not promising without a return to the hard currency system of the Constitution.
In paper fiat land, the least that the central bankers should be doing is raising reserve requirements So far it has been all talk, and my dad always said - talk is cheap.
COMING SOON: A REQUEST FOR AN AUDIT OF US GOLD RESERVES