Gold And Silver Smashed…Nobody Really Knows What Lies Ahead

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Published : March 01st, 2012
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Category : Market Analysis

 

 

 

 

I felt the need to take my eyes away from the screens today and write about a few things irking me involving the precious metals space. First though, we all need reminding that silver has continued to fall since hitting its high back in May of 2011. Gold, since double topping back in the fall has also failed to recover its gains. These facts aren’t lost on me and neither should they be lost on you.

Before I get started, I want to say to you that this piece is meant to provoke thought is not meant to predict the price movement of any precious metal going forward. I have grown increasingly frustrated of late trying to present both sides of the argument and getting smashed and spammed via email and in the comments section with the same arguments about how only gold and silver are real money. That isn’t what this post is about. I ask you to read this with an open mind and comment intelligently if you chose to do so. It takes time to evaluate these things and try to formulate some opinion. I don’t do it for just for the sake of doing it. Life is too busy to drum up controversy. I could care less about whether or not gold and silver is money. I just want to pay my bills and if means paying them in the only way that my creditors accept (fiat currency) then so be it.

First though, take a look at the 18 month silver and gold charts.




What really sparked my need to write this post was the commentary that I started seeing pop up around the internet from all the usual metal bug suspects. Jim Sinclair, John Embry et al. This is not a slam on them. They are very intelligent men who know their stuff and have many more years of experience than I will ever have in this game. However that doesn’t mean that they are always correct.

You can cry for years that the price of silver and gold will go up and when it does you are vindicated and hailed a hero for having called it correctly, despite the fact that it might have taken 10 years or so for your prediction to materialize. The followers forget that part. Most of these men 10 years ago predicted $1,000 gold but a funny thing happened along the way. Most of the same few writers on gold, including the fine minds at GATA (and I do mean that with the utmost respect) continued to raise their price estimates for metals as the price of the metal continued to rise. $1,000 gold quickly became $1200.00 gold, which quickly became $1700.00 gold which then quickly became $2,000 or higher gold. The problem with continuing to revise your upward forecasts beyond the current targets is that there comes a certain point in time when that last target will never be met. The same happened with silver. When gold started to become too expensive for the normal “Joe” silver became the metal of choice for most of those writers. Silver was (and still is) easy to get, relatively cheap and has a great story attached to it. The fundamental basis for owning silver is one argument but the monetary instrument argument is a different beast altogether. I won’t get into that here because it isn’t the point of this post. I have always maintained that if you are going to own silver, own it for the fundamental reasons, i.e. that it is an industrial metal with vast uses.

If you look at the Charts you will see that after both metals hit their tops they tried on more than one occasion to rally yet were always met with resistance at or near their trend lines. We never heard a peep out of the gold and silver camp about manipulation or corruption on the rise up. All was fine. The fact that silver was moving in a parabolic fashion in May was absolutely fine with the precious metals camp. They never once, except a few like Bob Moriarty, warned that the rise was scary and set to end badly. Such warnings never came from the others in the camp but instead, many an investor/speculator bought into the hype and continued to buy silver to the top. ($55.00 or more was what the last ones in paid (when you factor premiums, shipping and mark-ups if you happened to buy from Ebay)

But a funny thing happened. To cool the speculative fever, the CME group raised margins. If you look at the chart of silver leading into May, you can not make an objective argument that speculation was not present. Too many speculators were in the market up to their necks in margin. To cool the euphoria, margin hikes were implemented. This led to the first major decline in silver last May. However, those that refuse to look at the other side of the argument will blame the CME group while completely ignoring the fact that silver had gone parabolic.

Once the dust settled we saw a slow and steady rise again in Silver. People, thought that the worst had passed and started piling in again not realizing that the major selling in May could have signalled the end. We’ve all heard of the the dead cat bounce term but I am reluctant to say that this was what happened because this piece isn’t about picking sides.

Then it happened again … another collapse in the price of Silver in the fall of last year.

On the silver chart above I circled the lows of the sell-off in green for a reason. Each and every time silver sold off, the same “experts” came out to tell investors that this marked a great buying opportunity and that the silver price would still rocket to new highs. We also heard how the sell-off was due to contrived raids by the “cartel”.

But wait … wasn’t the rise in the silver and gold price due to massive monetary expansion? The silver and gold camps often looked for testimony from Ben Bernanke to signal and build their case for higher metal prices. Shouldn’t the opposite be true when the Federal Reserve signals that it will not move on a QE3 program? Many staunch and one-view pundits have argued that FED printing was why the metals would explode. Doesn’t a signal that there won’t be additional QE justify the fall in gold and silver? Not to agree on this point is contradictory in my view.

The pundits didn’t waste any time at all coming out proclaiming that this was an orchestrated raid again offering no proof just regurgitating each others’ unfounded statements to that effect. If this was a true raid, what was it when the price of the metal was rising exponentially? In fact, commercials were piling on the shorts over the last two weeks and even the staunchest longs should have taken notice. The fact they made more money than the longs somehow invokes fury and envy. Don’t fight the ‘JP Morgans if you think they control the game … play along with them and make a killing.

We heard from Embry who told King World News today:

This relates to the massive blowout in open interest in both gold and silver over the last few weeks. The market is always vulnerable short-term in that situation. Central planners can’t announce they are going to have constant and massive QE or everything would go to the moon. So the idea is floated around that QE3 is off the table.”

Does this mean anything in the long-run? Absolutely nothing. It’s just another great buying opportunity. I think the price will come back within days. This is just one of these momentary smashes where the speculators get cleaned out every time....

“If gold and silver are going to head a lot higher from here, this is what you would expect the manipulators to do ahead of that move to make sure as few people as possible are on the long side.

When asked about gold, Embry responded, “We are going to see the same thing happen in the gold market. Even though they smashed the price down over $75 at one point to $1,706 spot this morning, it doesn’t mean anything. So they clean out some speculators and then the advance continues.”

Jim Sinclair on his own site wrote:

Today’s Window Dressing Fall In Gold

My Dear Friends,

Please do not be bothered by today’s intervention.This day’s fall in gold is pure window dressing. Do not be concerned.

These guys said the same thing after the May collapse in silver and the October collapse in gold.

I am sure that over the course of this evening the others will pile on with talk about a contrived sell-off in gold and silver, ignoring their own bullish thoughts about how QE would propel the markets while poo-pooing the talk of no QE3 as being a catalyst for the fall.

The reality is that silver has been in a downtrend since May of 2011 when it made a double top after the parabolic rise and each and every one of the group of silver and gold bugs has indicated after the sell-off that it was then a good time to buy…but something has happened that has caught my attention that these pundits won’t tell you.

After 10 months, the market has never come close to challenging the old high in silver that still sits at $49.82. The market instead has continued to make a series of lower highs and lower lows. The market has tried 3 times to rally back, all 3 times failed. To most, this would seem as though the bubble has truly popped. To the hard-core silver crowd it’s manipulation. But wait, manipulation didn’t get in the way of the run to almost $50.00….why is manipulation going to be blamed for the inability of silver to make new highs? You can’t have it both ways.

The same story applies to gold. It too has been in a downward channel after making a double top in the fall of 2011. As with gold, the same pundits came out and urged the public to keep buying as the fall in the price of the metal was due to contrived manipulation but the rise was solely based on fundamentals, not speculation. If fundamentals change, (No more QE) then shouldn’t those fundamentals change the longer term outlook?

I respect many of the pundits I often write about greatly. However, as investors, we cannot get trapped into thinking that there is only one story to the entire picture. If, as gold and silver investors we believe that the stock, gold and silver market has been kept afloat by FED infused liquidity and that this continued liquidity was going to be the catalyst for further upside gains then we cannot ignore that closing the spigots will mean that the opposite is true. Perhaps one of the greatest paradoxes is the belief among hard core metal bugs that it was liquidity that would drive the metals while most of them continued to disbelieve the stock market rally. News flash: The same reasons why gold and silver were rallying apply to why the market rallied. The FED was re-inflating the balloon and when the air runs out, we all know what happens.

Back in the late 1970’s the metals rose, fell and rose again in a second euphoric phase….it was that second rise that trapped most people and flushed them out for good. Both metals would then go on an extended bear market.

A I said at the outset, this is not meant to be a slam on gold or silver. I love the metals but will only continue to trade what the market gives me. If the market wants to move them lower then I won’t stand in its way but will instead join them as I will when the market decides to take them up. But don’t ignore all the facts to only focus on facts that support your own belief system.

With that said, today could be an initial or over-reaction to the FED hinting that they will not embark on an official QE3 program or it could simply be an initial knee jerk that took out a bunch of cascading stops along the way. However, don’t discount the possibility that today could have marked the end to a countertrend rally off the initial sell-off lows of last year signalling lower prices ahead. By keeping all your options open can you really take an objective look at the situation and make an informed decision.

Don’t for one minute become complacent and think that silver won’t crash further below $26.15 or that gold won’t trade to $1500.00 or less. At the same time, don’t fool yourself into thinking that silver will trade over $50.00 and gold over $2,000 anytime soon. Always keep an open mind and analyze all opinions…from both camps, not just the stories that are re-circulated, often without any fundamental analysis behind them. Just because everyone repeats the same story doesn’t make it fact. Don’t look for facts to reinforce your own beliefs, look for as many different opinions as possible.

On a technical front, pay attention to the bearish engulfing candles that formed on today’s chart implying that further losses are most probably expected. Today’s selling did create oversold conditions so we may see a relief rally tomorrow but once that oversold condition is worked off, it is likely that the price declines will continue for the intermediate time frame.

Like I said in an earlier post today no matter what camp you are in, today is good news.

  1. If you believe that gold and silver are going to the moon, as is your right, then today’s action should present itself as a buying opportunity for you. Don’t complain.
  2. If you believe that silver and gold were in bubbles and that the bubble has finally popped but never got a chance to sell the remainder of your “stash” then have now been presented with what might be your last opportunity NOW to get out and minimize your losses or taking profit from the lows put in last fall and early winter. Rarely after a bubble pop does the asset give you 3 chances to get your money out.

Whatever your views, please examine all possibilities to minimize your chances of getting hurt in this cruel market.

 

 

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I am not concerned about accumulating fiat dollars. I am concerned about getting assets. I use fiat currency to accumulate assets when they go deep sale. Buy like an Indian from India. Stay out during the normal, dont buy retail, or at "every day lows". Buy the crash, buy when people are giving up. Buy when Kleenex is 89 cents a box. Then stock up.

Price prediction is impossible in this market. Most Prediction is based on probability. Probability based predictions are useless when information is asymmetric. And we the people don't have the info to accurately time the markets anyway.

But we do know the price action. I use the pain indicator. Most reliable.

Only Buy when it is way down in the pain zone. IF you are not in great pain don't buy. Don't buy when it feels good. Buy when the price is so low you want to quit. For example, Gold 1500, silver 26. This is the wealth building zones. Buy when you say "who wants to buy this shit, this is awful, this is carnage". Get ready to buy gold at 1000 and silver at 19. You laugh, impossible you say!

Let me tell you I am not blasting my wad now. I have lots in reserve for the Gomer zone. SUR-PRIZE SUR-PRIZE zone. I decided that if they control the money machine to infinity, they can do anything. They can force the price up or down, any which way, any how deep or high they want. Infinity is a lot of money.

Once they got control of the money machine to infinity, anything became possible. Price discovery occurs for brief periods when the market functions correctly to mark to market. The rest of the time forget it. The market mech of true price discovery is permanently broken.

Remember, buy the Kleenex at 89 cents.
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I think that what this article and comments show is that someone could be completely correct in their fundamental analysis and lose a hell of a lot of money not trading what is being shown on a chart of the price action ( aka reality).

In other words...technical analysis is what has happened till NOW and fundamental analysis is what should happen but may NEVER.

"Nobody really knows what lies ahead".... TRUE AS.
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Dan thanks for your post and timely warnings that are well taken. But with gold at 8.64 % and silver at 23.14% gains to date this year why cry wolf? This is the fourth time both gold and silver have survived major turbulations to remain above $ 1700 and $ 31 ( now $ 33) and shall slowly and steadily recover again. Yes, gold moves up silver follows, the reverse will be true when silver establishes its antecedents based upon its industrial Usage alone. That time is also not too far.
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I suggest you take a listen to the latest ANDREW MAGUIRE interview , This mans knowledge of the metals markets past,present and future makes him and his analysis 100 x more credible than yours and other metals commentators both longs and shorts.
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Agree with most of the analysis here.
Gold...if you look at the weekly chart you can see that this week has not been a particularly big sell off compared to the movements Aug /Sept last year and that gold is still in a strong UPTREND.
( note that gold is a seasonal sell at this time)

As for silver i recently traded it to the close 23 feb and reentered on a break above that till the close of 28 feb.
NOTE both these positions were closed for the simple and logical reason that Si was WAY OUTSIDE the the standard deviation and due for correction.

I retain physical for both. I do not to make predictions.
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Thanks for your article, and I do agree with you that investors need to look at the pros and cons in what they are investing in. Reveiw the fundamentals everyday or week as the case maybe.
However the fundamentals for silver look very good for the pros.
Fact 1 the total suppy for 2010 was 1056.8 mil oz
2- the total world demand was 1056.8 mil oz
3 total mine production was 736 m oz
4 the rest was made up from Government sales 4% , producers Hedging 6% and recycling 20%
the shortfall for silver for 2010 was 320.8 mil oz
the world demand for silver is growing and the stock piles are not , thats why the price for silver should move higher in the long run
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No evidence?
What about the dumping of 1mn oz of gold and 10,000 contracts of silver within a few minutes?
That is evidence, even if not conclusive.
I find it aggravating when commentors bluntly state that the 'conspiracists' offer charges without evidence. They simply ignore the evidence presented.



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Thanks for the article Dan, interesting analysis. But you are not looking at the macro outlook, which is debasement of fiat currency via central bank intervention in an attempt to overcome the worldwide debt problem. My money is on more of that same intervention, and resultant increases in silver & gold prices. By the way, physical gold and silver bullion is not "easy" to get, it is becoming increasingly harder to get. Regards from Tony in Oz
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Hi Tony
I have had no problems whatsoever securing gold or silver in Oz.
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Latest comment posted for this article
I am not concerned about accumulating fiat dollars. I am concerned about getting assets. I use fiat currency to accumulate assets when they go deep sale. Buy like an Indian from India. Stay out during the normal, dont buy retail, or at "every day low  Read more
B. - 3/4/2012 at 3:57 PM GMT
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