"The selfish they're all
standing in line
Faithing and hoping to buy themselves time
Me, I figure as each breath goes by
I only own my mind."
~ Pearl Jam, I Am Mine
Long time readers know that I
have been and remain bullish on gold and gold stocks in the longer-term.
However, the reasons why I believe gold and silver will perform well in the
longer-term are a bit different than what many economists and pundits are expecting.
I am a contrarian by nature. I
generally try to do the opposite of the crowd in every situation I find
myself regardless of whether I am in a movie theater or trading options.
Before getting into the gold and gold miners analysis, I thought I would
explain my position publicly to readers. I do not consider myself an expert
economist, but I try to read those who many consider to be experts looking
for similarities in their viewpoints and expectations.
The herd mentality exists in
financial markets and a similar behavior exists among economists. Most
economists in the mainstream media today tend to be Keynesians or
neo-classical economists. Both viewpoints are generally accepted as the
correct interpretation of economic and monetary policies by academia.
However, the academic world
can actually reduce open thought through ridicule and persecution. In the
world of academia the herd is right, until someone proves that they are wrong
using logic based reasoning.
Very similar to political
ideologies, economic ideologies are deeply rooted. Paul Krugman is a great
example of Keynesian economist. Like it or not, the majority of economists
believe his views are correct regardless of whether they are based on fact,
history, or dare I say "common sense."
This leads me to the reason
why precious metals and commodities in general may be approaching a major
bottom and the potential for a monster rally. The reasoning stems from the
fact that across the world central bankers generally share the same views as
Paul Krugman. They believe that the modern finance system does not need gold
and that fiat currency is the answer even though history argues in their face
across multiple millennia.
Most economists and financial
pundits believe that sovereign debt is going to bring down the economy and
they may be correct. Many believe that the debt will unleash a massive
deflationary spiral that will consume fiat valuations, specifically on risk
assets and debt obligations.
I do not necessarily disagree
that this is a likely outcome, but what concerns me is the number of people
that believe this is true. This is the herd's idea and as I have said many
times before the herd is rarely right. This time may be different, although
it rarely is. For inquiring minds I offer a rather different potentiality.
What if the debt crisis causes
a totally different outcome that very few economists envision? What if they
follow Dr. Krugman's ideas and create massive amounts of debt to stimulate
the economy while printing vast quantities of fiat money to prop up failing
financial institutions? Clearly increasing debt levels and debasing the
currency do not imply a long term positive scenario.
Central banks do not have a
strong track record when it comes to reducing liquidity or increasing
liquidity at the appropriate times. Thus these actions are likely to
facilitate some sort of crisis in the future whether it is a result of
runaway deflation or inflation.
I believe that should a
deflationary crisis caused by massive debt levels and diminishing economic strength
present itself, central bankers around the world will behave exactly the same
way. They will act simultaneously and through dovish monetary policy central
bankers will flood the world with massive sums of freshly printed fiat
currency with the intent to print away issues with a liquidity induced
risk-on orgy.
Should that be their ultimate
choice, risk assets will rally sharply higher initially. Paper assets like
stocks will produce huge gains in a short period of time while supposedly
safe assets such as Treasuries would likely arrive at negative interest rates
across the yield curve in nominal terms. The next phase is the scary part and
why I am bullish long term of precious metals specifically.
The devaluation of fiat
currencies simultaneously around the world will result in a monster economic
crash when the masses realize that the majority of the major worldwide
currencies are becoming worth less and less. The resulting crash would be
caused by the opposite force of runaway inflation while the herd mentality
that anticipates a deflationary debt spiral espoused by most experts and
pundits would be proven materially false.
Under those circumstances,
precious metals will be the true safe haven. Gold and silver will prove to be
a true store of wealth that they have been for centuries. So many so-called
experts fail to recognize that gold and silver are currencies. Yes they have
industrial uses, but gold and silver represent the last unequivocal bastion
of wealth preservation against the constant debasement procured by central
bankers and their minions.
Under the scenario whereby
central bankers flood financial markets with cheap, freshly printed fiat
currency one would expect other essential commodities such as oil to also
perform well. Furthermore agricultural based commodities would also flourish
under those economic conditions. Investors would be in much better fiscal
condition owning things that they could hold in their hands versus stocks or
bonds.
I posit this potentiality not
to say that this is exactly what is going to happen, but to challenge readers
to open their minds. The crowd is usually wrong. The central bankers and most
economists generally share the same viewpoints and their behavior is
literally a giant group-think.
Is it possible that they are a
herd which ultimately will be proven wrong? Will the herd mentality of
economists and central bankers cause a massive currency crisis as they
attempt to stem the tide of a deflationary debt crisis?
The two possible outcomes go
hand in hand. I do not know what is going to happen, but neither outcome in
the longer-term is especially optimistic. Should either scenario come to
pass, the human condition will likely be threatened by a decrease in the
standard of living across multiple developed countries and ultimately the
threat of revolution and military action on a scale not seen in several
decades could eventuate.
Clearly I have simplified the
issues at hand presently for ease of reading, but the ultimate endgame will
likely be one or a combination of both a debt crisis and a currency crisis.
They will likely occur in close proximity to one other in terms of time, but
the precise outcome will likely be different than what is commonly expected.
Regardless of which scenario
occurs, precious metals will eventually be sought for their protection
against the constant devaluation of fiat currencies by central banks around
the world. For this reason, I remain a long term precious metals bull. With
that said, why don't we take a look at the recent price action in gold,
silver, and gold mining stocks shown below.
A lot of writers have stated
that gold has bottomed. I am not totally convinced, however I do believe that
gold is in a bottoming process. For me to get completely in my gold bull suit
I would need to see price action exceed the key resistance trend line shown
below.
Gold Futures Contract Daily Chart
As can be seen above, until we
see price push through resistance I will remain cautious. I would also point
out that the last two times gold found bottoms near current prices the bottom
forming process took several weeks to complete.
I do not expect for gold to
form a V shaped reversal. In fact, lower prices in the short term would help
drive the bullish case for the longer term. Bottoms take weeks to form and
can be very dangerous trading environments where active traders get chopped
around.
Silver is very similar to gold
in that it appears to have formed the beginning of a possible bottom. Bottoms
are generally not formed in one day. During the recent selloff, silver showed
relative strength against gold. It is important to acknowledge that silver
has yet to test the key lows that should offer support.
Because of this divergence in
these two precious metals, I continue to believe that gold may see more
downside again before a much stronger rally begins to take hold. Similar to
gold, the descending trend line offers a great resistance level where traders
can flip from being short-term bearish to longer-term bullish if the
resistance line is penetrated. If we see silver carve out multiple daily
closes above the resistance trend line paired with strong volume, I would
anticipate that a bottom has formed and silver prices will have an upward
bias. The daily chart of silver is shown below.
Silver Futures Contract Daily Chart
As expected, the gold miners
have shown relative strength recently. The miners were just absolutely
massacred during the recent selloff in equities and precious metals. However,
gold miners similar to precious metals have a major descending trend line
which they have already tested today. If the gold miners can push through
resistance a large scale rally could play out. The daily chart of gold miners
is shown below.
Gold Miners (GDX) Daily Chart
In addition, if readers look
at a long term GDX price range that dates back to the 2009 lows the recent
pullback is almost precisely a 0.50% Fibonacci Retracement. Similar to gold
and silver, I would expect to see the gold miners pull back a bit here before
pushing through major resistance. We may be setting up for a possible major
bottom in precious metals and gold miners in the near future. Only time will
tell.
In closing, remember to keep
an open mind with regards to the future. The more often you hear the same
message coming from financial pundits and experts, the more cynical you
should become. Both potential scenarios will likely not end well. The
question is whether the reason for the crash is deflation, inflation, or a
combination of both scenarios. Regardless of the outcome, the long-term
future for precious metals remains quite bright.
Happy Trading and Investing!
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