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I must confess I am a gold bug both philosophically
and in terms of investing. We are entering a golden age for Gold as the bull
market is destined to reach amazing heights and real and honest money
reemerges as legal tender against fiat currencies that will soon be at the
mercy of a sovereign debt crisis. All this being said, I take issue with some
headlines listed
here in friend Gary’s blog and some gold bug talking points.
I’m listing some of these headlines and talking points and then my
response.
System Wide Meltdown as US to Enter Hyperinflation
The odds of hyperinflation are extremely remote. For that to even
happen, the US would need to lose its status as the largest economy in the
world and completely lose the reserve currency. Neither of these things is
going to happen. Sure US power is waning but the US remains the dominant
nation which is essential to the global economy. Moreover, our debt
isn’t owed in a foreign currency.
More importantly, if hyperinflation was even a small risk, the US
Dollar and the bond market would be falling apart. This is where technical
analysis comes in handy. The US Dollar has just emerged from a bullish double
bottom on the weekly chart while Bonds (as per TLT and IEF) have been ripping
for weeks. Their uptrends remain intact and have actually strengthened as QE
has come to a close. The hyperinflation talk is nonsense.
Gold & Silver Have Bottomed, Summer Explosion Ahead
Gold has actually peaked at $1550 and looks headed down to $1475. It
hasn’t bottomed but is in a bullish consolidation that will likely
continue into August. In terms of sentiment, Silver looks excellent.
Sentiment suggests a lack of material downside but Silver’s rebounds
continue to fail and now the metal will retest $33. It could bottom at
$30-$31. To conclude, further consolidation in Gold will likely fuel a
stronger breakout at somepoint but not until August
at the earliest. Silver needs to confirm a bottom and build a strong base. We
won’t see an explosion until the market exceeds $50 which may not
happen for another 12 months. First these markets need to sustain an uptrend
before an explosion can happen. It is just wishful thinking.
Hedge Funds are Shorting the Gold Stocks and the Juniors
Anytime the gold stocks underperform out comes this battle cry.
First of all we need to understand that historically gold stocks do
not outperform Gold. Please see this
excellent piece by Steve Saville which should
put to rest this idea that gold stocks should outperform Gold or are cheap
because they are not outperforming. Gold mining is a very difficult business
and its extremely difficult the larger the company
is. Even with a rising price of Gold it is difficult to sustain production
and reserve growth. Hence, the sector doesn’t outperform over long
periods of time.
Sorry but hedge funds are not shorting the juniors. The juniors are
extremely risky illiquid and are the worst performers when the broad market
is weak. The vast majority of these companies have no production, no cash
flow, no earnings and no money. They are not real businesses. They are
vehicles for speculation. If your juniors are badly underperforming then you
haven’t picked the right ones or you have unrealistic expectations.
Maybe a tiny hedge fund here and there is shorting a few juniors. Other than
that the notion is completely unproven. Consider options, warrants and
private placements and then you might find the reason your juniors
aren’t performing.
The current reality, as we described in a recent editorial, is one of
risk aversion. That is good for Gold but bad for gold shares. However, Gold
is rising relative to mining cost inputs which will be a bullish catalyst for
the gold shares in a few months and likely when this summer selloff abates.
Bonds will Crash without QE, Interest Rates will Skyrocket
Bonds began another advance into the end of this QE. This is counter
intuitive. If the Fed isn’t buying Bonds then who is? Institutions with
millions need a safe place to park funds and earn a small return. Stocks and
Commodities have had a great run but now the ill-fated economic recovery has
lost momentum. Bonds are the only place the big money can go when risk assets
pullback. Remember, no QE initially means lower inflation
expectations which means lower Stocks and Commodities which provides a
bid for Bonds.
In the Great Depression, rates didn’t bottom until the 1940s.
Short term funds continue to make new highs. IEF, a 7-10 year ETF is on the
cusp of another all-time high. There are many reasons why Bonds may not
decline over the next few years. The US still has the reserve currency and
global economic power. Weakness in the US will keep short rates low and
affect global economies and markets. That combination is advantage for Bonds
against risk assets. Japan is one example.
We expect continued debt monetization, currency depreciation and
inflation but we disagree that Bonds are going to collapse anytime soon.
Conclusion
Precious Metals are certainly in a bull market and the birth of a
bubble should occur sooner rather than later. This being said, we need to
remember that precious metals and the respective shares are extremely
volatile. The buy and hold philosophy can work with Gold but it doesn’t
work with the gold stocks. Most companies are not even close to their
2007-2008 levels despite the price of Gold being 50% above its 2008 peak. It
is more of a bull market for traders and active investors than a buy and hold
for 10 years investor.
Jordan Roy
Byrne
Trendsman.com
Jordan
Roy-Byrne, CMT is the editor and publisher of Trendsman.com. You can get a
free 14-day trial to his Gold/Silver service by clicking
here.
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