Gold & Silver Speculator

DESPITE END-OF-YEAR VOLATILITY, UNCERTAIN ECONOMIC CONDITIONS & LONG TERM FUNDAMENTALS REMAIN EXTREMELY BULLISH FOR GOLD & SILVER AND SHOULD REMAIN SUPPORTIVE GOING FORWARD, POTENTIALLY PROPELLING THEM FAR BEYOND THEIR ALL-TIME HIGHS OF $1920 GOLD & $50 SILVER IN 2013

Now that Thanksgiving has passed and the Holiday Season is in full swing with thoughts turning toward Hanukkah, Christmas, and the New Year, I’m getting asked more and more questions from traders and investors who are very concerned - even anxious, about the Fiscal Cliff, the Debt Ceiling, tax implications/considerations regarding both and how all of this will play out in the precious metals markets. So, in this edition of the GSS, I’d really like to focus on the bigger picture.

But before we delve into that, I must take a moment to address yesterday’s violent intraday price move in Gold (and Silver to a lesser extent). We witnessed another one of those counter-intuitive, intense, vicious “waterfall selloffs” or spikes lower that seem to “randomly” occur from time to time over the past couple of years.

Massive and concentrated volume hit the market immediately on the NY Pit open: Over 35,000 lots or contracts reportedly traded - the equivalent of 3.5 Million ounces of Gold - with nearly 7800 contracts (that’s 24 TONS!) traded electronically in a single minute, slamming the price of Gold down -$36. The price drop was not enormous in percentage terms, but the volume size and velocity of the move still shocked many market participants as there was no corresponding “news” to point to.

Initial reports of a “fat finger” trader or broker error were summarily dismissed by a CME spokesman and their circuit breakers weren’t even tripped, so it was an orderly move. Although nobody can really pinpoint exactly who is responsible for such a move, the typically fruitless search for the culprit(s) began again, with the usual suspects like short-term algorithmic High Frequency Traders (HFT) and large, institutional and/or commercial firms (or bullion banks) dumping huge size orders getting the lion’s share of the blame.

I am of the opinion that yesterday’s move is consistent with coordinated weakness and artificial selling pressure associated with some large investor(s) or trader(s) desire to move the market lower for what could be any number of reasons. We’ve seen this before and will likely see it again. But was this a clear example of market manipulation?

As the year ends and portfolios get rebalanced, some investors take the opportunity to liquidate positions and take profits in Gold & Silver to help offset or cover losses in other markets. In our heightened environment of fiscal and monetary uncertainty (some would say insanity), this year should be especially volatile and I think we saw some of that coming through yesterday - and over the past couple weeks.

If it really was an investor simply exiting profitable positions, it makes absolutely no sense to simply overwhelm the market with thousands of sell orders at the market. Giant institutional-sized orders would be placed and managed in such a way to obtain the best possible price without disturbing or violently disrupting the market, and that clearly was not the case yesterday.so the search for answers will continue. Just don’t expect any real answers anytime soon on that.

For leveraged short-term traders, this type of volatility and potential market occurrence must be something you are fully aware of and plan for accordingly by using protective stops. But more importantly, for a longer-term trader/investor, these intraday moves eventually become just another part of the big picture over time and can present great opportunities to take advantage of the short-term weakness to get long (or longer) by initiating new positions or add-on while Gold & Silver are “marked down” or on sale. If you followed the recent filings, Mr. Paulson hasn’t sold out his enormous stake; Mr. Gross & Mr. Dalio still believe they should be in everyone’s portfolio; and Mr. Soros and Mr. Rogers have been adding on to their positions. (Mr. Buffett apparently still despises the Precious Metals and is too busy out campaigning for higher taxes, so take that for whatever its worth to you).

Many people still think of Gold & Silver as commodities - and they are, they’re heavy metals and there’s not a whole lot of the physical bullion to go around. But they’re also Hard Currencies and have been used as stores of value to protect purchasing power for thousands of years. Let’s examine what could help propel Gold & Silver far beyond their all-time highs as we approach 2013:

LONG TERM FUNDAMENTALS
Negative Real Interest Rates
Negative Fiscal Outlooks
Ultra Loose Monetary Policies (open-ended Quantitative Easing programs from our FED, ECB, and BOJ)
Global Debasement of Fiat Currencies or Competitive Currency Devaluation (“Race To The Bottom”)
Central Bank Purchases and Hoarding (no longer making large official sales)

UNCERTAIN ECONOMIC CONDITIONS - US FACING ANOTHER CREDIT DOWNGRADE IF NOT RESOLVED
FISCAL CLIFF NEGOTIATIONS: Likely result = resolution that fails to solve anything/more kick-the-can.
DEBT CEILING NEGOTIATIONS: The current legal limit of $16.4 trillion on the federal government’s debt would need to be raised in the next few months by another $2.4 trillion, Senate Leader Harry Reid said they’ll raise it.That would set the debt limit at $18.794 trillion.

CENTRAL BANK & PRIVATE INVESTMENT DEMAND CONTINUES TO BE STRONG, EVEN INCREASING
Central Banks (primarily developing or non-Western & Asian) continue to diversify out of USD holdings - converting to Gold. CHINESE IMPORTS ARE OFF THE CHARTS - The People’s Bank of China is highly secretive and has not updated their official Gold Holdings in over 3 years (since 2009) but they’ve been accumulating big time - in this year alone, China has imported more Gold from Hong Kong than the European Central Bank’s entire official 502.1 tons of holdings.

Increased Private Investor Demand - especially Silver in China - their Gov’t has recommended Gold and Silver as important investment assets to accumulate. Their banks now allow their customers to purchase gold and silver directly in their accounts.

We’re also seeing record demand and allocations in the form of ETPs or exchange-traded products as well - GLD holdings, the largest Gold ETF, has again set a new record high with SLV, the largest Silver ETF near record highs as well.

GEOPOLITICAL RISK: GOLD & SILVER ARE STRATEGICALLY IMPORTANT SAFE-HAVEN METALS
Not just for Central Banks but for individuals too.All of the other enormous economic problems have basically relegated this unique driver of demand to the backseat, but that could change in a flash. When dictators flee their palaces, they leave behind stacks of Greenbacks and Euros, but never forget to grab the gold.

Gold, and Silver to a lesser extent, has always been the ultimate Flight-To-Quality Asset. They are safe-haven assets that people turn to in times of extreme chaos to protect their wealth or purchasing power.

In the Middle East with Israel firing missiles, taking out Hamas leaders in Gaza in retaliation for their rocket attacks, the bloodbath in Syria, Iran’s Nuclear Program, there is a Geopolitical Risk Premium that I don’t believe has been priced in or been much of a recent factor in price. If conditions change for the worse and tensions increase drawing other countries into it, I think we’ll start to see more of a Geopolitical Risk premium added and accounted for in price.

THE REMONETIZATION OF GOLD & LEGITIMATE USE AS GOOD COLLATERAL is well underway too but really not discussed much outside of the Precious Metals community. Major exchanges around the globe (LCH.Clearnet, CME, ICE) as well as large investment institutions have recently begun allowing Gold to be used as collateral.

The world is drowning in bad sovereign debt and bad collateral. The antidote to that is Gold. Although its implementation has been delayed from January 2013, the fact that the new Basel III framework includes a positive reclassification of Gold from its current Tier 3 status up to a Tier 1 asset, essentially making Gold a “risk-free asset” on par with US Treasuries, is extremely significant.

If implemented as written, I believe it could be an enormous new driver of demand where private banking institutions would seek to accumulate and hoard massive amounts of the precious yellow metal. Since there is a very finite, limited amount of known supply & annual production, they would have to compete with each other and against Central Banks to acquire it in the open market. This has the potential to be a “game-changer” in the Gold market, similar to late 2008 when Central Banks flipped from being Net Sellers of Gold to Net Buyers.

OBAMA REELECTED: GOOD FOR GOLD, GREAT FOR SILVER…?
Gold and Silver were clearly the best performing assets over Obama’s first term. Gold always gets the front page headlines, but Silver totally obliterated all other contenders.

Back when Mr. Obama won his first presidential election in November 2008, Gold was trading just under $700 an ounce. Just before Election Day last week, Gold traded at $1686. That’s an increase of nearly $1000 per ounce for a 141% gain.

Not to be outdone, “Poor Man’s Gold,” - Silver was priced under $9.00 an ounce in November 2008. Just before Election Day last week, Silver traded at $31.25. That’s an increase of $22.48 per ounce for a 256% gain.

Looking out into the future, will “For More Years” yield a similar outcome for Gold and Silver? If the precious metals were able to replicate the past 4 years in percentage terms from current price levels, that would put Gold over $4100 and Silver over $116. If they were only able to achieve half as much, you’d still have some extremely elevated pricing as Gold would come in just under $3000 with Silver around $75.

In the short-term, market volatility will continue to rule. No market goes straight up or down and there is quite a bit of year-end money-flow type cross-currents to contend with. Only time will tell, but in my opinion, if your long-term investment view on Gold & Silver is bullish, you couldn’t have asked for a better outcome.

LONGER-TERM TECHNICALS
As far as long-term technicals go, a few weeks ago we witnessed Golden Crosses in both Gold and Silver, which are important to recognize as they’re typically very bullish indicators. A Golden Cross is a positive technical indicator that reflects a confluence of short-term and long-term market strength and occurs when a market’s 50 Day Moving Average crosses above its long-term 200 Day Moving Average. It’s understood to be one of the strongest buy signals that can be interpreted by technical traders. This should serve as a major confidence booster for Bulls going forward.

Since 2006, Gold has had 2 Golden Crosses with gains of 66% and 102%. Likewise, Silver has experienced rallies of over 50% and 280% following its Golden Crosses.

So, if history repeats itself, we could potentially see Gold trading around $2900 to $3600 and Silver trading north of $125 over the next 2.5 years into 2014 and 2015. These projections are in line with the INFLATION-ADJUSTED PRICES ARE FOR THEIR ALL-TIME HIGHS HIT BACK IN 1980.

So where are the precious metals markets right now? It appears that potential bottoms for the recent October/Early November consolidation were put in on Monday 11/05/12’s printed lows going into Election Day. Since then, while there has certainly been some volatility, both Gold and Silver have rallied, working themselves higher as they attempt to gain positive momentum by putting more distance between their current prices and their 200 Day Moving Averages.

As noted in a recent GSS, another classic technical candlestick pattern formed in both Gold & Silver: The Morning Star formation - which typically portends that a bullish reversal is about to occur. Especially interesting was how they both formed nearly right on their 200 Day Moving Averages, which may be highly supportive if tested again.

Next week we’ll take a fresh look at the technicals and have plenty of chart analysis.

STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A “LIMIT MOVE”, IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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By: Kurt Pfafflin