Gold's fortunes will turn around soon

The metal is near record levels of negative sentiment. We can't know exactly when things will turn around, but we can get ready.

By Bill_Fleckenstein May 18, 2012 2:42PM

I would like to devote this week's column to the metals and miners in an attempt to put the recent nasty correction in perspective, as best as I am able.


First of all, I don't really think that the decline in gold prices or the miners' stocks reflects those markets "discounting" any particular event or outcome. That is, I don't think the decline is telling us that those markets are expecting some negative development in the future. Rather, there has been an overall lack of interest (demand), and the decline has fed on itself.


In addition -- I don't know this to be a fact -- but it does appear that there are a lot of people who are short metals because they think the U.S. economy is doing well. (It wouldn't surprise me if these are the same folks who didn't see the housing bubble.)


Meanwhile, sentiment has now become extremely lopsided: the Daily Sentiment Index has reached a record low. The Market Vane gold sentiment survey, at 51%, is back near the lows of 2008. The Hulbert Gold Newsletter Sentiment Index has been negative longer than just about any other stretch over the last decade.


According to the most recent data, the short interest in the gold ETF SPDR Gold Shares (GLD) has almost doubled (and it has likely increased since those data came out). Thus, we have now reached a point where psychology toward the gold complex is about as negative as it possibly can be.


Priced for defection

In addition, the open interest (i.e., the total number of contracts) in the gold futures market has declined drastically, although it has picked up in the last week as prices have plunged, indicating that there are new shorts (as well as new longs, since each short position must have a long counterparty).


Finally, the prices of gold mining stocks themselves have collapsed -- to absurd valuations, in some cases. Pan American Silver's (PAAS) market capitalization, for example, is so low you could buy the whole operation, sell off just the gold it recently acquired from its Minefinders acquisition and make a profit on your purchase, and you'd still own rest of the company (leveraged buyout artists, take note).


At the same time, weakening economic activity here and everywhere else, combined with European political and market instability, continue to increase the probability of more quantitative easing at the Federal Open Market Committee meeting in late June (with the European Central Bank not far behind).


What all of these extreme readings cannot do is stop stock prices from falling. In the present environment (on both the upside and the downside), when price momentum builds, it seems to feed on itself and gets carried to bizarre extremes. Once that process is under way, the only thing that can stop it is exhaustion. Only then can the asset in question turn around.


The big move coming

I don't know when this will happen for the metals and the miners. There have been a few times on the way down in the last couple of months when I thought that a reversal would lead to a move to the upside, but the action quickly indicated that this was not the case.


Nonetheless, at some point the stage will be set (if it isn't already) for an unbelievably explosive rally to the upside in metals. I think, given how stretched everything has become, that day is close, but that could mean a matter of weeks or it could be a few days. We can't know, nor do we need to. The point isn't to predict when, it is to recognize the moment when it occurs and have a plan about what to do.


Get ready to move

These violent moves don't just happen to gold and gold miners; they show up in other industries as well. But the metals complex may be more extreme because of the fact that gold isn't really analyzable and, thus, there is more of an emotional component to its price action. Nonetheless, a tremendous opportunity is setting up for those who can take advantage of it.


Prospectively, it's important to remember, because of the huge psychological component and price swings, that it is a good idea to have something you can trade so you have the flexibility to take advantage of moments in time such as these. That means at some point you have to sell something, either as they're going up or when they roll over and head back down.


In any case, I hope this discussion will help folks construct a game plan.


At the time of publication Bill Fleckenstein owned gold and precious-metals mining stocks, including Pan American Silver.
May 19, 2012 9:19AM
What I read is that the EU money is going to crash very soon, when the other countries in EU need HELP ( more printing money)! Watch for the (Bank Run) Billions of money is taking out of the banks in Europe. The United States is trying not to let you know what's really is happening over in Europe so I believe that's why the metals are dropping. It's because everyone knows that a indicator that tells you and the public how bad it's going to get or already is, so they drop the prices of metals and at the same time, the banks are buying (short and Long position). If I were you guys I would take full advantage of this and buy Silver (it's cheaper) and the news is saying it will be in shortage (very soon) because we used it in alot of things with silver like: (solar panel,medical instruments,computers,cellphone etc ) and the population is over 7 billion people that used alot of this stuff causing a shortage in precious metals (so why is it dropping?). The good thing is that you can buy Silver or Gold now when it's cheap but  the bad thing the world is getting worse by the day. Another thing please keep your attention on the 4th reactor in Japan, it's really bad. Thier's over 150 rods on the outside of the reactor (not inside) and it's in a 10 stories building that about to fall apart , If theirs a earthquake and the building 4 rector breaks, ALL BETS ARE OFF. Check it out for yourself.
May 19, 2012 8:12AM
Bill's right, 99% American People take your money out of 401k(The corrupt Republican corporate MONARCH insurance policy; if they fail, so do you! They stole your pensions to give this fluctuating junk!)! Put it in GOLD, OIL, NG & COAL, nothing else right now!

And, 99%, vote 100% DEMOCRATIC, the lives you save WILL be YOURS & your CHILDREN!

May 19, 2012 7:47AM
Just as I suspected.  The price of gold will go down unless it goes up.  It's always comforting to know that there are other like-minded geniuses.
May 19, 2012 7:23AM
The way gold in manipulated by "Inside Traders" constantly selling long and short positions the price of gold is stable for now. Just watch out for a blast of very unsettled news with great instability over a much larger country than Greese or Iran.
May 19, 2012 2:28AM
Gold was a bubble.  And its following a bubble path.  It hovering flat line around 1600 dropping slowly.  Than pop. The bottom will fall.  Especially if some countries start selling more of their gold holdings.  As well as those mining firms start producing more gold, which they are, because gold is super priced-- they would have never thought of gold beyond 400 an ounce 10 years ago.  And its 4 times that right now.  Even my dad is prospecting gold again LOL!  You get a few ounces out of the ground thats 3200 bucks.  And with a nice slews machine or even some dirt and pan and some mercury to bind gold concentrate, you can get a few ounce every month or so.
May 18, 2012 11:45PM
If Europe doesn't get their head out of the sand with the austerity notion .. the pending recession will limit the demand for costume jewelry.  The G-8 meeting and NATO meeting, this weekend, should give an indication that economic stimulation is just around the corner .. and if not .. well, I hope those that have gold bars and nuggets have a wheelbarrow to fill with yellow rocks .. to buy a loaf of bread. 
May 18, 2012 10:53PM
uh huh, talk it up handouters, I bought gold in April of 2008, it stays there until the inept lying quasi socialist in the white house is gone
May 18, 2012 8:23PM
I just have jewerly I dont want.  Is now the time to sell?
May 18, 2012 3:53PM

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[BRIEFING.COM] The stock market finished the Tuesday session on the defensive after spending the entire day in a steady retreat. The S&P 500 (-0.6%) posted its third consecutive decline, while the small-cap Russell 2000 (-0.9%) slipped behind the broader market during afternoon action.

Equity indices were pressured from the start following some overnight developments that weighed on sentiment. The market tried to overcome the early weakness, but could not stage a sustained rebound, ... More


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