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.
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.
And, 99%, vote 100% DEMOCRATIC, the lives you save WILL be YOURS & your CHILDREN!
OLD Column count (RSS) = 9, NEW Column count (bill-fleckenstein/default.aspx) = 10
The old columns are NOT available in the RSS collection.
The "Special note to Bill Fleckenstein readers" column
appears to be in error. In fact a review of the new column
collection (the "this page" link) appears to contain the same
nine articles (prior to today's) that are contained in the
RSS collection (the "...his RSS page" link) ...
Please restore all of the old columns, even the oldest
of the old, in the RSS collection ...
Thank you for your time and consideration
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
[BRIEFING.COM] S&P futures vs fair value: -0.60. Nasdaq futures vs fair value: -11.50. The S&P 500 futures trade less than a point below fair value.
The latest weekly initial jobless claims count totaled 304,000, which was lower than the 312,000 that had been expected by the Briefing.com consensus. Today's tally was above the revised prior week count of 302,000 (from 300,000). As for continuing claims, they fell to 2.739 million from 2.750 million. n-bo> ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
VIDEO ON MSN MONEY
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'