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.
The G8 summit's with Obama and the europe lefties and broke beggars calling out Merkel for more growth instead of austerity shows me why I want gold. They can't use the word stimulus after two failed attempts here and across the pond, so they come up with a new tag for the sheeple. Let's call it GROWTH!
Still boils down to unsustainable debt and government run amuck. And the economic winner (Germany), having to prop up the losers. You know, like China is doing for us by buying our debt.
As long as this mindset is running the governments here or across the pond you want gold and silver.Those policies will debase the dollar and cause inflation.A tangible asset will hold up better in that kind of world.
I don't get any caloric content from political buzz words that change everytime a policy fails. Debt= Growth. Proponents of this are stuck on stupid!
I'm watching these posts and it makes me laugh. No wonder most of you can't pay your bills. All you do is whine about folks that do well and make money and then blame them as wealthy ****s because they are smart with their money!!
Yes .. put SOME money in gold and other commodities, but always maintain a balanced portfolio. Make sure to put SOME money into dividend paying blue chips stocks. But SOME money in short term bonds. At this point, don't have more than 40% of your money in the stock market. You'll be fine. Quit freaking whining!!
In China and India, the two main markets in the world for gold, demand is decreasing. And , I don't know if you have noticed but almost every commodity that is an indicator of economic activity is also going down in price (especially copper and oil). This decease in demand for commodities would indicate to me that we are headed for a slowdown which will drive gold lower not higher.
The fact is, that our GDP will only increase by 2% this year rather than the 3% our dear Socialist Leader and his wizards(Timmy and Ben) are predicting. Why do I say this? Because if GDP was going to be 3% why would Bernanke be hinting at QE 3. Slow growth = Slow change in price of gold.
Think you missed this one Bill. The whole rapid rise was just another bubble manufactured to manipulate some $ from the pockets of the suckers!!!
That's all you need to know folks, he needs it to go higher to dump his holdings.
Why do we take investment advice from self-interests like this? Its bad enough that the financial industry has bribed Congress to remove all those pesky restriction on not risking investor funds on speculation, but this is like taking sheep protection advice from the big bad wolf.
Investment that wrings every penny of profit from the real value of commodities (think wheat, rice, soy beans, metals) is a TAX on every citizen.
Look at what oil speculators have done to the price of oil. Not one barrell has been lost in the last two years, but speculators used the Arab Spring, the Libyan and Egyptian uprisings and the sabre rattling of Iran to spread fear about oil, abnd we all paid more for gasoline so speculators could profit.
Speculators are thieves who steal with a pen. Bill here should not be giving advice on investments as he is in competition with you. He makes money on your losses. Do not play the game!
What a bunch of crap... they blew it on FB ipo, I think an article like this is a paid infomercial. Kramer saw it happing and issued sell sell sell.. give me a break!! I take no advice from people like this pumping themselves up at my expense. Will I buy facebook (FB), no, will I buy gold now, not on this clowns advice.
come clean, show us your affiliations to the gold community. do you practice insider trading? How much do you stand to make if you can get gold to go up? Hmmm
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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.
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