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.
65Comments
May 19, 2012 9:07PM
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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!

 

 

 

May 19, 2012 9:19AM
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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 18, 2012 10:53PM
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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 19, 2012 1:39PM
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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!!

Unbelievable!

 

May 22, 2012 6:17PM
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Wrong Bill!
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!!!

May 22, 2012 6:42PM
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"At the time of publication Bill Fleckenstein owned gold and precious-metals mining stocks,..."

That's all you need to know folks, he needs it to go higher to dump his holdings.

Next!
May 19, 2012 5:18PM
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I mostly agree with hockey dude. Diversify. Even so, I don't believe events will unfold well because the system rewards greed and recklessness not thrift and simple living. Also, there are too many people on government assistance. So yeah, gold, stocks, real estate, do a bit of prepping with supplies and food, it can't hurt. 
May 19, 2012 7:23AM
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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 22, 2012 7:25PM
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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!

May 22, 2012 6:13PM
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Is this one of the same people that said FaceBook was the stock to buy ?    The dollar has been getting stronger.  Just look at the cost of crude dropping (based on dollars).  Look at the cost of gold dropping (again, based on dollars).  I think I'll just hold onto my money thank you very much.
May 19, 2012 7:47AM
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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 21, 2012 4:05PM
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Gold will go up at some point in the future?  Thanks Fleck.
May 20, 2012 6:12PM
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I started mining gold about 49 years ago. It was $35 an ounce. Sure am glad I did now!
May 21, 2012 5:55PM
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Re-TOG Re-TOG.....did you take the profits on the hills? Or did you watch your profits disappear into the valleys again and again? When has Fleck EVER said to sell gold because it will pull back on price? That is exactly the problem with every gold junkie I know personally. They NEVER sell. If you never fold you never win. You can't buy a loaf of bread till you sell it. And the gold junkies can't part with it. Don't tell me about your profits when you have an open position. Close it out then pop the champagne. I had relatives 1 year ago that I tried to talk some sense into. They owned silver and it was trading over $45. A 30 year high. They just couldn't sell it. Because it was going higher. It always goes higher, they said. Yeah, so does real estate. Today silver is at $28.42. The only people making money on gold and silver are the local bullion dealers and the miners. Why? Because they sell it.
May 21, 2012 2:04PM
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Gold is an insurance policy against the debasement of our currency, a world economic collapse, or other event resulting in runaway inflation.  Everyone should have some hard assets in their portfolio, and gold is the most liquid hard asset you can own. 
May 22, 2012 5:55PM
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Invest in gold while it's clearly in a bubble... makes perfect sense to me.
May 21, 2012 11:02AM
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India---.They never mention India where1 billion people want as much gold as they can afford to buy. AND it is part their culture so the demand isn't going away any time soon
May 21, 2012 12:46PM
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I usually agree with you Bill. However, not this time. There is a credit crunch fast approaching. And the price action in gold and silver and oil and copper are telling you something. You would be smart to listen to what they are telling you. They told you the same thing in 2008. Remember 2008? If not go back and look at a price chart of commodities. Cash is king and you will learn that soon.
May 22, 2012 5:56PM
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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

Image: Bill Fleckenstein, MSN money

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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