Is gold ready to turn?

The distortions created by the misguided policies of central bankers have inverted the investing world and hurt the precious metals. But investors will wake up.

By Bill_Fleckenstein Mar 15, 2013 2:19PM

Commodity Exchange report © Fotog, Tetra Images, CorbisI realize I run the risk of sounding like a broken record every week when I discuss precious metals, but given how important they are as a vehicle for protecting one's wealth in today's insane money-printing environment, it would be hypocritical, if not irresponsible, for me to pay attention to less important topics.

 

What's more, given the action in the metals sector last week and the current sentiment, we may be seeing the beginning of a turn higher, following the recent rejection of lower prices.

 

Granted, to feel like any real turn is at hand we would need to see aggressively higher prices pretty soon. 


Given that so many people have positioned themselves (both psychologically and financially) for gold to decline, we easily could get that jolt higher.

 

Consider it a hostile takeover

I have been involved in the investment business for more than three decades, and I don't believe I have ever seen an asset market (I'm speaking of the metals themselves, not the miners) become so hated when so little has changed and price damage has been so minor.

 

Yes, the world hated stocks at the bottom in 2008 and in 1982, but the environment was much different. People were scared to death in 2008. In 1982, they were pretty frightened and had alternatives, such as CDs and bonds with yields in double digits. Today, there is really no alternative to owning some gold, unless you happen to have the perfect inflation-protected business, which perhaps some do.

 

Yet gold is routinely scorned of late, laughed at and puked up, all while central banks are trying to double inflation to around 2% from the 1% or so they claim it is -- when in fact it is quite likely already 4% to 5%.

 

How anyone can forgo having exposure to precious metals to protect themselves from the eventual destruction of G-7 money is beyond my comprehension, but that is what markets do. They get you horribly negative on something at a moment in time when you should be wildly bullish about it, and vice versa. Note the attitude toward stocks in general right now. The latter should be sold and the former should be bought, yet people are doing the opposite, in size.

 

The optimist sees the inflation rate as only half-right

On the inflation-watch front, I believe that investors should be keeping an eye on Japan and Great Britain, as well as the United States. Money printing is a worldwide phenomenon. Thus, we may see a change in inflation psychology somewhere else before we see it here, and such a "sneak peek" may enable us to understand better how the process is likely to evolve in this go-round.

 

For the moment, however, it seems as though folks are totally sanguine. In the U.K., inflation expectations, as measured by five- and 10-year break-even rates, ticked up to 3.3% this week -- according to an article in the Financial Times headlined "Investors see rise in U.K. inflation" -- which is a level not seen since 2008. Having said that,  the 10-year gilts yield about 1.95% and are not all that far off their best levels.

 

They can't have it both ways

So the bond market is simultaneously suggesting that inflation is headed to 3.3%, but it is happy to accept a 2% coupon. I am certain the 3.3% expectation will turn out to be low, but that doesn't matter. At this point, bond investors are willing to accept a negative nominal rate, presumably because they believe that the rate of inflation implied by bond yields won't be hit, or that some other happy outcome will save the day.

 

As for Japan, yields there are hovering near all-time lows. This suggests the moral of the story is that, thus far, the power of money printing has pushed bond markets higher, while its consequences have not concerned enough people to matter.

 

The same is true in the U.S., where money printing has helped boost the stock market and the economy at the margin, with the latter perhaps looking even better due to faulty seasonal adjustments and assumptions. The combination has powered the Dow Jones Industrial Average ($INDU) and the Standard & Poor's 500 Index ($INX) to record highs. That has conspired to cause journalists to write all kinds of glowing stories about the U.S. stock market and economy and, by extension, the dollar.

 

In the perverse world of money printing, if you conjure enough paper, you can get all your asset markets to rally, along with the very currency you are debasing. It is a wonderful world, until it isn't. Think 2008 -- only worse.

 

At the time of publication Bill Fleckenstein owned gold
75Comments
Mar 15, 2013 9:06PM
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What’s up Doc? We know they’re supremely stupid and above all arrogant. By the results of their work alone, it’s easy to see that the financial wizards don’t know what they are doing. In the 1990s, they built a stock bubble which they all denied existed. And when it popped (poof) they went about rebuilding it with a housing bubble which led to another stock bubble by 2007, both of which they denied ever existed. When both these bubbles popped (kablooey) they declared the greatest recession since blah, blah, blah, and went about rebuilding both bubbles. And here we are today with their re-inflating bubbles stretching and bulging. Gee, I wonder what’s gonna happen next, Doc?

Mar 16, 2013 8:59AM
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If the fundamentals we have today existed in the late 1970s and early 1980s before the change in CPI and PPI calculations before the invention of QE we would be looking at a crash of the bond market which would also crash stocks. Gold and sliver would be 3-4-5 times what they are now despite short positions held by global investment banks(those guys would start buying too as they would sell their own mothers) and things would be really bad as in depression like. So what we have now is actually a well thought out plan started in the 1980s by the Fed which was exacerbated by corruption in the mortgage lending business and endless deficit spending on wars and social programs. Greenspan tried a soft landing approach to try to return to a normal federal funds rate and it didn't work. Most people I know in local banking tell me that the current Fed policy will continue well past 2014. So buy metals its the only hedge. One day it has to blow and I think we are past the point of no return.
Mar 15, 2013 6:23PM
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Gold and the miners have bottomed.  Follow the yellow brick road.
Mar 16, 2013 1:09AM
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We are toast.  Maobama will sink this country in 4 more years......  Now they are lining up Hilderbeast for the next term.  May I buy the next round for the makers that have some common sense?????  Welcome to the United Socialist States of Amerikka......  The makers are outnumbered by the takers....
Mar 16, 2013 11:37AM
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Current accounts deficit is 17 trillion, three years hence 20 trillion or more.  If interest rates rise to 5% in three years, the interest on deficit will be $1 trillion or equal to or less than the extra money we now are required to borrow to spend on "budgeted" items.  So we are either going to have to find someone who is willing to lend us money to pay the interest on our debts or stop spending money we don't have. 

This really is the definition of unsustainable, with the 64 trillion dollar question being: What happens then?  

Mar 16, 2013 9:06AM
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Precious metals, the original "money" in the world, long before governments had printing presses.  I see metals as a form of value but we all should be cautious of how value is measured.  The dollar will eventually be devalued and its worth watered down "naturally" by inflation etc.  Gold or silver will buy food, or other tangible assets in a world where the dollar is no longer the measure.  Only have precious metals as a form to protect the need for survival, not as an "investment" to make "money" aka dollars.  Eventually we will all have baskets of dollar denominated cash but can only buy a loaf of bread.  One small silver coin will buy a lot more when this happens.  Humans are ignorant of history by nature and when survivors of past failures are gone, history will repeat.  Our monetary minions of policy think they know best but the course is charted toward failure. 
Mar 16, 2013 12:12PM
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Gold and silver have been the choice of currencies for almost 5000 years. To think that it suddenly doesn't hold that value because some buffoonish politicians/economists disconnected those metals from our current form of paper(fiat) money 50 years ago is shear folly. There is absolutely no reason It will not be the chosen form of currency for the next  5000.  Many people do not like what Bill advises and predicts often to their own demise because they can't handle the truth. Bill actually called the great recession well before it actually happened...fact.  Peace......
Mar 15, 2013 7:57PM
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Bill... Bill... Bill... it doesn't matter what you attempt to invest in IF millions of other sudden millionaires and billionaires join you-- your investment taints and you will be screwed. The enactment of Gramm Leach Bliley opened the floodgates of corruption into your once-calculated Risk world. No more. Any and every idiot can Fund their way to our decay. Do the math Bill... last week's 5-day gain for the Dow created 300,000 new millionaires. That's $300 Billion in dollars. If Ben is only pumping $85 Billion a month in, and there is ZERO native activity, then where did the rest come from? The answer is-- BEN BERNANKE. He accelerated his printing and no longer listens to anyone. Why does this matter if you invest in metals? Because the fiat money is also buying gold and when the shift hits the fan, it pulls in all directions. Odds are, there is far more sold gold than actual cash paid fot it. Your miners are okay but you need to retrace to REAL tangible validated stores. The likelihood of gold having legs isn't good if all who hold certs are mistaken about their value. Think more humbly and you'll stumble across hedges that wealth can't touch too much or don't want to. Real people need that stuff, which makes it golden.  
Mar 16, 2013 7:05AM
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"robin1620, stock market up 128% percent under Obama. Word."

 

Koo, the stock market is NOT up 128%. You have to weigh the sheer dollars printed and their dilution factor. What you get is a number well-South in the last known valid figures for the markets. If you shelved it in 2008, it has the same value today because it's still all there. Everyone else is saying the same thing... if you are in the markets you used fiat cash t o get what you've got. You won't be walking away as flush in the reconciliation. It stands to reason though, that if it has been shelved all along, there's nothing to reconcile you just get to walk away with it.

Mar 15, 2013 9:54PM
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Even a broken clock is right twice a day.
Mar 16, 2013 12:41AM
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Here's a strange idea...the environmentalists will hate it, unless there are safeguards...but why not use the resources the US has in coal to back our money...the ones that use the coal mostly are the very ones that buy our bonds..(can you say China)...we have more than enough coal for everyone..why not use it to secure our own future.....Contrary to poplular belief, the US uses a whole lot of coal, but we can develope new resources to take it's place, while others can use the coal to drive their economies...we chose to have a world economy...now we need to make the best of it...just a thought...
Mar 16, 2013 1:11PM
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Yep. Invest your money in gold to get away from fiat currencies. Then when you sell it,  what do you sell it for? Why fiat currency of course.
Mar 17, 2013 10:15PM
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I bet a lot of Cypriots wish they had gold bars and GLD in their portfolios.
Mar 16, 2013 7:10AM
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Bill...when do you think investors will wake up ? Even a 2nd rate weather forecaster will forecast when the sun will shine again......so I'm asking you...when will investors wake up.

 

By summer? By fall? Next year? in 5 years? in 2020? When ?

 

 

Mar 16, 2013 2:08PM
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Gold does not lose value the dollar loses value gold's double 2007 price. Market would need to double to be 2007 value @14K.
Mar 17, 2013 10:32PM
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I just reviewed the indicators on the front contract month (June, 2013) of the Dow Jones (Commodities, Futures).   I've never seen anything like it!  RSI, Commodity Channel Index, Slow Stochastic, MACD and  Williams Percent; THEY ARE ALL PUSHED TO THEIR EXTREMES!!.  RSI is at 94, it can only go to 100.  A 60 rating is the beginning of an over bought market.  Commodity Channel began falling on March 5, usually when CCI falls, so does price; The Dow has risen everyday since the 5th.  Slow Stochastic is at 97, it can only go to 100.  Williams Percent (which works in reverse) is at 1.00 and can only go to 0.

 

You get the point, everything is at an extreme.  In all most all commodity cases, they would never reach these levels, leading me to believe, that when the Bulls have had such a great lasting run such as this, the Bears will retaliate in kind.  I believe we will see an EXTREME move to the downside to offset the huge upside, that's usually what happens, I would be surprised if it would be a mild correction, that is possible but I'm thinking not likely.  I'm not a doomsayer, I only call them as I see them and we have a very unusual case here.

 

Gold indicators are still weak but if the Dow falls like I think it will, Gold will probably rise quickly.  That will be an upside opportunity most will not want to miss. 

 

I feel the Dow is poised to fall anyday now, be prepared. 

 

Note:  Reviewing Gold indicators (Daily Chart)  they are still very weak, but showing some signs of life.  Looks like it is forming Wave 1 of an Elliott wave.  MACD has a buy signal on March 8.  Monthly indicators are not as promising, they all are vary weak, so for Gold to rise, it's going to need help from another source, possbily the Dow.  The negative fall of the Dow will create a perspective to encourage investors to flock to Gold.

Mar 17, 2013 10:21PM
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Bill

 

I like to read the comments.

 

Those of us that have some gold or silver metal, some Gold stocks. some Gold Mut Funds and some gold ETFs have to stop and think at this bargain price for Gold, how much more should we buy and of what.

 

And more importantly the fellow signing as GubmintChesse says "and when we sell it, we sell it for Fiat Dollars?" He's right! And if we are buying the metals in small denominations, to buy food or necessities when all else fails, well then I think...maybe I should buy more guns and ammo also, because aren't we talking about some sort of anarchy?

 

I'm thinking I'm moving more towards gold and silver coins and more guns and ammo. Heck if the Social Security Administration is buying guns and ammo, to defend themselves from us, things are looking pretty bad. Obozo appears to be afaird of the public and is closing the white house tours. And I read Obozo had the Marines remove the bolts form their rifles in his inauguaral parade so I guess he is afraid of his own armed forces. And then I read the Germans want to hold their own Gold and have asked us to send them their gold that we hold. And other countries are following suit. What happens when Obozo doesn't have enough Gold to return.

 

And worse of all I just saw an internet joke: A bumper sticker that said Hillary and Michelle for President & VP in 2016. Grab your ankles because we are ****ed.

Mar 17, 2013 6:58PM
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There is a gross amount of ignorance on display in a lot of these comments poo-pooing Bill and his take on gold.  The archduke of black money was just shot in Cyprus by EU bureaucrats on Saturday morning and these commenters are clueless to the effects.
Mar 16, 2013 11:58AM
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Isn't he the father on Little House on the Prairie?  Michael Landon?
Mar 18, 2013 12:01PM
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Its time to bring back gold backed currency. Heck lets bring back gold coins. The 2 1/2 dollar,

5 dollar and the Double Eagles. Anything is better than the paper the Fed keeps printing.

Oh by the way as a back up buy one other precious metal. The metal our  government is

buying in huge quantities BULLETS.

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ABOUT BILL FLECKENSTEIN

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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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