Trouble ahead for gold and silver

Precious metals take a beating after the Fed announces continued stimulus measures.

By Anthony Mirhaydari Dec 13, 2012 3:01PM

Image: Metal Bars copyright CorbisAside from supply and demand, one of the most basic precepts of modern economics is the concept of diminishing marginal returns. If you're hungry, your first Big Mac is wonderful. Your 10th isn't.

 

Diminishing marginal returns were on display Wednesday as the Federal Reserve -- as expected -- unveiled a fourth round of quantitative easing that will continue its current pace of $85 billion a month in bond purchases. But now, four years after the Fed first started expanding its balance sheets by using freshly printed dollars to buy long-term bonds, Wall Street just isn’t impressed anymore.

 

As a result, gold and silver got hammered Thursday on a combination of lower inflation expectations, lower economic growth expectations, and a strengthening of the U.S. dollar. By all indications, the new downtrend will accelerate from here, creating lucrative short side opportunities for nimble traders.

 

Silver looks to be the more vulnerable of the two metals as the iShares Silver Trust (SLV) drops out of a two-month consolidation range.

 

 

This is set to catch a lot of people by surprise. Total assets invested in the two largest gold bullion ETFs, the iShares Gold Trust (IAU) and the SPDR Gold Trust (GLD), have recently surged to new highs as people seek safety from the uncertainty of the budget negotiations in Washington, D.C.

 

The surge in new assets over the past two months has come despite a slow decline in gold prices, suggesting people are feeling far too good about gold and will need a serious decline to shatter the fantasy.

 

In response, I'm recommending short exposure via inverse exchange-traded funds (ETFs) such as the VelocityShares 3x Inverse Silver (DSLV) or the ProShares UltraShort Silver (ZSL). For individual short ideas, I've recommended short positions like Kinross Gold (KGC) to my clients. I'm adding DSLV long and KGC short to my Edge Letter Sample Portfolio.

 

I found these positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

 

Disclosure: Anthony has recommended DSLV long and KGC short to his clients. Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

VIDEO ON MSN MONEY

86Comments
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But doesn't QE-4 and QE-Beyond, fuel the inflation risk in the next 2 to 4 years that it makes sense to own Gold and Silver when the dollar will be so devalued it is worthless?
Dec 13, 2012 4:32PM
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Pretty typical, stick your head in the sand, article from MSN; total fantasyland.
Dec 13, 2012 5:25PM
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The only thing that doesn't seem to be finite on earth is the amount of money that the fed will print, position yourself accordingly.
Dec 13, 2012 3:15PM
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The FED balance sheet is 20% of GDP.   Gold isn't going down.
Dec 13, 2012 5:04PM
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Specie should always be held.  It is ahead of itself now.  However, I figure it's fair value based upon M2 money supply growth around 1420.   Gold is up thinking that QE IV, V and VI are coming.  People are expecting helicopter Ben to print, print, print.  He hinted that he may have to stop and let the economy tank.  This would cause gold to probaly drop to around the 1420 level as the froth is taken out.

Maybe Ben is hinting that he cannot print forever, no matter what Obama wants...

We do need a full and complete AUDIT of the FED.  Nothing wrong with that.  And we should do it EVERY YEAR no matter who is in office.  This is  a government agency accountable to Congress.  
Dec 13, 2012 5:15PM
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$16T national debt and climbing, non-stop paper money printing, a rabid socialist in charge and you think PM's are due to fall?  Interesting.
Dec 13, 2012 5:01PM
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I'm waiting for the disconnect to start.  When gold and the dow begin to go in opposite directions.  I just will not ever accept the idea that gold which is and forever has been the ultimate transaction for all value.  Look at all the years.  I will never drop this idea until we produce gold from some other process than mining.
Dec 13, 2012 5:56PM
Dec 13, 2012 6:29PM
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Yeah right. I waited all week for 30 rounds to come in to the local pawn shop just to find out that they sold before the guy had a chance to set them down. Now I have to call the last two guys I know who have been out for a month just so I can listen to them say the same words they've been saying for a month now. "It's crazy." We're looking for more but it's getting tough to come by.

Then you have the MSM saying things like, "We expect massive shorts on silver." and, "We expect silver to move to the down side because there's plenty around."
Yeah right. I'll just keep stashing it away, you can keep writing the BS and we will see what 2013, 2014,2015,2016,2017 and beyond look like for your useless paper.

Dec 13, 2012 7:06PM
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Gold and silver are taking a beating because,as the Fed destroys what the definition of money is,Goldman,HSBC,and the Morgue,through their paper shorts on the COMEX,smash the paper prices at all cost.This has been going on for years and will continue until such time that the sheeple wake up and realize what has been done to the purchasing power of the fiat in their pockets.Anybody stacking phyzz just needs to be patient-the fiat,Saudi "petrodollar" monetary system is in its final years.Anthony like so many others,is simply clueless when it comes to PMs.
Dec 13, 2012 6:42PM
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Just look at the prices of EVERYTHING. Everyone is complaining about the prices of everything.
When Hell Fire Inflation sets in what are you going to do with your useless paper?
Myself, I will hand the Dentist, Doctor, Local Farmer store owner a few pcs of silver or gold, rather than a car trunk load of colored paper. And I'll bet they will take it too. As a matter of fact, I think they will just laugh at your car full of useless paper. Good Luck!

Dec 14, 2012 10:36AM
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JFYI;  Hundreds of millions of Asian people wear gold rings, necklaces, and whatever for one important reason.  They want to have funds in an emergency.  And we all know how long those cultures have survived.  Just sayin
Dec 13, 2012 6:59PM
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So they do not like the Fed bailout of poor BANKSTER investments or just giving them $85 billion  per month until unemployment hits 6.5% . Now why should we be alarmed ? Don't forget Obama wants to be able to raise debt ceiling at will !
Dec 13, 2012 6:15PM
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1 Classic Lady - The U. S. has been exploiting China for years.  And, they're dumb enough to keep lending to the U.S.  They probably own many more trillions in U.S. govt. debt that will never be repaid.
Dec 14, 2012 10:46AM
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Today's opening not a whole lot different than the previous 4 days, flat to a bit down; manipulators attempting to take control and bring this market down once again...Be cautious out there...Obviously it is still very early but keep your eyes open...Plenty of cheaters on and off the floor...More later.
Dec 13, 2012 6:45PM
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For those who want protection from inflation and the fiscal cliff - I'm selling mood rings and cabbage patch dolls that will protect you.  Let me know how many you want.  And by the way - they're made in China.
Dec 13, 2012 4:11PM
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I'm pretty much in agreement with latter part of Article...The 800# Gorilla cannot be hidden behind the curtain forever.

 

Although have curtailed Gold-type holdings to 10% instead of 19-28% of investments.

Dec 14, 2012 7:51AM
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Anthony

 

This makes no sense.

 

If Helicopter Ben keeps on printing more money and Obozo keeps spending money we don't have then sooner or later we are going to see Gold a whole lot hire and a whole lot of inflation. What keeps inflation at bay is there are so many people out of work. Remember figure lie and liars figure. Unemployment remains at record highs. 1/10th of 1 percent is one whole heck of lot of people. And our beloved leader refers to U-3 not U-6 which is a way lot worse unemployment statistic.

 

I'm keeping my gold.

 

I do taxes and accounting and from what I've seen of traders, they lose more often than they wiin. Perhaps the pros do well with access to internal and whispered data, but the chump trader is just a chump.

 

 

Dec 13, 2012 6:58PM
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Nope, they didn't drop us triple digits but, believe us, they tried....Oh well, scumbags still did some damage and got their way...We knew this since yesterday's closing....We will see if they will try to continue their cheating and manipulating tomorrow.
Dec 14, 2012 4:57PM
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To be honest, most good people here paying more attention to what happened in Ct than what is happening down here....The fricking manipulators reaping the benefits and are doing what they do best, cheating, manipulating and going home happy...Oh well, cheaters will always be cheaters....Try to have a good weekend, pray for the people of Ct and hug your children a little tighter tonight. May God Bless us all.
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