The golden ticking time bomb

Depending on whom you ask, the precious metal is either about to collapse or is on the threshold of a massive move higher.

By TheStreet Staff Jul 1, 2013 11:54AM

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By Marc Courtenay


Gold bugs are on life support and those who've hated gold (-GC)as a "barbaric relic" are gloating. No one seems ready to call the bottom for the precious metal's decline either.


On Friday, the end of the second quarter, gold fell to as low as $1,179.40 an ounce, the lowest price in three years before settling at $1,223.70. Silver (-SI) rallied off a bottom of around $18.35 on Thursday and moved up 5% Friday to around $19.47.

On Monday, gold moved up $32 to $1,255.70 an ounce. Silver hit $19.58. Silver-streaming company Silver Wheaton (SLW) closed Friday up 7.5% at $19.67 and reached $20.17 on Monday.


Hundred dollar bills surrounded by gold © Anthony Bradshaw, PhotographerThe golden version of SLW is Royal Gold (RGLD), which closed up 4.5% at $42.08 but moved up to $43.95 on Monday. Even the badly battered Market Vectors Gold Miners (GDX) ETF, which just a few days ago hit a new 52-week low, popped 7.5% to $24.49 during the last trading day of the second quarter and an additional 40 cents to $24.89 on Monday.


Standard Chartered analyst Daniel Smith recently put the gold quandary into perspective with some relevant comments: "Gold has been battered by the Fed's policy stance, while the change in U.S. real interest rates, which have turned positive in June, has become an element disproportionately negative for gold relative to other commodities."


That's why analysts like him believe the next support level for gold is lower than Friday's. Smith publicly stated that the "next short-term target stands at $1,160, but I think prices will be higher at the end of the year than they are now as the market starts to price in that the Fed's language will unlikely change from now on."


Let's take a look at the descent that SPDR Gold Shares ETF (GLD) has experienced in the last 12 months.

GLD Chart

In just the last three months we've seen GLD hit two bottoms, rally and then fall to new lows. Friday's rally might be the long-awaited "bottom" or just another head fake higher.

 

There are many reasons to think the latter. Yet, like many great buying opportunities it always seems to look darkest before the dawn and bleakest before the blast-off.

 

It's also reasonable that an investor believes that the bigger investment theme isn't the physical metals but the incredibly undervalued mining stocks.

 

That's why I want to look at a one-year chart of GDX to see if there is a pattern of price movement that might give us hope that the bottom is in place or very near.

gdx chart

Holy guacamole! This looks strangely similar to the GLD chart. I can't see any reason to feel certain that the miners couldn't keep plunging, even though I admit that Friday's upside volume for GDX was almost three times the three-month average daily volume.

 

So if you're looking for tremendous upside potential, you've probably come to one of the most promising sectors. The only big question is, when to pull the trigger?

 

My experience and costly lessons learned say don't be greedy, be willing to wait until the uptrend is firmly established even if you miss the first 20% or 30%.

 

One more thing: The cure for gold's and silver's falling prices are falling prices.

 

As producers cut back production and the price per ounce gets too cheap for new exploration, the supply will suffer. Buyers will say, "If I liked gold at $1,900 I love it at $1,200 or lower" and the demand will rise to meet the falling supplies. It's a recipe for an eventual new boom.


At the time of publication the author was long shares of GDX, RGLD, and SLW. 

 

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62Comments
Jul 1, 2013 12:55PM
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Up and down we go and that's what Wall Street traders want. Come on fools, the Fed's been printing fiat USD for 3 years now along with the rest of the world. The Fed wants 2% inflation and 6.5% unemployment but they determine how and what gets counted.  Equity and home prices are up for only one reason - the FED's got $4 trillion on it's balance sheet. The US economy could tank as soon as the Fed takes it off of QE life support and they have to start paying 4-5% interest on US debt.  Gold's only a shiny yellow metal and a house is only a pile of sticks and stones that you rent from the government.  You don't get interest on gold but the Fed can't print it or charge you rent on it either. It's amusing to look at India and the 6% tariff they've placed on gold because they can't control the price of gold and oil and  they don't want their citizens to invest so much in them. I can't wait until we find out that the Central Banks and large investment banks are purposely shorting gold because it's not in their favor to have investors relish and profiting from it's ownership.
Jul 1, 2013 3:06PM
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You just don't get it. The Fed is trapped. With the massive devaluation of the dollar it has boiled down to damned if they do and damned if they don't. They are in a dilemma and the only definition for that is two bad choices
Jul 1, 2013 1:36PM
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Can't eat it, can't make change with it. Gold is a hedge against inflation and uncertainty. Unfortunately, many buyers of gold in the recent past did so in anticipation of a financial Armageddon, urged on by all the shills on TV. If that were to happen (highly unlikely), gold wouldn't keep one alive, bullets and survival skills would. Those folks are beginning to realize this and contributing to the sell off.

 

Don't buy into the notion that $1200 gold is too cheap for mining. It was mined plenty when it was $35. Wait 'til all the suckers clear out and buy at $800 or less. 

Jul 1, 2013 3:44PM
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The fed don't want people taking their money out of stocks and into precious metals because that will only speed up the  inevitable! They would rather see you lose all your money to the rich which is them along with the other 401 K RAPISTS!! They know pumping billions into the markets cant go on forever and they know when they stop the markets crash and whoever is left with any money will invest in precious metals to make big profits!! Sure Gold is a armeggedon investment but something to increase wealth until our country is forced to get back on track the right way!!
Jul 1, 2013 3:22PM
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Money printing will take the dollar out of the preferred currency of the world soon! Its already happening with other governments making deals to accept each others currency on trades! In 2-3 years the dollar will be next to worthless but gold will skyrocket because the stockmarket will plunge when the fed cant help with the money printing no longer! Those greedy rich suckers wont have much to invest in and will turn to precious metals like everyone else! Im buying and holding and watching my gold increase in value as the economy and dollar tank!!!
Jul 1, 2013 4:58PM
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Ticking time bomb..hmm..never mind the multi trillion dollar debt that grows larger every day,totally out of control spending in D.C.,personal /private debt at all time highs and central banks around the world creating money out of thin air...yikes!
  Tomorrow,the market could plummet to zero,and no one would be accountable. No one. 
  So,a little precious metals stashed away isn't such a bad idea; just don't go all in! I will always accept gold/silver/platinum as payment in my place of business. Always.
Jul 1, 2013 4:18PM
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I think that the reason there is so much dispute on the direction of gold is that you have two conflicting scenarios. 

If the Euro collapses, then central banks in Europe may flood the market with gold, driving down the price.

If central banks continue to print money and the Euro does not collapse, then gold may, as Peter Schiff says, "go to the moon".

Either way, the direction gold's price will go is not a function of which will happen, but is a function of what the big money and central banks believe will happen. 

Jul 1, 2013 3:33PM
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There is a reason there are buy gold shops popping up everywhere and all these places wouldn't be wanting gold if it wasn't going to be worth anything in the future...duh!! The economy is worse than it was a few years ago when the markets plunged. The only thing keeping gold prices down and the stock market breaking records is THE FED!! When the dollar weakens and stays that way because of not being the worlds preferred currency anymore...Gold will be king!!! Silver also!!
Jul 1, 2013 3:49PM
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I'll buy gold when it drops below $800. Anyone around in the 80s has seen this before.
Jul 1, 2013 4:01PM
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Gold's main investment use is as a hedge against capital gains.  Money invested in gold is money that is not invested in productive assets.
Jul 1, 2013 6:38PM
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Purchased my first 100 ounces in 1995 at $256 per ounce and haven't bought any since it went above $600 per ounce - can't wait for it to hit $600 again to scoop up more.  I'd rather have a million bucks in gold than in Obama dollars.

Jul 1, 2013 5:14PM
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And people keep talking about political parties, they are stuck in this earthy bickering and forget what really matters. The economy is a man made game, right now we don´t have stable rules. Gold has little natural value, its utility is very limited. Money is being printed on a regular basis, interest rates are being determined by central banks without any consideration for market forces. That´s why the price of gold or any other asset is completely dependent on government manipulation.

Jul 1, 2013 5:58PM
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Very little money is "printed" these days. It is 90%+ "electronic" and transferred from bank to bank. And all that debt gold junkies talk about is constantly being defaulted on. That means there is less money in the system when loans by the billions go bad. This all adds up to less money floating around and what is floating around is worth more. So gold drops 30%, silver 60%, steel 36%, aluminum 36%, copper 33%, coal 51%, natural gas 73%,  lumber 25%, etc. Say good bye to inflation and hello deflation. And you thought inflation was bad? Check the value of your house. I bet you wish we had inflation.
Jul 1, 2013 5:24PM
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Hmmmmm; Isn't that Silver Bullion that the guy is holding in his hands....??

ON THE ORIGINAL ARTICLE COVER PAGE.

 

And Gold was up $25 per, early on today....wooohooo, we be a coming back.!!!

Jul 1, 2013 7:05PM
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If you go with the value of an ounce of gold in 1973 which was $97.39; looking only at inflation, today you would be looking at gold around $510.96 per ounce. I'd say we have a lot of falling left to go.
Jul 1, 2013 5:05PM
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There is no doubt the money has been printed and is sitting on the books of institutions and corporations everywhere.  Depending on where that money gets applied (invested), the specific asset(s) will go up or down.

Therefore, you are looking at the next great bubble - ALL PAPER

If that 100s of trillions in currency gets a faith loss, just see if anyone will accept any of it for gold or much of anything else.

Jul 1, 2013 5:28PM
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The Mother of all Crisis is a Currency War against the U.S. Dollar  and this gal tells of how the BRICS are doing this now .

 

WORLD BANK EXPOSED!!! WHISTLEBLOWER Former Senior Counsel Karen Hudes TELL IT ALL!!!

 

Whistleblower Karen Hudes [Pt.1] Corruption / World Bank Exposed

 

 

 

Jul 1, 2013 4:09PM
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Gold only went down 27% last quarter.Buy gold and watch it go lower.The gold saps

will always be pushing gold.The guys on TV keep getting rich pushing it to saps who

arn1t smart enough to buy good stocks.

Jul 1, 2013 5:56PM
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I know what it's going to do!  It's going to go a little lower, and when MSN money recommends it again, as they've been doing for a while now, the small investors are going to jump back in on that GREAT investment, and then it's going to tank.  OR
it's going to go higher and right before the small investors get around to selling and taking their profits, it's going to tank.

End result, it's going to tank just when all the small investors have the most money in it just like everything else.  For some reason the banks and brokerage houses are always on the right side of these situations, and the small investors lose everything.  You would almost think the banks, the brokerage houses and the rich politicians had inside information.  Oooh, wait, THEY DO! 

Jul 2, 2013 12:00AM
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I've never understood the "hoarding of Gold", except maybe in sellable Jewelry, because of other uses...

Just seems if you never sell any of your Gold and take profits occassionally...;

What is the reason to buy it on speculation to begin with..??

 

Small amounts maybe? But I'm not sure most of our kids or g-kids want the headaches of dealing with it....Unless maybe you are filthy rich, and have nothing else left to invest in.

Silver about the same.

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