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.

 

86Comments
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 6:59PM
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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 6:58PM
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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 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 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 13, 2012 6:36PM
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But one thing I don't understand and that is.....gold and silver are being mined out of the ground everyday.  So, in essence, money may be printed and precious metals are mined and does anyone know how much gold/silver is being brought into the system?  I think that must be calculated as well.  This isn't as if there is a certain finite amount of gold/silver like there is say, of a collectable like fine art, which can act as a yardstick against the dollar.
Dec 13, 2012 6:29PM
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I think I'll try to buy a Coke and insert gold coins into the soda machine.  Who thinks that my thirst will be quenched?
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 6:26PM
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If gold/silver are such valuable stores of value, then why did they do nothing for over 20 years, from like 1980 to early 2000's?
Dec 13, 2012 6:23PM
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Who holds on to metals that China controls the majority of? Do you eat gold? Do you wear silver? You are IDIOTS. China has manipulated a significant part of our circumstance. Why shouldn't they? IDIOTS on Wall Street recommended globalization. Have you ever know Wall Street to do the proper diligence before entering... or after they have an exposure? China can easily freeze the markets for metals then make the Buy Threshold as low as they want. Metal Morons-- you're screwed. There is no likelihood that we will utilize nuggets or coins. Our currency is buried in Europe. We don't make or grow what we need to sustain. We will need to. Oops... there's a commodity hint you can believe in. IDIOTS. Restore the experience and skill, fire the administrators. Act quick, time is very short. No bail-outs this time. 
Dec 13, 2012 6:20PM
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People were suckered into buying the metals because they were told that it was an inflation hedge but we're still experiencing deflation.  There is mild inflation in things we have to have like food, health care and oil/gas , which has always been the case.  But everything else has been & will continue to deflate.  Try to sell your house and see what happens.

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 13, 2012 6:12PM
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There's just opportunity in reaping profits regardless of the economic climax.
Dec 13, 2012 6:08PM
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You can't sell the metals without paying someone a commission.  And I don't know anyone that will take gold for a home or car.  next time up - do you live in the Roman Empire or something?  I live in America in 2012 and know of no one that will take gold.  Last time I checked we use dollars here in America.  The whole premise is stupid.  Next you'll tell me that Arab sheiks will pull into McDonald's drive-thru & try to pay for their Big Mac with oil.
Dec 13, 2012 5:56PM
Dec 13, 2012 5:37PM
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To all those who have been buying gold & silver- What are you planning on doing with it?  Last time I checked, you can't go to McDonald's, WalMart, the grocery store or the gas station and pay with gold/silver  coins or bars.  And who's going to buy the gold/silver  from you so that you can convert it to dollars and buy something with it?  And if everyone starts trying to sell their gold & silver at the same time and there are not many buyers - what will you do then?

 

I understand the inflation argument & that they are a store of value during times of inflation/fear/uncertainty.  But even if the world went to hell in a hand-basket, the metals won't do anything for you unless you can get someone to exchange food, water, gas, etc. for it?

Dec 13, 2012 5:25PM
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"I'm recommending short exposure via inverse exchange-traded funds (ETFs)"
I would say short exposure = buy in the morning, and close your position out prior to 4pm DAILY.
Yes daily, you can loose your shorts in a buy and hold scenario- inverse ETFs require DAILY care and feeding.  Good Luck!
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 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 5:06PM
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Really! I find it hard to believe that what the Fed does will have an impact on anything! 
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