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 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 5:01PM
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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.
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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 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 13, 2012 3:15PM
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The FED balance sheet is 20% of GDP.   Gold isn't going down.
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