Trouble ahead for gold and silver
Precious metals take a beating after the Fed announces continued stimulus measures.
Aside 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 firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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!
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.
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.
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?
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!
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Bargain hunting gives silver a boost after a nasty dive in overnight markets. But worries about rising interest rates and a possible U.S. debt downgrade gives the metal a boost.
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