On Friday gold and silver lost almost 5 percent of their value, but Monday morning we are seeing gold and silver down another 10 percent or close to it. The past few years has seen many individual investors load up on precious metals, as everyone figured out the Federal Reserve wants to kill the U.S. dollar.
As I pointed out a couple of times last year, gold, silver and precious metals, in general, appear to have been in a bubble in late 2010 and early 2011. In my piece for predictions of 2013, I was neutral to slightly negative on this sector. If I had known the Bank of Japan was going to launch a QE mission six times the size of our Fed’s, I would have been much more bearish, in that piece, on gold and silver.
Some are going to point out that Cyprus may have to sell it’s gold as a condition to it’s bailout. The bears are shorting to front run that liquidation, but that rumor seems myopic at best.
The gold bulls are very educated about this sector and there is a large book of information that supports a thesis that gold and silver are the place to be as the Fed does QE. My problem with this thesis is it whistles past the grave yard. I got very bullish on this space in 2002 and 2003, as the Fed’s plans were not so clear cut, back then.
Bank of Japan has become 2013′s wildcard
The key variable that really drives gold and silver is the U.S. dollar, but more importantly as it pertains to the “Carry Trade.” “The Carry Trade” is a trade put on by huge hedge funds. These are the elephants that really move the markets and they run billions and billions of dollars. For about a decade, sans 2008, there has been a “Carry Trade” that is long risk assets (gold, silver, stocks and bonds) and short the U.S. dollar.
The wildcard in 2013 has been the Bank of Japan. If you believe our Fed is reckless, take a look at what the Bank of Japan is doing. Here is an analogy that may shed light on the Bank of Japan. The Fed is Lindsay Lohan. Lindsay is a hot mess, but she is no Charlie Sheen. The recent QE effort of the Bank of Japan is twice the size of the Fed’s mission and Japan’s economy is one third our size. That makes the Bank of Japan’s QE effort six times the size of “Helicopter Ben’s” plan. The U.S. dollar, which has been firm for the last two years, is now very strong, and this is what is crushing the metals, in my opinion.
As these hedge funds unwind these trades of long risk and short the U.S. dollar, the metals are just getting hammered, then taken out back and shot. The real question, to me, is what about other risk assets, like stocks and real estate?
Just last week we talked about how the S&P 500 was at a new high, but the economy didn’t feel great. Did Mila Kunis kiss the top of the stock rally? I am net short the market, for a trade, but this sell off in gold might have larger implications.
Another thing probably exacerbating this sell off is there are probably some hedge funds blowing up for real, and have to force liquidate their gold and silver positions. The bears see that and press their bets and it has become a vicious cycle.
I would guess that gold at $1,400 and silver at $23.50, short term is buyable, although I have no interest in this space, because it is too crowded with fast money. I know the fundamentalists will give me a long list as to why this is not a bear market for gold and silver, but charts and numbers don’t lie. These charts are so broken and now have so many upside down longs, all blips up will be met with demand for a long long time, like a decade or more, as the world comes back to realize why gold was in a bear market for 20 years from 1982-2002. Gold and silver are horrible investments and they will never be used as currency again.
I was popping Xanax’s like candy because of where I saw the Fed taking us by 2001, when most thought the Fed led by Alan Greenspan was doing a great job and/or had no opinion. Now there are seemingly a billion people who believe the Fed is going to eradicate the U.S. dollar. The way markets really work is now that everyone knows what had me taking pills and putting therapists into therapy, over a decade ago, is that trend is completely played out. It is a game of supply and demand, and in the information age the fundamental data, to me, is almost meaningless, unless you use it to game psychology.
The people who have been hoping gold and silver would break the down trend that started in 2011, ended up with everyone else who has ever hoped for anything. Hope is not something you can put money into, unless you like to lose money. Gold and silver bulls will be taught an expensive lesson today, and that lesson is the fundamentals really don’t matter, not if it is in a bubble.