Is Gold at a Turning Point?

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There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so.

In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.

A Hard Look in the Mirror

The past two years have not been kind to holders of the precious metals. The price of gold is down over $500/oz since the record high (nominal) price it hit in August of 2011. That's a decline of 28%. Silver has seen a decline of 56% over the same period.

A healthy amount of that decline came in the past seven months, which have pretty much seen a steady price deflation punctuated by sharp (and historic) downdrafts:

On top of these grim charts, daily headlines touting, often with delight, the demise of gold appear nearly everywhere in the media.

And forget about PM mining stocks. They have been absolute widow-makers for investors:

(Source)

It's hard to argue that PM mining stocks aren't the most hated sector in today's markets. The chart below shows that last month, the bullish sentiment on gold miners dropped to 0%. Can't go any lower than that:

Wasn't reckless central-bank money printing going to flood the world with paper currency, sending gold prices – and those of its "poor man's" sister, silver – to the moon? Weren't the markets going to crack as the unresolved economic and financial rot in the U.S., EU, and Japanese systems became further exposed, sending capital fleeing into the bullion market and driving prices much, much higher? Weren't escalating mining costs going to march up the price floor for the precious metals?

Why haven't any of these scenarios happened? Were we wrong in our reasons for purchasing gold and silver?

Are we the clueless patsy at the poker table?

The Way of the World

These are very understandable questions to be asking. You wouldn't be human if you didn't.

So, it's wise to return to the #1 lesson of investing: Never fall in love with your positions. Be sure to question your rationale regularly and often. Remove emotion from your decision-making, look to what the data tells you, and continually ask yourself: Ignoring my past decisions, would I purchase this investment today? If the answer is no, lightening up your position is almost always the right decision.

Chris and I follow the precious metals markets on a daily basis, and we frequently challenge the logic behind our support of them. But at this time, we can find nothing – nothing – that has happened over the past two years that invalidates the principal reasons we've laid out for owning precious metals. You can review these reasons in detail on our foundational report, The Screaming Fundamentals for Owning Gold & Silver.

The hard truth for us investors is that secular market trends take time to play out. Nothing moves in a straight line. And they are many false signals along the way. There are no sure bets, no risk-free winning options to pick.

But the good news is that the laws of physics and rationality always prevail in the end. If you can identify the right endgame and position yourself for it patiently, the messy volatility along the way really won't mean much in the big picture.

But Has Anything Really Changed?

Let's look at the key reasons why we originally recommended that investors look to the precious metals as a safeguard:

  • Negative real interest rates
  • Fiscal deficit spending and unserviceable sovereign debts
  • Loose, if not reckless, monetary policies
  • The price of newly mined ounces continues to climb higher and higher, due both to reduced ore grades and higher costs for fuel and equipment.

Negative real interest rates have always been supportive of gold prices. While admittedly that's not been the case for the past two years, we now see that historic relationship re-expressing itself.

After all, when the return on cash savings is virtually nothing and the money printers are running, inflation eats away at fiat purchasing power. Gold, as money, offers protection from this.

Perhaps things are different this time, but we're thinking not.

The degree of fiscal and monetary recklessness has taken us by surprise, both for the intensity of the actions already taken, but also for the fact that financial markets have adjusted to the practices and now treat them as normal, if not desirable. While the U.S. deficit has been declining from its record highs, much of that is due to accounting shenanigans, all while our dangerously high debt-to-GDP ratio (as well as those of most other developed countries) continues to worsen.

Mining costs have been on a steady march upwards over the past decade, setting an average "all-in" cost floor now very close to the current price of gold:

Even exploration costs have skyrocketed, which, importantly, is happening in parallel with a marked decrease in discovery volumes: 

(Source)

Gold, it seems, is getting both harder to find and harder to get out of the ground.

And to the above list of original fundamentals, we must sadly add several new drivers:

  • MF Global proving that client accounts can be looted and then drawn into a lengthy and unsatisfying bankruptcy/creditor process
  • Cyprus proving that the banking system intends to make depositors pay for its mistakes
  • Politicians openly calling for various wealth taxes to be levied on anybody who has managed (dared? bothered?) to save up funds

And one last big one: a new secular change in rising interest rates that threatens to create havoc in world economies and financial markets across the world.

(Source)

After a decade of low and declining interest rates, yields are back on the rise. The low cost of debt that the markets have become used to has created a worldwide bubble in bond prices, about which experts like Bill Gross have been increasingly vocal in issuing dire warnings. A popping of this bubble will increase borrowing rates for governments/business/consumers, depress home prices, make mortgages more expensive, and basically act like kryptonite to any "recovery" in the world economy.

Wall Street has certainly taken notice. And it's worried about the implications:

In a Shift, Interest Rates Are Rising (The New York Times)

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.
 
As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil.

Bond bubble threatens financial system, Bank of England director warns (the guardian)

A key Bank of England policymaker has warned of the risks to global financial stability when "the biggest bond bubble in history" bursts.
"Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted."

60% chance of global recession: Pimco (CNN Money)

Pimco's founder and co-chief investment officer, Bill Gross, argued last month that central banks' ultra low interest rate policies and ongoing bond-buying programs have resulted in a financial system that is "beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions."

Lastly, there is the wild-card possibility – improbable, but certainly worth considering because of the gains to be had – of gold being re-monetized as a means of balancing and settling international accounts.  Should that transpire, gold will be worth many multiples of today's value.

The Light at the End of the Tunnel

For all the reasons above, the bruised precious metal investors out there should still sleep well at night, secure that the foundational rationale for holding gold and silver remains intact.

But, excitingly, there are numerous new compelling new reasons to hold on to – or add to – your precious metals stack. 

In Part II: The New Game Changers for Gold & Silver, we delve into the very positive, very noteworthy developments afoot, including:

  • A seismic change in the commercial trader positions, returning to a bullish stance not seen since 2004 (and changing the incentives for any potential price manipulators)
  • "Unprecedented' retail investor appetite for bullion
  • Accelerating East-to-West demand for physical gold and silver
  • Continued accumulation by world central banks
  • Shockingly depleted Comex inventories available for delivery

And we revisit the signals to watch for that will indicate that the secular bull market has run its course (none of which are remotely visible at this time.)

Trying times like these are designed to wear you down and force weaker hands to capitulate before reversing. We remain steadfast in our conviction that the precious metals investment thesis remains healthily intact, and that the real price action in the gold and silver story has yet to be seen. And we see increasing evidence indicating that the next big upward reversal is near at hand.

Stay disciplined.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

This is a companion discussion topic for the original entry at https://peakprosperity.com/is-gold-at-a-turning-point/

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You are not dealing with the laws of physics. You are dealing human psychology and behavorial economics.

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i don't know all the fancy reasons about charts etc…so count me stupid if you so choose.
 when i do invest my money in things based on the current "news/logic/reasonings" i lose money every time.

when i buy in at lows…in a solid investment…i make money only if i sell at a higher amount than i paid.but always. i bought silver around 1999 for $5 an ounce and sold at $45/ounce a little while back…no reasoning other than oh, oh oh, look…a 9 fold increase…grab it.so i did. i ran not walked to the local dealer who cheated  me quit a bit on weight and going rate…but i factored that in… it peaked a few days later at $49 and then …well you know what it is today. i will buy in when i see it at $8-11 an ounce.and i will see thatin my lifetime i believe.silver will lose it's manufacturing value as that all falls off.

perceived value: if people believe something has worth, then for a time it does act that way.

re: gold…remember we are talking about it's value in us dollars. that doesn't mean gold is worth more, it only means the markets say it's worth more in  us dollars…gold theoretically stays the same as it is

.so it is more a marker of us dollars than the value of gold.

us dollars are actually worthless…we are just waiting for that idea to catch hold.

gold is fiat just like paper us dollars are, and digital us dollars. it's all perceived value. and right now the perceived value is that they all have buying power. i don't think this will remain so for very much longer. either paper or gold having value…digital value is setting up to get a run…roasting chickens are looking more valueable…i can eat them and definitely trade for something or a favor…or fire wood…but then we get back into the future again.  it's how we are. we discount the future for a hamburger today. thanks wimpy for the model.

i think in the immediate aftermath of a collapse(which i believe we are in process of) none of the fiat currencies will be deemed valuable–gold, paper, digital…seaschelles…tulips…stocks ,bonds to a populace that is out of touch with reality and definitely not in pocession of life sustaining skills, or resources. so at this point in all articles, vague negative terms get used …like "then the bottom falls out, or what awful things will occure etc etc etc…it leaves your mind to conjure your worsest fears…take the time to think things through folks…instead think of what you need not what you will lose…and you will be ok

we are talking worthless right now for all of the above currencies…however, perceptions on them are fluctuating and so the movement fools people into thinking value or worth…not so. it's pretty much worthless …all of it.  there i said it.

having said that scary thought…now i can prepare and adapt where i need to. i can focus on having what i need to stay alive vs have worth 200 years from now… oil era is on the way out…fathom that or think what you need now to live to be satisfied.

i'm sorry to you all to say this, but the idea to try to carry wealth into the next phase/dark age…is again only for a select few, the 5% if you will. i know i am not that greedy to be one of the  5% or that inside the loop.

history shows that mankind swirls in this fallacy for only so long and then it tanks and starts over…maybe not at zero but damn close enough. simplicity ensues.

re gold: i think for me  it's best to follow the drift of the administratiion(us govt)ic. if the west is selling to the east then i shall too. this is not an age where fundamentals apply…it's haywire out there  and senseless.

in a matter of a couple of weeks, i will be self sufficient and not longer online.  the internet, cell phones, and the dollare are all complexities that i can't relie on. oh yes…electricity from the grid  and gasoline…

in a few weeks i will be free of the system…i've worked hard on small money to do this…while i've had the opportunity to do so.

gold, soil any of it…is not a savior so don't look for it to be that.

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If you don't think that PM's are now being manipulated by the Central Banks, then I think that you should not be investing in buying additional PM's!
BUT
If you believe that the Central Banks cannot continue to keep printing paper money forever then what is happening now is nothing but a huge buying opportunity!
 
Consider: As the Central Banks further restrict credit and loans to us, what other options besides selling PM's (at a large discount )do small investors have, if they want to grow what is left of their portfolios?  This is a move to drive a stake into the hearts of all those that are still holding PM's; while at the very same time, these same Central Banks (who are in on the deal) are scooping PM's up (using their own printed paper money) at very low prices.
 
My gut feeling is that when the PM "reversal" happens, it will be so extreme that most small investors will not be able to jump on-board before the prices have skyrocketed relative to where they are currently, due to the market dynamics that favor the really big investors.
 
Here is a great PM question for you:
Are the Central Banks still buying Gold, and if so why?
 
I look forward to your comments!
 
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First and foremost, I think the weakness in gold is a forecast of the deflation to come. Banks and financial institutions worldwide are still sitting on many severely impaired or worthless "assets". In the US, it would appear that some of the rubbish has been off-loaded onto the Federal Reserve but that is really no more than a sweeping under the carpet exercise. The US banks are part of the Federal Reserve system. Essentially, they own it and are resposible for bailing out the Fed if it gets into trouble (light-hearted joke - it is in trouble)…
The hope has always been that things would pick up, growth would return and those assets would either start performing again or could slowly be written off. That is not happening. Banks have gone quite a long way towards restoring their balance sheets by taking huge bets with more or less free funding. In the equity markets it has been quite successful with one short squeeze after another. The wonder is that the shorts have kept coming back for more punishment. Without the shorts that game will be over.

In other markets I doubt there have been many successes for the large institutions. At some point the holders equity, as opposed to shorts who borrow stock, will lose their faith in the Bernanke "printing" machine and so will those on the Fed committee. The same resolve is no longer there and they can hardly have not noticed that the Japanese attempt at quantitive easing has backfired with rates rising (as they are in the US).

We are now on countdown to a major deflationary episode. Values will be decimated while, ironically, dollar value will rise as trillions of those make-believe digital dollars just disappear. Dollar value will rise because there will be less of them so their purchasing power will be greater - hence, the nominal dollar value of gold will fall.

All the talk about gold market manipulation is true as it is for every market. That is the nature of markets. Whether manipulation has any effect on the longer term direction of any market is very doubtful. Derivatives such as futures may have originally had a hedging purpose but today the myriad of derivatives are there to get an edge on a market, to twist and manipulate in your favour. The bigger you are, the more effective  your manipulations can be. Go back to any major market top and there is always more talk of manipulation for the obvious reason that there is more manipulation at market tops. The strongest, largest and most successful are in a better position to manipulate and their success also leads to complacency. That is why sentiment is always most bullish at tops.

Trying to gain out of this is a Quixotic quest. It will be hard enough just to maintain your capital. Remaining in cash seems the safest option for me and paying off all debt. Do whatever it takes to hold onto your job or to remain in business. When the dust settles, you may find that you are no worse off than before. Nominal values of many or most things may be crushed but relative values will probably be similar. If you have cash and courage, you will be in a great position to buy assets at or near the bottom. But you have to have cash so liquidate anything now that gives you doubt or that you do not need. Best of luck to all.

6

Today the turning point looks more like a plummet.  The question is, is there a bottom somewhere above negligible?  How many of you brave souls are buying at these new lows?
Doug

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These are certainly trying times for owners of the precious metals.Why are gold and silver selling off so spectacularly vs everything else? Especially after an already-ugly run in the past few months?
I spoke with a number of PM analysts (both macro & technical) and dealers when writing the fundamentals review above. I've been on the phone with many of them this morning, as well.
All agree there are no good reasons for the current price action beyond the animal spirits of markets where sentiment runs roughshod over sanity.
Here's a chart of gold sentiment from late April (the most recent I can find). It was even lower than scores seen during the 2008 bashing (and has likely dropped further since this chart was published):
(source)
Some see today's downspike as yet another raid engineered by the big banks with concentrated positions, a likely-final capitulation of the levered longs ("shaking the last fruit from the tree"). The charts mentioned in Part II of the article above show that these big banks are switching from net short to net long, so they very well may be trying to get everyone out of the PM pool before allowing prices to recover.
The technical side sees today's action as potentially positive if prices stablize here. Technicians like to see a capitulation downspike to mark a botton, before getting comfortable calling a trend change in the other direction.
I realize none of this likely soothes the pain PM holders (Chris and myself included) are feeling right now. Precious metals are volatile, today's markets are often irrational (and broken), and there are a lot of forces coming to a head right now (which Chris will write about later today) that are creating a lot of thrash and turmoil.
During these times, we need to remind ourselves of why we own what we own, revisit our investment theses (which is the purpose of the orginal post above), and act with the courage of our convictions. We still think the fundamentals for gold & silver are as strong as they ever were. In fact, today's lower prices make them even more compelling.
If you're wondering what we're doing, we're staying the course.
 

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BTFD

9

I agree with you Adam:
 

The technical side sees today's action as potentially positive if prices stablize here. Technicians like to see a capitulation downspike to mark a botton, before getting comfortable calling a trend change in the other direction.

One of these downspikes will mark the bottom and then I'm expecting a huge rally upward.  I can imagine such a rally making it very difficult for small retail buyers like me to get ANY gold/silver at ANY price. If not that dramatic, gold/silver may only be available at some near future period at very large premiums.  (My local dealer ran out of product on April 15-16 as people rushed in to buy at that bottom, raised his premiums, and waited for deliveries.  Premiums have since come back down.) So, I'm with you and others: every downspike is a buying opportunity and each one may be the last before we see $2000 gold in the rearview mirror.
 
I timed it well and bought at the bottom of the last downspike on April 15 and I don't regret it one little bit today.  I'm watching today's action and will be buying again as soon as I think it's bottomed and starts back up. One of these days the downtrend will reverse and I don't want to regret not buying even a few ounces at this level.
 
Unlike some people, I have years to go before I will want or need to convert PM's back into currency.  That gives me the luxury today of not having to panic. I'm keeping my eyes on the fundamentals and the all the fundamentals are saying the best days for gold and silver are ahead of us.
10

I hope thc0655 is correct in saying:
"Unlike some people, I have years to go before I will want or need to convert PM's back into currency.  That gives me the luxury today of not having to panic. I'm keeping my eyes on the fundamentals and the all the fundamentals are saying the best days for gold and silver are ahead of us."

because I'm in the same boat but it sure takes a lot of courage to be a "brave soul" as Doug calls us!

I continue to buy on the way down!

dickd

11

Two weeks ago I moved most of my investments in cash…Money Market. 
I told my boyfriend yesterday morning that things are going to get real ugly in the next few days and beyond…  It's happening and it ain't finished!  My guts are good at that. 

My gold investment is melting away $ but I'm not selling. I still believe that when people really realize what's going on, the panic will appear. 

Hold on.

NN

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Let me try and give some reasons - other than animal spirits, that is.Everything is getting hammered today, literally everything.  Every asset class in every country is getting sold - equities, bonds, commodities - practically the only thing up today is the US dollar.  Gold and especially silver happen to get the worst of it.  And nobody is "buying the dip."  Based on price charts, my guess is that money is going to very short term instruments and/or cash.
So why are gold and silver beat on the hardest?  First, they're leveraged by the nature of futures, which means they move both up and down faster than other things.  Also, their price charts were looking particularly horrid prior to yesterday's open - gold had a descending triangle, a series of lower highs which often ends with a drop off the cliff similar to what we saw yesterday.  Horrid price charts make the shorts more enthusiastic, more willing to take risks, and it makes the longs more nervous and more ready to bail out.  Usually when a trend is in place, its tough to change it.  Unfortunately after that bottom on April 21, gold never moved high enough to get the shorts to cover.  And silver's chart was even weaker.
The PM miners for a time outperformed gold & silver, but now most of them are also either forming new lows, or are perilously close to doing so.  Some of them started today all right, but then just were sold the whole day long, and are now looking really awful, with nary a bounce to be seen.
For what its worth, I am not seeing the same sort of PM price action I saw during the April gold smash.   Its hard to explain exactly how its different - it just is.  Nowhere near as much power was used to force the market lower.  And the volume isn't as high.  The number of stops getting triggered is much lower.  My guess is, a bunch of leveraged longs just decided to bail after the Fed press conference which weakened things, and then there was a 3-hour pounding that happened in the afternoon in asia that moved the price from 1340 down through 1321 support to 1290.  Support at 1321 wasn't very impressive.  It just feels like nobody is showing up to buy.
If the thesis is "money printing causes inflation, so buy gold", then the lack of interest in buying gold makes complete sense.  Money printing is going on, it has been going on for years now, but there really is zero inflation except in the bond market - and now even that is being unwound.  And what happens when money printing stops?  More inflation?  Not likely.  So all the general inflation-based gold buyers are losing faith and bailing out, especially when credit tightening happens to kick them in the butt.
My gut is telling me, money is being sucked out of the system, likely in several different places.  Europe already has credit deflation (banks shrinking their loan book) and from what I read, now that's happening in China as well in a big way.  And we know money is fleeing peripheral countries - Brazil, India, Thailand.  There's lots of stuff happening now, lots of money being moved around.  And with two big players deflating credit and then Ben hints that he might do so as well - well, its the snowflake that sets off the avalanche.  You never know which snowflake will do it. 
There have to be other people buying - big guys - for a bottom to form in a commodity like gold or silver.  It can't simply be you and me buying silver coins at our local store.  That means leveraged money has to come in and decide its cheap enough, and that its not likely to continue going down.  I'm not seeing these guys showing up right now.  They might, by end of day, but it's not looking so good now.  If I were to bet, I'd bet on another leg down tomorrow.  The credit situation (or perhaps its just the perception of the credit situation) adds emphasis to this.
I still think all those factors (the COT report, the sentiment, etc) should eventually bring about a rebound.  Heck, I thought the bottom was in at 1321.  That's why they call it a market though, not "a sure thing."  But this credit-tightening is going to cause problems.  Everything with any leverage in it will be hosed as long as credit continues to shrink.  And that includes gold & silver.
I don't know how much farther it will go.  If the credit tightening continues, things will continue to drop until the leverage is mostly wrung out of the market.  Commodities will be hit the hardest, and then equities and bonds.  
 

13

There is too much risk in buying gold yet.  Gold bugs always talk up gold even as it falls.  Gold has had a great run over the last decade but it will now suffer with the general loss of liquidity that is coming.  We should all wish for a wash out in gold back down to support around 800.  THEN may be the time to load up for the long haul.

14

All else being equal won't higher interest rates lead to lower gold prices?
In order words, if interest rates spike, causing the stock market to fall, I suspect there would be a flee to cash, not gold.  Any thoughts?

Thank you,

John R.

15

i am in awe of what you've written it set me thinking, thanks.

16

if two futures exchanges, Comex and Shanghai, are already delivering more physical than is mined yearly… and that does not speak to OTC London deliveries, coins sales, etc… then what makes you think that we get down to $800?  How do you know how far beyond fundamental supply:demand contstraints the bullion banks/FED/BIS can push this futures-based system before it breaks?  With the Comex bleeding down Gold, COT showing bullion banks getting longer and longer, the GLD bleeding down Gold, and mining becoming less profitable… I can't see the price getting that low before the shelves are bare and the commecial signal failures occur.      

17

Excellent article. Thank you for these charts.
http://www.certifiedgoldexchange.com

18

[quote=Nervous Nelly]Two weeks ago I moved most of my investments in cash…Money Market. 
I told my boyfriend yesterday morning that things are going to get real ugly in the next few days and beyond…  It's happening and it ain't finished!  My guts are good at that. 
My gold investment is melting away $ but I'm not selling. I still believe that when people really realize what's going on, the panic will appear. 
Hold on.
NN
[/quote]
I like the way you are positioned and agree not to sell Gold/Silver. I actually bought a few shares of CEF today. Cash and Gold are good places to be.

19

[quote=Nervous Nelly]Two weeks ago I moved most of my investments in cash…Money Market. 
[/quote]
Just a quick thought. We have our Money Market Funds in "Treasury Only" Money Market Funds. In this day and age of chasing yield, even Money Market managers can go out on the risk curve and invest in risky things. Remember "breaking the buck" during the Lehman crisis?
Yes…I know that Treasuries are not risk free, but it's all relative.
 

20

Jim wrote:


With the Comex bleeding down Gold, COT showing bullion banks getting longer and longer, the GLD bleeding down Gold, and mining becoming less profitable… I can't see the price getting that low before the shelves are bare and the commecial signal failures occur.

I certainly hope he is right.  However, if we look back on oil in 2008, we notice that it dropped from 140 down to 30 during the 2008 crash.  Now $30/barrel was clearly below the marginal price to produce, and yet it stayed down there for months until it finally rebounded. Another example: houses that were selling below their cost of construction after the US housing bubble pop.  It didn't last forever, but the cost of production provided no "short term" floor on the price. Cost of production is not a lower limit on the price of gold.  In the long term, the price of gold should be higher than the cost to produce, or else it won't get produced.  But prices currently engaged in a downtrend can sometimes go down further than the price to produce.