Is Gold at a Turning Point?

I agree with Olive.  Its a good idea for you to poke your nose inside your money market fund, to see what it currently owns.  In the past, they lent money to banks and corporations - short term 30 day "repos" - which means you are exposed to any bad things that happen to that bank or corporation.The Reserve money market fund (been around since the 1980s) lost money in th 2008 crash and eventually went under because their money market fund lent money to Lehman, and then of course Lehman died.  I think they eventually paid off 97 cents on the dollar, but the money was frozen for a very long time.  Think "months".
Treasury-only short term money funds are safer.  Buying a treasury itself - through Treasury Direct - even safer.  And if you can somehow deposit your money on reserve at the Fed, you get paid 0.25% AND its the safest place possible for US dollar deposits.  But since we aren't member banks, we don't get that privilege, so that option is just a big tease.  But that's why there are so many excess reserves.  Super safe, and 0.25% returns.
Here's what Fidelity says about what's in SPRXX - one of their money market funds.
Morningstar has the top 5 holdings in the section linked to below.  Note: 4 of the 5 top holdings are loans to banks: Sumitomo, Bank of Tokyo-Mitsubishi, National Australia Bank, and Royal Bank of Canada.  My gut feeling says those are higher risk entities than the US Treasury.

It seems like we are close to a bottom in both silver and gold.  If you purchase gold/silver coins; is offering silver eagles at spot silver prices and gold eagles at a discount to other dealers.

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ex Max Keyser.

Gold (and silver) just took another hit today. It is at $1230 as I write this. In April, the price drop brought out lots of physical buyers around the world. The premium charged by dealers increased as demand outstripped supply. There is a slight increase in silver premia, but not like it was in April. Gold premia haven't increased much if any (over last week.)
I'm trying to wrap my head around this and trying to determine a strategy to capitalize a bit on it. So, what is different now?

  1. China has been trying to tighten credit to wound the shadow banking industry. China is the biggest consumer of gold. Without credit, speculators have to use their own money to buy. Those who used up dry powder in April are now underwater in their investment. How willing are they to take advantage of these lower prices when prices could go lower?

  2. Sovereign bonds are dropping. The yields on bonds therefore are increasing. Higher yields attracts new money, but the leverage used (when previously buying overpriced bonds) has to be brought back within margins. That means that something must be sold and gold is a liquid item to sell.

  3. The big investment banks have been steadily lowering forecast prices for PMs as the year progresses. Are they talking their books? Do they really have any way to analyze what the actual value of PMs should be? If it is just the retail investors who listen to it, it would be a minor impact. Does this constant hammering influence the hedge funds who flit fro and to for profit? Is JPM still long or is their long position now a source for shorting?

  4. Bernanke said that with an improving economy, QE may taper this year. Their forecast for growth is extremely optimistic. I can't see that we'll get "growth" approaching their assumptions. The housing market is very dependant on mortgage rates, and rates are increasing in line with bond yields. There are still folks in the market at these low rates who want to lock-in before rates increase further, but that will pass as rates creep higher.

I'm going to watch China's credit markets for a clue as to when the bottom is near. Rising bond yields should signal a deeper problem to the big boyz. At some point, they'll realize the game is changing. Again, their only loyalty is to higher returns. The forecasters are really just projecting trends. They didn't see the last top and likely won't see this bottom. Bernanke may be trying to reduce some froth in the markets so he can smooth it out and appear to be the hero as he exits the chairmanship.

I'd appreciate any thoughts.


Just got off the phone with a PM dealer.  When he purchases gold he protects himself with puts.  He just removed the last of the puts and feels we are near the bottom.  He acknowledges he may be wrong, but feels we are close enough to the bottom that it won't matter.  This is the most concerned I have heard him - is this blood in the streets time?
Grover's thoughts are looking at economic trends - tightening credit, sovereign bonds, and big Ben.  Another angle is cost of production.  I have read it costs about $1200 to produce one ounce of gold.  This means a decent % of mines are running deficits at these levels.   If prices go lower and stay there for any lenght of time, many mines will suspend operations and many juniors will be done. 

My current thought at this time is that in 3 years many on this site will be kicking themselves for not at least starting to purchase PM's at these levels.


So Grover, from my intraday observations of futures PM markets, there simply just aren't many buyers out there.  It used to be that moves down were met with buying, a nice rebound, and (ultimately) decay.  These days, the metal gets pounded, and the rebound (if any) is anemic.  Nobody is buying the bounce.  What's more, when a support level gets cracked, the number of stops hit is a lot less than it was previously.  There just appear to be a whole lot fewer longs in the market - and a whole lot fewer people willing to enter.The open interest doesn't look to be dramatically lower - perhaps 10% - but the feel of the market is different to me.  And here I'm talking about the futures markets, not about the physical market.  It feels to me that a bunch of people have just taken their marbles and gone home.  Perhaps its just summertime.
We can speculate as to why this is [and I will, naturally] but its just a guess.
For the past month or two we appear to be going through a "financial deflationary period" - which means that money borrowed to speculate with is being paid back, and the stuff bought with the borrowed money is being sold.  [We'll be able to verify this a bit better when the NYSE margin data arrives, but it always comes a month late]
We can see at least some evidence of this by the price action in the USD, in the emerging markets currencies, and in longer dated bonds, equities, and many commodities.  So with things moving in reverse in general, with this rapid financial market deflation occurring, traders aren't looking to put on new long positions.  Perhaps their risk managers have said "reduce your position sizes."  The price action feels (in fits and starts) a bit like it did back in 2008 - some days are just sell sell sell.  Perhaps some funds are liquidating too, which wouldn't help.  I've seen signs of that too, in the mining shares here and there.
At some point all that unwinding will stop when "enough" of that dollar borrowing is paid off, but until it does, everything will be caught in the downdraft.  And it appears that gold is being hit particularly hard.  Perhaps more of the long-side gold players are off the field than the shorts, for some reason.
None of this helps to answer the question "when will the beatings end."  Today we might get a pause.  We saw money come back at least a bit into bonds and equities, although the dollar is still rising.  1200-1220 should be a decent support level for gold.  And its possible that this phase of the overall risk off move is done now.  Watch the USD, and bonds for clues as to overall conditions.  However if we imagine that bonds and stocks and things overall will continue to be sold and the dollar will continue to rise, we could go down further from here.  Think: "oil in 2008/2009."  How far below production cost did oil drop before it finally rebounded?  Answer: really, really far.  I hope its not the case, I really do.
I have to say the PM price charts still look horrible, no dip-buying is apparent, and gold today closed at its low, which is never a good sign.  The modest intraday bounce today was treated as an opportunity to sell.  Even though the COT report and sentiment indicators suggest good things are in the offing, the price still hasn't responded at all.  I can't tell you why this is, or when it might change.
I don't pay any attention at all to what pundits or the banks say, except perhaps as a contrary indicator.  If I saw a rash of goldminer downgrades around this level, I'd take that as a very positive sign.  From what I've seen, no bottom happens without a few big bank analysts suggesting you SELL within a few percent of the low.

Nate, Dave,
Thanks for your insights. Always a pleasure to read.

First, Nate, I've heard lots of people saying the bottom is in. Buying puts would hedge against further price declines, but there is a chance that you'd miss the bottom based on the duration of the put. I wholeheartedly agree that 3 years out, we'll be glad we bought at this time! Last week, I was looking for an opportunity to buy around $1300. Now, I'm not sure that I couldn't do better waiting a bit. When do you grab a falling knife? If it gets back to $1300 before I buy, I'm not really out anything.

I don't put much stock into the cost of mining as a basis for a floor. As Dave pointed out with oil in 08/09, the price can drop below the cost of extraction. There is another concern. Unlike oil, gold isn't used up. Mining adds about 2% to the overall stock each year. If all the mining suddenly stopped, we'd still have lots of above ground gold to trade. It is bad for the miners who need higher prices to make a profit, but not for already refined gold.

Dave, I agree that nobody is buying at these prices. It is also telling that gold ended the day at the lows. The after hours trading is meandering lower. Your summertime comment makes sense. I've seen charts showing monthly percentage changes compiled over many years have shown June and August to be typical loser months. Yearly lows are usually found around here. Buying for the Indian wedding season seems to be the impetus for higher prices in the Fall. When prices plummeted in April, Indians may have used up lots of dry powder and can't buy at these lower prices or are waiting (like me) for further reductions.

I'm not sure how to relate bond prices or the dollar index into gold prices. Granted that the dollar index is up sharply since gold hit $1900, but this year, it seems to be meandering and gold is solidly down. Bonds got ridiculously expensive and have corrected slightly, but again, gold is down consistently over these fluctuations. Today, sovereign bonds rose (slightly to +5%) and gold got hammered.

I agree that the banks forecasts are a longer term contrarian indicator. Shorter term, they may influence traders who are just trying to front run everyone else. As such, these forecasts are another piece to the puzzle.

I read a piece on MarketWatch about gold getting hit so hard and read the comment section for fun. Geez, insults were flying against the bulls and wild speculations were rampant. Each poster was trying to outdo the others on what a worthless speculation gold has been and how low it will go. Again, I consider this to be a contrarian indication for gold and a measure of how much of the MSM pablum has been internalized. It can't help but influence those on the fence.

I'll keep watching the price line and premium changes at the on-line dealers. I'm also keeping my eye open on China's borrowing rates. When overnight rates drop back to reasonable levels, that might be the end of the correction. The rear view mirror will tell us for sure.


I have always said that secular bulls end in denial and that bears in derision. In other words, I'm not worried about the gold bull being "over" until a major sell off is widely greeted as a buying opportunity. Now that would give me pause (if I wasn't out already).
To me, the fact that every opportunity is taken to call the gold bull dead is telling me the opposite. Look at the period between 1974 and 1976 when gold pulled back 50%. I think we are in that sort of situation - a mind wrenching shake out whose job it is is to make sure that as many people miss the third and final bull crescendo. (After the 1976 cyclical gold bear, real interest rates quadrupled while gold went up > 700%)

Templeton could teach us all investing in one sentence: buy at the point of maximum pessimism. I think this applies here, we are not talking about some single stock that could conceivably go to zero (a la Enron) - we're talking gold and silver here, the most durable form of money in existance, now trading for below it's average cash cost of mining (

I have been invested in gold and silver since 1999, one of my RRSP accounts is nearly 100% invested in gold and silver mining stocks. At the bottom of the 2008 it was down 60% or 70% and I didn't do anything, except (and I have to admit, this was pure luck) I doubled down on Silver Wheaton right at the lows, which has since proven to be my single best trade ever. I do remember looking at that drawdown and wondering if it was possible I had been completely wrong about gold after all. Maybe I should sell out and preserve what was left? I remember the doubts creeping in toward the bottom. I hung on and that account went on to gain over 450% in the ensuing up leg.

That said, this latest selloff has me experiencing doubt. This is not the first time I've started to wonder if maybe I'm wrong about gold, the people I've been following and reading, maybe they're all wrong. Maybe we're all wrong and the top has been and gone…

In the past, when this has happened, I've basically held the course because I realize that when even I am experiencing doubt, apprehension and fear, we are sitting in the trough of maximum pessimism. At which point I suck it up and buy some more.

I remember that after the last high I had an inkling that before the next leg there would be a pullback so brutal, so vicious it would be "common knowledge" that the bull is over.

My take on this is is that we're closer to the end of this cyclical gold bear within a secular gold bull, similar to 1974 - 1976.

The legendary value investors say that it's always really hard to buy at these moments but it's buying at times like this when fortunes are made.

It's pretty damn scary though. It's weird to be simultaneously salivating and crapping my pants.






1)  Be a bullion bank and an authorized participant in GLD   SPDR Exchange Traded Funds (ETFs) | SSGA
2)  Dump paper shares to create a waterfall decline… buy back your shorts, and then some, after the decline starts.

3)  Buy up GLD shares that are being dumped in the market as the price drops

4)  Convert GLD shares to physical, as only an AP can do…  NICE!

  The GLD  reported another massive loss in inventory of 16.23 tonnes of gold inventory.

And from Jesse today;

While this most likely had its impetus in the official, in practical implementation it smells like Wall Street asset stripping to me.
That is another term for a stealth confiscation through price manipulation.

But maybe you thought bankers were nice people!  Think again;

eff Olson, a 40-year-old man from San Diego, Calif., will face jail time for charges stemming from anti-big bank messages he scrawled in water-soluble chalk outside Bank of America branches last year.

The San Diego Reader reported Tuesday that a judge had decided to prohibit Olson’s attorney from “mentioning the First Amendment, free speech, free expression, public forum, expressive conduct, or political speech during the trial.”

With that ruling, Olson must now stand trial on 13 counts of vandalism, charges that together carry a potential 13-year jail sentence and fines of up to $13,000.

During one protest outside of a Bank of America branch, they drew the ire of Darell Freeman, vice president of Bank of America’s Global Corporate Security, who accused them of running a business with their demonstration.

The Reader reports that Freeman aggressively pressured city attorneys to bring charges against Olson until they announced that they would do so in April.



Grover -I was talking about watching bond prices and currency moves as an indication of the general state of what we might call a financial deflation storm.  We had one of those a while back when the ECB decided to tell its member banks they had to reduce their leverage - and for a month or two, stuff just got sold.  The deflation storm itself happens  in segments (waves?).  Let's pick May 1 as its starting point.  Today for instance the current wave appears to have passed, we have a bounce in SPX, maybe we'll get one in bonds too, and then - will a new wave strike, or will the deflation storm have passed?
Prices which have tended to move in tandem this wave (use to view symbols):

  • China stocks ($SSI, FXI)
  • US Long bond (TLT, $USB)
  • Australian Dollar ($XAD)
  • Canadian Dollar ($CAD)
  • Indian Rupee (ICN)
  • Thai SET index ($SETI), Thai baht (no symbol, sorry)
  • Brazilian Real (BZF), Brazil Equities - with lag (EWZ)
  • $GOLD, $SILVER, $PLAT - in fact, $CCI
    Its kind of neat to spot the patterns.  Visualize what must have to happen to have all these things happening at the same time.  What gets bought, what gets sold, where the money goes, etc.
    Its not so much viewing things on a one-for-one daily basis, this is just looking for money flows overall.  In this storm, money has flowed out of the emerging markets, AUD, CAD, bonds, and commodities.  When that flow stops, likely prices will rebound.  Some things rebound faster, others respond with a lag.  "That's just how things work."
    How far will the rebound in PM will go once the deflationary storm passes?  I don't think we get new highs unless we get some new even more exciting reflationary policy along with it, or one of our favorite golden black swans hit.
I needed a bit of cheering and support. 

I just know that I didn't like the fact that Ben just said that he  MAY  slow QE and the whole market turned. Just words but can he really slow down ?

Markjr I feel like you too. Doubt , fear and a few skid marks. I can't sell now! Kitco' s opening page is about them ready to buy your gold.

Thx to all who contribute good insight on what they think is going on. 


I bought some more today (been nibbling all week, actually)Except physical silver, I tried to get another 100oz from my bullion dealer this week but he's been cleaned right out.

Impressive analysis, good job Adam. Since Monday, July 1st, gold has entered a rally and is climbing up fast to recover earlier losses. No one knows whether this fresh really will culminate into a bull rally or fade out into another price plunge…… None the less, it’s been a great gold buying opportunity for investments and jewelry purchase.