Gold and Silver Smashed: Is the Bottom In?

My recent comments on the smash in gold and silver.

1) gold broke thru major support at $1180, and is stabilizing around $1164.  This is bearish, if you're a short-term trader.  In other words, it could go lower.

2) However, what's positive is the gold mining shares appreciated today, which is bullish for gold, as mining equities--while more volatile, are often leading indicators for the future direction of gold (and silver).

3) silver appears to have bottomed out late last week and is rising today, despite a flat gold price.  This decoupling usually indicates inflection points (in this case, a bottoming).  Perhaps markets are discounting that the economy is recovering (since silver is not only a monetary metal, but also an industrial metal).

4) silver has been beaten up more since the 2011 peak (down 70% from $49), so if it is rebounding, it is bullish for gold also, and its recovery will be more amplified than gold's recovery.  In other words, if a bull market in precious metals resumes, or returns (depending on your time frame), silver will appreciate more and faster (i.e., the gold/silver ratio will narrow).

5) last week's capitulation in silver may indicate exhaustive selling, which means a bottom may have formed.  Having said that, this brutal bear market in silver has experienced many lower lows since the 2011 peak, so catching a falling knife is inherently perilous for short-term traders.

6) for long-term accumulators, these price declines are gifts.  BTFD.

7) we know the precious metals paper markets are manipulated because during these price downdrafts, physical supply dries up.  In normal, functioning markets, price declines are accompanied by a glut of supply.  In this price drop, supply has dried up, as deliveries are pushed out.  This isn't the first time this has happened, but it does indicate the scale of manipulation.  Price discovery mechanisms are completely distorted.  The most money made in any market is when an investor identifies a distortion in price that the market hasn't yet factored in.

It could be an ebola-related stock, a solar company who's fundamentals are flawed (Solyndra), or a company who's about to release a breakthrough product (Apple's Ipod).

8) right now, the fundamentals for gold and silver have never been better.  The cost of extraction keeps rising, to a point where it is no longer profitable to mine gold or silver.  Marginal miners will either shut down or go out of business, further exacerbating future supply shortages.  This occurs with any commodity, whether it's crude oil, DRAM chips, or gold.  Of course, other markets can adapt to supply shortages quicker.  But with energy and mineral resources, re-starting up wells or mining sites takes years.  Supply won't be able to catch up to demand overnight.  This is when moon shots in price will occur.

9) So if you have enough gold and silver (5-10% of net worth), hang on and wait this out.  But if you're still in accumulation mode, these price dips present "golden" opportunities to add to your hoard, and lower your average cost basis.

Happy stacking!

Gold: Last Friday Was Likely The Bottom

http://seekingalpha.com/article/1532442-gold-last-friday-was-likely-the-bottom

Key Chart As Gold, Silver & HUI To Have Massive Advances

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/14_Key_Chart_As_Gold%2C_Silver_%26_HUI_To_Have_Massive_Advances.html

Wait for Gold to Bottom at $1525: Ilczyszyn

Peeking back to March 2012, this guy exactly called the bottoms in gold and silver.  He gets the Nostradamus award for 2012.  And buy the guy a vowel.

Dow Jones / gold ratio revisited

I earlier blogged about the Dow Jones Industrial Average-to-gold price ratio in this entry.

The graph above is basically the same graph charting the ratio, only the number of years in the dominant trends are delineated (click on chart to enlarge). The duration of an increasing ratio--indicating rising equities markets and a positive slope in the chart, is between 20 and 32 years in the last century. The periods when the ratio contracts lasts about 14 years. We are currently in the midst of a contracting DJIA/gold ratio, currently around 9.

If history is any indicator, the ratio will drop to below 2--or to unity before the downtrend reverses itself. Since the last inflection point occurred in 1999 when the ratio peaked at an all-time high of 44, we can expect the ratio to bottom out around 2013. Gold's nominal low of approximately $250/ounce occurred in 1999 and 2001, inferring this current downtrend has legs until 2013 - 2015.

So unless the DJIA plummets to 2000, expect higher gold prices over the next several years.

See sidebar for disclaimers.

Disclosure: long gold and silver mining shares.