Is Gold’s Fall Finished?

 

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  Is Gold’s Fall Finished?

Someone sent an email to me a few months ago asking for my philosophy on investing.  I wanted to use the fewest amount of words in my response, so I simply typed: “News follows price.  Opinion follows price.  Emotion follows price.”

Price is the most important part of investing.  If you own something and the price starts to increase, your opinion, emotion and the news follow that up.  However, if the price goes down, your opinion, emotion and the news go down with the price.

So let’s talk about the price of Gold, specifically because it has been falling.  Although Gold ended higher on Friday, it was down for the week, month, quarter and year. Therefore, the news, opinions and emotions have been following the price downward.

My thought for the week is doused in some humor: “This is a pretty good week if you are wedding planner who specializes in gay weddings, and who also shorted Gold.”

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The Swiss Bank, UBS stated that if quantitative easing (QE) ended, it would basically make Gold obsolete.  Incredibly, the big banks have been wrong for a long time about almost everything, BUT people still listen to them.  It wouldn’t surprise me to find out at the end of the year that UBS is out of gold just like ABN Amro.

From a high-probability point of view, I’m sure that UBS is an insolvent bank, owing much more than they have in assets.  However, they are stating that something that has been around for 5,000-6,000 years is suddenly going to be obsolete.  I love it.  Opinion follows price.

The big question is, where’s the bottom?

All resource stocks (the sector itself), go through a “puke moment”.  Hopefully, we are in that right now and gold is getting cleaned out.  I believe that the bottom for Gold will be about $1,040. Of course, I don’t really know; no one does.  But, with all the volatility and downward momentum, it feels like Gold is not done with its downward move.

Personally, I don’t think that QE (money printing) is ending.  I believe that Bernanke floated the idea that sometime in the future he would like to stop printing money if the economy improves, if unemployment falls, and if prices go up. But that isn’t happening for sometime.

One additional thought for this week: “Central banks need inflation, and the easiest way to do that is to increase the price of Gold.  This will be their last move…but, first it needs to fall.

So, let’s take a look at Gold, Precious Metal Mining stocks and Silver.

Look at the price chart of Gold below, which goes back to the beginning of 2001.  Notice the horizontal line, which reflects the peak of the price of Gold in 2008, and how it could not break above that until the last part of 2009.  That past price resistance makes a very good future price support. And that price?  $1,049.

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Next, notice the upward trending line in the price chart above. That trend line intersects the flat line at…you guessed it, $1,049. The take-away from this is that we could see another 15% downside in Gold.

Take a look at the next price chart of Precious Metal Mining stocks below.  These stocks probably have another 25% more downside after a recovering small rally.  The reasoning…the next major support is 25% away and the momentum is clearly to the downside.  

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Precious Metal Mining stocks could very well drop down to 150.  Resource stocks have a very long history of huge moves to the upside and the downside; so 25% more down is not that much more, considering Gold stocks are resources stocks, too.  Resources stocks have a very long history of insane price drops.

Lastly, look at the chart below for Silver.  I’m just guessing that Silver is going to have a 30% more downside, because honestly, Silver is almost a leveraged play on Gold.  If Gold is going to fall another $190 (15%), the next major support for Silver is at about the $15 mark.

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The price chart below has been shown before.  The red line depicts how many shorts are on the Comex Gold.  The price chart goes back to 2006, and you can see that the amount of hedge funds, individuals and other entities shorting Gold on the Comex, are the highest they have been since 2005.  Until they start closing out of their shorts, we will not see Gold bottom-out. But when they do close out their shorts, they will do it all at once and race towards the exits en masse.

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My research on the average dollar cost, per ounce, to pull Gold out of the ground ranges from $1,100 to $1,300.

The chart below is from Casey Research, and it shows that the industry average is about $1,300.  That seems a little on the high side.  However, if we split the difference from the research that I did, we can say that it takes about $1,200 for a miner to get an ounce of Gold out of the ground. 

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That means that Gold can’t spend that much time below $1,200 per ounce.  Although it can go below that amount, it just can’t stay there for long.  Otherwise, mining companies are going to start shutting down some of their more expensive mines until the price rises.

Clearly, there is a bottom to Gold.  However, it is not zero.  No commodity has ever gone to zero.  When the ridiculously stupid headlines come out from MSNBC, UBS or Goldman Sachs, remember that they all follow the price direction first.  Therefore, as the price falls, their opinion, their news and their forecast follows that momentum.

Historically, June and July are bad months for Gold.  We are hopefully going to finish out this “puke moment” soon.  The last time we had one of these moments was in the ‘70s.  Gold fell 50%, and when it got to the other side, meaning after it puked up all the non-believers, it went up 800% the following five years.

Lastly, the demand for physical Gold continues to go up as the price is going down.  If the secular bull market in Gold was truly over, we wouldn’t see the demand go up.  I’ve never, ever, ever researched any secular bull run of any asset where the demand is going up as the price is falling as it is with Gold.

Think about the tech stocks in 1999 and 2000.  The demand fell as fast as the price fell.  However, that is not happening with Gold.

The red line on the chart below shows how many ounces of physical Gold that the Comex warehouse has on hand.  This means that when people are trading their Gold futures on the Comex, they are taking their Gold delivery. They want gold, and not cash, as their settlement method.

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Look at the chart above. The inventory has fallen from almost 12 million ounces to about 7.5 million ounces.  There will be a point where the Comex will no longer allow liquidation in gold.  There will be cash settlements instead, which will eliminate leveraged positions.

We are definitely moving in the right direction.  We just need to get through this dark, painful period to get there.  Stick with your strategies.  If you followed my approach to be diversified into two, three or four strategies, it will help you survive this correction in Gold.

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The next Monthly Strategy Gathering is on July 9th, where I will be discussing what assets or sectors actually thrive and do well with higher interest rates.  I have identified five sectors that I am excited to share with everyone.

Together, we are growing and protecting your wealth,

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Editor’s Note: My team and I have spent the last decade, and nearly $1 million, designing an overall system to take the human error out of investing…and help you beat the market over the long-term.  It’s simply called The Fearless Wealth System.  Large hedge funds spend millions of dollars for these kinds of results. Click here to learn more about how regular investors are using it to profit right now.

 

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