Addressing the Precious Metals (GLD)

Thank you, one and all, for your overwhelming support and interest in what we do – and, as always, for your always intelligent feedback. Without it, we’d be up a tree without a paddle.

Lately, you’ve taken to writing about gold and our ability to appreciate what it is and how to use it. And that’s great. We’ve been dead right on the precious metals bear market for coming on four years, but we’re not above a little jab under the ribs with a stiletto.

So let’s address it.

First, we got a letter from good reader Kevin, whose travails with the metal bring him to ask –

My question to you guys – When the heck does the Gold price pop for real. I am a firm believer in the worthlessness of the Fed’s and other global central bank’s QE programs. … But, what will be the trigger for [a rise] to occur & when? Is it even possible to predict? Will Gold ever soar again?

And we say – dear Kevin, it is absolutely possible to predict, though not in the way most imagine.

Some folks say “This year will be gold’s year” or “the conditions are ripe going into Indian buying season to turn gold around”, or other such tripe.

But this is not like putting a 20 on Notre Dame football, friends, and that’s not the way gold works.

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That’s right. A moving target.

So long as the price of gold continues to fall and there is no corresponding surge in volume – no ‘capitulatory moment’ on the part of those who have invested in gold – the metal will continue to fall.

We stress ‘investors’ here, because they are cohort that moves the gold market… in both directions.

There will be no bottom and no subsequent rise in gold until investors decide, en masse, that it’s again worth purchasing.

And we’re nowhere near that at present.

We will of course, be monitoring investor flows and keep you apprised of any turn in the making.

Onward, HO!

We got another letter from our good friend ‘HMM’, who apprises us that,

You are missing the point… — which is not unusual. Gold is a “hedge” against sovereign default, — whether in the nation’s currency or its bonds, or both. Nothing more; nothing less.

And we respond – yes… and no.

Here is where we’re all required to be brutally honest with ourselves, because everything’s lost when we start rationalizing away our losses.

What do you mean?

Precisely this – if you bought your gold for the express purpose of putting it away as insurance against a sovereign debt default, bully for you.

But the flat-broke, honest, bottom-line for most gold buyers is that they bought the metal because it was rising in price and they got lost in the hype.

When it turned lower, the smartest of us sold off and took whatever profits they could. Those who stuck with the trade, enduring along the way some painful losses, did one of two things – they either admitted their mistake, like our good reader Kevin, above. Or they turned their losses into a virtue, claiming it was never really a loss. It was just ‘insurance’, and they continued on their merry way, poorer, but self-satisfied in their new-found justification and anonymity.

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We mean no disrespect.  But that’s just what we see.

As for HMM’s point regarding whether Russians are better off for having bought Gold five years ago, we never addressed the issue. We simply called out the lie that gold spiked in Ukrainian Hryvnia terms because Ukrainians were purchasing the metal.

It didn’t, and they weren’t. We hold by our claim.

Now What?

As for gold’s near-term prospects, pour yourself another tall high-ball of the single malt…

The dollar is about to take off on another flight higher, and both gold and silver’s technicals appear bleak.

Here’s the buck –

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As of two trading sessions ago, the dollar is now back on an upward trajectory. It took six weeks of sideways action to work off an overbought RSI read (red circle), but that’s now behind us. The break to new highs signals great things for dollar lovers – and a whole lot less for goldphiles.

Now, lets look at the charts for gold (NYSE:GLD), silver (NYSE:SLV) and the miners (NYSE:GDX), highlighting just the moving averages (or MAs) for the three.

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It looks dismal.

In each case, price action is below all the major MAs, all of which are trending lower, and a steeply arching short-term MA is about to completely unfurl and lock down both GLD and GDX. SLV’s MAs are already unfurled.

In other words, ‘Fed insurance’ is about to get a lot cheaper.

Many happy returns,

Matt McAbby, Normandy Research

See what people are saying...

  1. Benjy

    As oil and the euro continue to decline, so goes gold. Of course the inverse is true for the dollar. I would rather bet on the Islanders!

  2. Edouard D'Orange

    I would like to know what the MACD, RSI and your analysis is saying about oil and housing? What about these economists crying about deflation?

  3. A

    I think the writer is spot-on here.

    There are those among us who appear to think “precious metals” ESPECIALLY GOLD are the answer to all economic and even some other problems:

    Don’t trust the FED? —- “Buy gold.”
    Inflation on the horizon? —– “Buy gold.”
    How about deflation? —— “Buy gold.”
    There’s trouble in Greece. ——– “Buy gold.”
    “Islamisists” are foaming at the mouth. “Buy gold.”
    The Chinese economy is strengthening “Buy gold.”
    There’s a Democrat in office. ———- “Buy gold.”
    There’s a REPUBLICAN in office. —- “Buy gold.”
    Your wife pays little attention to you these days. “Buy gold.”

  4. george

    got it on gold. lets do oil?

  5. Brad Hall

    Hey Matt, really enjoy us “stuff”. I’m think all the central bank, especially our Fed’s continually actions, will likely, but who knows when, result in some kind of collapse. So yes I consider an investment in gold as insurance kinda like property insurance on my house. In that regard, 1) I don’t get upset if my house doesn’t burn down, and 2) I don’t bet the farm on my house burning down. So my gold insurance represents less than 5% of my net worth and if it gets to more than 8%, I adjust it.

  6. Darrell

    Hello All,
    I totally agree with Matt, and to expand, I believe gold price will drop to $1000.00 U.S. per oz. When that happens, some precious metal mine producers will cut back or shut down operation, then less gold to acquire.
    I also believe, U.S. dollar is very strong and needs to weaken before gold price drops.
    Best regards,
    Darrell

  7. RJ

    Great gold story, how would you play it?

  8. bob

    I wish i knew what you guys know i just keep buying stocks some Israeli bonds us treasury
    tips a little cash mres and booze i hope i am prepared for whatever comes our way even hillary!

  9. Jim Rodgers

    Matt, As usual another absolutely wonderful & insightful piece of analysis-ship. I had my Bermuda shorts on ready to dive in and that’s when it happened – “You Quit!”. What’s the reco? Long Puts?
    Seeking the thrill of the hunt if I only had a target!
    Thanks,
    Jim

  10. aaron snyder

    I ‘ve enjoyed reading yr analyses which have, so far, made good sense. Thank you.

    PS. Please do NOT post my banal comment.

  11. Bob

    my compliments on your spot on anaysis regarding GLD over the past couple of years, a remarkable accomplishment really. I only wish I had more faith earlier on as I unfortunately seem to be among the category of longs who just can’t let go. Your advice thought has allowed me to soften the blow a bit as I continue to sell calls and buy puts on my long poition –so thank you for that.

  12. Fabian

    You’re right on gold. For this cycle it’s over. Much lower I don’t know but the next few months are going to be bad.

  13. Steve

    Sir,

    Your are spot on regarding “insurance.” I bought TZA and FAZ a big, big loss ago, and have always seen it as “insurance.” Selling is much harder than buying. At least they’ve been up lately. I’ve even thought of adding to my positions! Don’t think I will.

    Steve

  14. Bob

    As a strong US$ has the same effect as a monetary tightening you can count on the Fed Reserve to at least talk down the dollar and possibly to curb its ascent by disappointing the financial markets and not raising interest rates. There is a price to be paid for everything and that includes all this damn full QE BS.

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