I’m Calling a Top On Gold and Silver Trades

Gold reached a high today of $1314.10 and is presently has an ask price of $1310.40. The HUI is at 512.56, down $1.00. Below is the data as of the writing of this article.

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Everyone who is a gold bug is screaming “Gold on FIRE!” like a recent email I received from Weiss Research, Inc. Or if you follow Lew Rockwell’s site, you see almost every other week an article promoting Jim Rogers views on gold and stocks, or that of Peter Schiff, both investment advisors and managers of funds.

Rogers and Schiff have been right on gold for the last decade, but they were also wrong about commodities and precious mining stocks in 2008 and it cost new investors plenty during the crash of 2008 (note: they were not wrong about physical gold as gold ended the year up).

While there may be some caution thrown out by these advisors today about investing in precious metal stocks, after having learned their lessons in 2008, in practice, I don’t believe that is what Schiff and Rogers are doing with their clients money. It goes against all rational advisor thinking to take profit because of the typical buy and hold mentality, something I do not agree with unless it is physical gold and silver.

Any advisor who takes to the airwaves or in print, always has to cover what they say with an out. That way they can point to what they said when, claiming they did mention the fact things “could” change.

Jim Rogers and Peter Schiff have even been put against each other in an article posted on Rockwell’s site; Gold and Silver: Jim Rogers Wins Over Peter Schiff. This surprised me at the time. I wrote a rebuttal to the article explaining to the author, Dr. Jeffrey Lewis, that they in fact both agree on gold as insurance; Gold and Silver: Jim Rogers Does NOT Win Over Peter Schiff (Dr. Lewis never did post my reply).

In fact, Rogers earlier this year said to be “long on commodities, short on stocks.” Of course he is the author of the book, “Hot Commodities” where he outlines the length of bull markets as being as long as 15 or so years and is always going to be long commodities. But the stock market was 10,172 on June 10th and today it is north of 10,850, 6.2% higher in just 3 1/2 months. I myself haven’t been perfect on calling the stock market, but I do know when stocks are of value and when they are not. I can also analyze a balance sheet.

Don’t get me wrong. I like the long term outlooks of Schiff and Rogers, and I am negative on the stock market long term because of the high P/E ratios compared to historical range of value (single digits), and the same with the lack of dividends, averaging under 2% today, when historically they have averaged 6%. Short term anything can happen and will. Right now I am somewhat bullish on the stock market, which goes against the grain of my own analysis. From a trading perspective, price action trumps everything else, including good valuation analysis.

I am not a gold bull 100% of the time except for ownership of physical. The same with silver.

You see, I don’t recommend any other form of ownership besides physical gold and silver. It is the investing in the other forms of gold and silver that gets you burned. If one takes profit, how can they get burned? They can always get back in the trade right? Don’t get emotionally attached and take profits!

And because I don’t agree with lord Schiff or lord Rogers, or even lord Gary North on his inflation scenario at present (because the net effect of the deflationary contraction is dwarfing any stimulus), I will never have an article posted on LewRockwell.com, despite the fact that in my book, Buy Gold and Silver Safely, I have 100 footnotes to Chapter 4 all from the Austrian school of thought pointing to a deflationary credit contraction….along side an inflation of the monetary supply.The title to that chapter is; “Credit Expansion->Inflation->Bubble Bursts->
Recession->Government Intervention->Unemployment->Credit Contraction and Deflation->Banking Crisis->Hyperinflation->Depression”

Add to this the fact I have outlined how physical gold is actually good to own during deflationary times in What Does the Price of Gold Do In Deflation?,  something I have not seen discussed anywhere else.

Enough of my rant. I’ll just let my words stand up to the test of time, and live or die by the sword of my own writing. That’s all I can do. You have to have a little bit of an ego in this business, and when it comes to gold, I can at least say I have done my research and I don’t follow the crowd.

Looking at Historic Examples of Why Investors in Derivatives of Gold (Mining Shares, Leverage, etc.) Need To Be Cautious

When looking at what trouble an investor can get into when investing in gold and silver, and not thinking there will be a pullback in price, look no further than Monex.

Monex has a Better Business Bureau rating of “F.” Why? How could a company selling gold and silver the last 10 years have an F rating? It’s because in 2009, the gold and silver market fell for a bit and investors who bought gold and silver on leverage, received margin calls.

Excerpt from my book; “Buy Gold and Silver Safely;”

Leveraging means an investor will take a sum of money, say $10,000 and be able to buy up to five times that amount, or $50,000 worth of gold, by borrowing $40,000. They would then pay interest on that $40,000 they have borrowed.

If gold fell by 10%, they would actually be down 10% of $50,000, or $5,000. The original $10,000 investment has become $5,000, and a further decline in the price of gold could trigger a margin call.

When investors lose money this way, they aren’t happy.

Another example of the risk with paper gold was seen during the fall of the precious metal mining stocks in 2008, especially the junior stocks, which fell by 80%.

When investors don’t understand what is going on in the gold market, they complain when they lose.

If you want to hear a lot of complaints from investors in gold, just wait till they sell their gold Swiss Francs, French Roosters and British Sovereigns they bought from some unscrupulous gold dealers and realize if they would have just bought gold bullion to begin with, they would be 100% or more ahead in their investments depending on when they bought the coins. But that’s a story for a future article.

I Write This Article for Three Reasons

One, is to explain my current thoughts on the gold market, and two, to recommend taking some profit in the paper stocks and ETFs invested in gold and silver mining shares. And lastly, to wait for the pullback and buy physical gold and silver, setting yourself up for the third and final stage-what I call “the investment of a lifetime.”

Yes, one can get back into gold and silver mining shares at that time “for a trade,” but don’t consider that to be the core position you should have. At some point you will have to trade in that profit you’ve made on precious metal stocks for something else of tangible value. What will you be able to buy with your ever decreasing dollars? More paper assets? These are the decisions you will eventually have to make.

Physical gold and silver are a necessity for at least 10% of your portfolio and they need to be acquired before the trouble starts. That’s not asking for much, and remember my mantra; a holder of physical gold and silver cares not that it falls 20% on its way to 100% or higher returns. As far a paper gold investments, as outlined above, I am a big fan of taking profit, especially when there is evidence of a top forming.

Why I Am Cautious With Gold and Silver at Present

The average gain of all 7 HUI uplegs in this bull before the 2008 high was +94%. This current run up from the low in the HUI of September 9th, 2008, to today, is 97.3%. In other words, from a precious metal stock investing perspective, the move up in the HUI, is right at its historical bull move norm. But when the norm is broken, the average, as noted by Adam Hamilton in the link above, is 136%.

So the question on everyone’s mind is, will be break out from here, and march towards the 136% mark, or will we fall back before we take flight?

Looking at other data might give us some insight.

What Does the Data Say?

1. HUI has not broken out

2. Double top in the HUI (some would say a triple top)

HUI Chart 2006-2010

3. ProShares UltraShort 20+ Year Treasury (TBT) is in uncharted territory. What this shows is that people still have faith in treasuries. In fact, what we are seeing is the perceived safety in treasuries as the deflationary credit contraction continues.

4. 10 Year Treasury back below 2.5%

5. Stock market trending higher, now over 10,800

6. No, I am not going to include here the National Bureau of Economic Research (NBER) statement that the recession has ended as it is just a bunch of baloney.

7. But I will include the fact that Republicans are possibly set to take control of the House and Senate again in November, and this could spark interest in the stock market rather than gold for some. Remember, professional traders want what’s hot and while gold has been hot, the stock market could be poised for a move despite the fact valuations aren’t there.

8. Some of the Elliott Wave folks are calling for gold and silver to fall. The following charts are from Ron Rosen from the Rosen Market Timing Letter where he points out that AEM, CDE, FCX, ABX, HMY, KGC, for gold, and PAAS and SSRI for silver, have not broken to new highs.

On the flip side, we have;

1. Consumer confidence slipping

2. U.S. Dollar Index is presently in a downtrend, but short term trend is still up, and we are still within the historical 80 range of where the dollar index has bounced. The bottom for the Dollar Index occurred in March of 2008, about the same time as the high in the HUI Index. Remember, the Dollar Index is just a sign of how the dollar is doing against other weak currencies, not an indication of wealth.

3. Fed threatening to implement quantitative easing (more than they have). This had been going on all the while the dollar index was rising to the tune of trillions, but had no effect in stimulating the economy or depreciating the dollar for the short term (versus other currencies). Europe had their own issues that trumped any Fed stimulus. The problem with Bernanke is revealed in his 2002 speech where he believes what he says can actually move markets, rather than actually doing what he says. The short term trend in the dollar index is still up and don’t be fooled by Bernanke’s words.

4. The banking system is still a mess. I will be addressing this further in a forthcoming article, utilizing some of the research I did for my book,  but have already addressed some of it in two articles here (there is reason enough to be invested in physical gold alone just from an analysis of the banking system);

Aug. 17, 2009 The Banking Crisis is Far From Over

Feb. 10, 2010 The Banking Crisis Is Far From Over Revisited – FDIC Troubles and Bank Shenanigans

July 21, 2010 European Bank Stress Test Results Prediction UPDATED: Results Are In

Conclusions

So while there still could be a push higher with the price of gold and silver to trap any shorts, the data right now tells me to be cautious and possibly take profit on trades. Market makers aren’t stupid and read the same data and charts as everyone else. One has to account for this in their trading.

I have to rationalize my own internal bias towards gold and silver and just call things as I see them.

Putting capital in precious metal stocks or leveraging gold and silver are trades, not investments. The only real investment one needs to make is in physical gold and silver. You buy it for that allocation to your portfolio and you forget about it while keeping tabs on political and economic happenings. This is what I call peace of mind.

Price is secondary in this scenario. Remember my motto above. There is no doubt we’re moving higher from a long term perspective. What the trader in gold has to decide is if they are the tortoise or the hare; the Gordon Gecko or the Richest Man in Babylon.