Will the Price of Gold and Silver Keep Falling?

The price of gold and silver are down again today, with the dollar moving higher and precious metals investors are wondering how this can be with a Federal Reserve implementing Quantitative Easing to infinity and a Congress that allows the debt ceiling to keep moving higher and higher.

If you had a choice between reducing your spending to live within your means or acquiring additional funds and keep the lifestyle you have grown accustomed to (or is is addicted to?), then you might be tempted to take on the extra debt load and the extra interest expense. This would of course be contingent upon an entity willing to loan you the additional funds. That’s exactly what our Congress and Federal Reserve are doing.

Congress need only ask for more and the Fed is a willing participant in giving the spending addict more funds to “keep the lifestyle” they want for U.S. Americans. Many Americans then get to continue receiving the benefits that government gives, whether it be record food stamps, prescription drug benefits, Obamacare and continued Social Security payments. This leads us to ask, is the “have-not” society a thing of the past? Are the “good old days” here to stay? Are the Federal Reserve and Ben Bernanke really our heroes along with Obama? In a democracy where the have-nots can vote in those who steal from the haves via taxation, the good old days are here. All is indeed well in a Keynesian economy, or so they would have you think.

Stock Market Euphoria 

Even the stock market has seen a nice rise in value since the financial crisis of 2008 is just a short blip in the move to a record for the DOW.

30 Year Mortgage Rates Still at Historic Lows Resulting in Spiking Real Estate Prices

U.S. home prices rose 8.3% in December over the year prior.

U.S. Dollar Index Consolidating But Trend On the Rise

Trend higher since May of 2011.

The Euro and Yen Are Heading Lower Which Is Dollar Bullish

The Euro makes up 57.6% of the U.S. Dollar Index and the Yen an additional 13.6% where both represent 71.2% of the U.S. Dollar. We have already seen the Dollar appreciate greatly against the Yen of late (see chart below) and if I am right about the problems in Europe, the Dollar would be the natural beneficiary of any potential Euro weakness.

What Does All This Mean for the Price of Gold and Silver?

For over the past year I have been telling clients to dollar cost average into a position in gold and silver. Many have done this by buying physical gold or silver for delivery or by buying proxies to gold and silver ownership through ETFs’ like GLD or SLV. In fact, gold has fallen 4.57% the last year over year and silver has fallen 8.46%.

I have been telling my clients that this is the tortoise vs. the hare approach one should take for investing in precious metals and the expectation of what is to come. I have said the Fed is still relevant and perception is important. People perceive Federal Reserve Notes to have purchasing power and buy them things and people perceive gold and silver can do the same thing. Of these, gold has maintained its purchasing power better than Federal Reserve Notes the last 12 years running with silver close behind. But those who are thinking about buying gold and silver today want to know if this trend will continue.

Many reading this article might think I am biased one way or another as I do sell physical gold and silver for a living. But anyone who has ever read my articles knows I recommend one thing and that is to dollar cost average into a position of physical metals and take price out of the equation. In fact, I tell many of them to “hope” prices go lower so you can buy more at an overall lower price. I am not like most other Gold Dealers in that I am dollar bullish. Not too many Gold Dealers I am aware of write articles about being dollar bullish. I try and call it like I see it and have done so in my replies to articles consistently on SeekingAlpha.com to the various negative articles written about gold.

Short Term vs. Long Term Thoughts on Gold and Silver

Short Term

With all I have written above about the U.S. dollar, the Euro, the stock market, mortgage rates and real estate, it does paint a short term picture of potential problems for gold and silver. The Fed has succeeded in throwing enough money at the economy, along with government programs meant to stimulate, that we have seen a sense of euphoria beginning to return. This can’t be discounted just because our national debt keeps moving higher and each taxpayer has to pay more in the years ahead. Short term sentiment can sometimes outwit, outlast, outplay the longer term issues, but how long can it do this is the question? Eventually the long term issues resurface. Eventually, debt and deficits do matter.

Long Term

Using our example above, I said you might be willing to take on additional debt if you had an entity to lend you more money to spend, allowing you to live it up a bit longer. Who doesn’t like spending and having a good time? But eventually that extra spending has a consequence. Keynesian’s can never see the potential of these consequences, because they believe all a government via the Fed has to do is stimulate more. In their view, the system isn’t broke, so why fix it?

But we are seeing the consequences of the effects of stimulating more play out live before our very eyes in Japan.  Japan’s Debt to GDP ratio has been going up for quite awhile now. They could not fight deflation even by lowering rates to zero. Japan had something to get them by during this time-frame though; they were a net exporter. They also owned, and still do, billions of U.S. Treasuries. They have managed to muddle through.

But is it game over for Japan? Despite all of the government stimulus, which is only prolonging the inevitable, Japan’s  economy unexpectedly fell last quarter with falling exports and a business investment slump. Throw in an aging population straining social security, and we have a recipe for disaster.

Over the last 6 months, gold, priced in the Yen has appreciated 19.51% as seen in the chart below.

Keynesian’s should know that stimulus can keep the game longer than one might expect, but at some point there will an end game. As mentioned above, Japan had something going for them the last couple of decades that the U.S. has not. They owned most their debt, were a net exporter, and even owned some of our debt. They had been considered a good risk by investors. But that’s all changing. Some ratings agencies already have a negative outlook for Japan, and without future growth, this outlook will only get worse.

By comparison, Moody’s gives the United States a rating of Aaa, it’s highest rating, with an outlook of “Negative.” Fitch gives the United States a rating of AAA, it’s highest rating, with an outlook of “Stable.” S&P gives the United States a rating of AA+, it’s second highest rating, with an outlook of “Negative.” Perhaps an additional increase of 100% of Debt to GDP should get the U.S. to where Japan is. Maybe the Fed knows this and doesn’t care about any short term easing consequences.

Utopia vs. Fedtopia

What prosperity would we have in the world if Governments didn’t borrow to the extremes they do or even lived within their means? Don’t we have to with our own personal finances or suffer consequences? Wouldn’t it be nice to pay less in taxes? Wouldn’t it be nice to maintain purchasing power? It’s not all about helping the “have-nots” as some on the left would have you believe. Their spending on the military is just as ridiculous as the right. Those on the right kept the debt parade going their entire tenure and control and are still doing so today in the House they control.

No, Japan will be leading the way as to the consequences of government spending, followed by Europe and eventually the United States. Governments will always do what they do best, especially when they have a complicit Central Bank to loan them money. But today’s Central Banks can’t be compared to their predecessors who used to hold good assets on their books. They are increasingly taking on assets that no one will want in the future. The 2008 financial crisis changed everything.

The fact that Central Banks like the Federal Reserve, through a complicit Congress, can even get taxpayers to help them through programs like TARP, just shows you how far they will go in fixing the problems they and Congress created in the first place. One cannot see the potential of any damage down the road with today’s blinders on just as Congress and the Fed couldn’t see the 2008 Financial Crisis coming. One won’t like the results when this new crisis finally hits the United States. Look no further than to Japan and Europe for what’s to come. How quickly will things get out of control this time?

While sentiment can keep prices of gold and silver at bay for the short term here in the U.S., other countries economic weaknesses are already showing up. Iceland had better economic data than the U.S. before their banking crisis caused the Krona and the stock market to fall 75% in one year. All it takes is one of these big banks to expose the fact they don’t have a counterparty to their billion dollar bets. Sentiment can change on a dime. Perceptions can be altered and panic can set in. 2008 was a prelude of what’s to come and the crisis has been prolonged for now with some magic beans offered by the Fed. In a currency race to the bottom that Japan is presently winning, what steps will the Fed and U.S. government take to make the U.S. dollar weaker when all of Japan and Europe want it? Are they still going to be yelling at China or does Japan have special privileges?  This is what I see developing over the course of this year.

Market Makers and the Price of Gold and Silver

I fully expect over the next few months the Market Makers to test and break the 200 day moving averages lower on both gold and silver. I have written about expecting it and have seen it 100 times on various other assets/stocks. When you have an asset like gold or silver that big money can easy manipulate as J.P. Morgan and others who are increasingly playing the precious metals derivatives market have done (not talking about the alleged J.P. Morgan short here), then why not try and shake the late comers to gold and silver out? Why not make them scream UNCLE? That’s what they do!

When we do get such action, it should happen and be over with quickly. What to look for is the candle stick tail down on the charts. Kind of the opposite of the silver chart below when it hit close to $50 in April of 2011.

 

The game between those who believe in printing more Federal Reserve Notes and the quantity versus quality of money and those who believe in honest money like gold and silver is far from over. It’s not about winning short term battles or “end of world” scenarios because believers in gold and what it represents don’t want the sky to fall. They are clearly critical of government and Fed action to try and right what they perceive as a sinking ship economy. They can clearly see the storm approaching and cannot be blamed for preparing for it by jumping in gold and silver lifeboats. Unlike most financial advisors, Congress and the Fed who weren’t prepared before for the 2008 storm that came along and shocked many, believers in gold and silver were well prepared and will be once again. Once the short term pullback is behind us, and assuming the Fed and Congress continue to do what they always do best (see debt clock above for clues), we’ll be off to the races and won’t look back because this time, it really will be different.