Why Gold And Silver Prices Are Declining Along With The Dollar

 |  Includes: GLD, SLV, UDN, UUP
by: Doug Eberhardt

Today (Tuesday) we saw gold and silver take a big hit. Normally this would be the result of a stronger dollar, but the dollar also took a big hit today. So what's really going on here? Why are gold and silver prices falling along with the dollar of late?

I wrote the article Thoughts On Gold Price Manipulation the day before the latest Fed meeting where the Fed came out and announced more Quantitative Easing and tying the continuation of future easing to a 6.5% or below a 0 unemployment rate. Gold immediately shot up $11 on the announcement, to just over $1,715 an ounce, and then within the next 24 hours the bottom fell out. As of today, the gold price has slipped to just over $1,660 an ounce, its lowest price since August of this year. This decline in price is occurring despite soaring American Gold Eagle sales at the U.S. Mint for the month of November and a huge inflow of $282 million into ETFs like the largest, SPDR Gold Shares, symbol [[GLD]].

Fed Eases More While Gold and Silver Prices Fall?

So, the Fed eases more, and announces (or says what it said last month about QE infinity in a different way) a tie in with a lower unemployment rate, along with soaring gold sales at the U.S. Mint and Precious Metal ETFs and the price of gold and silver for some reason moved lower. At the same time the stock market has moved higher. It wasn't too long ago when the Fed announced additional QE that both gold and the stock market moved higher.

My advice is still to dollar cost average into your gold/silver allocation and just be patient. It's the tortoise versus the hare approach to investing in precious metals and eventually the tortoise will come out ahead. Naturally, the result of the tortoise winning is the hare (Federal Reserve) losing as we'll see below.

Some will say there is some manipulation occurring as it's the last day before the Commitment of Traders (C.O.T.) report comes out, and that shorts like to play havoc with longs during this time. Technically, this is possible. We have seen the market manipulated many times the last month, early in the morning. Unfortunately for many gold and silver buyers, the prices have fallen during this price action. But gold investors should be holders, not traders.

Some Things Don't Change

As much as there may or may not be manipulation in the gold and silver markets, the national debt keeps going higher and the Fed won't have anyone to buy the trillions of Treasuries they will have to dump at some point. But they do believe they can print forever without consequence. Gold is the insurance against the inevitable. But at least I can call it like I see it and set myself apart from many other gold dealers. While I am confident the price of gold will move higher, I have to see that data before me and make assumptions on what I see.

While all the talk is about the upcoming Fiscal Cliff, it's just a side show. Congress won't make any cuts. It never does. The debt limit will be increased as it has since the Reagan years and Obama's $20 trillion of future debt limit will be taken out during his second term.

The interesting thing to me is people still believe the euro story (I don't) and as such the dollar is falling while the euro rises, but gold and silver prices are falling too.

I waited this long to use the word manipulation in one of my articles and I can say that I am confident it's occurring as all the fundamentals point that gold should be moving higher; the dollar falling and the Fed doing additional QE are part of this reasoning.

Moving forward, what could make matters worse is if the euro did start to fall below 1.20 and test it's all-time lows (see chart below). It is up against resistance as we speak and things just aren't magically getting better in Europe. By default the dollar would move higher and the manipulators may just get their chance to drive gold lower, and of course profit from this. Don't say it can't happen, despite the evidence to the contrary as pointed out above. Smart investors will dollar cost average into a precious metals position and just sit tight. Further dips could come. Market Makers love to move markets they can control. Large banks that trade the precious metals market, like JPMorgan Chase, can wreak havoc on how gold and silver should be acting.

Click to enlarge

European Banks Not Faring as Well as U.S. Banks

I first started pointing out the problems in Europe in an article I wrote in July of 2010; European Bank Stress Test Results Prediction. The results of that stress test were positive overall, but the bank balance sheets told me a different story.

How have banks in Europe done since that 2010 article? Here are some recent headlines from the eurozone;

You don't see these types of headlines about banks in the U.S. And please note, these countries can't individually throw money at their banks as every bit of monetary stimulus has to come from the European Central Bank (ECB). The ECB can't be as covert as the Federal Reserve.

Despite all of these European banking issues still occurring, the euro is actually higher than it was during that first European stress test in 2010. Why? Because the ECB is throwing as much money as it can at the problem. It's the same thing the Fed is doing here in helping their friends the bankers make up for their past sins, allowing U.S. banks to obtain the highest profits in 6 years. Of interest, the Fed did announce it would be drafting tough capital rules for non-U.S. banks...in July of 2015. The Fed is of course hoping by then its investment in the ECB will have paid off just as its investment in Treasuries through Quantitative Easing to infinity. I don't think you'll see Japan and China bailing you out as they have in the past. Those days are over.

And this is the bottom line you need to know...

Yes, the Dollar has issues. Huge issues. But the euro situation I see as a bigger issue at the moment as noted above. The Fed and ECB will throw money at the banks in blatant attempts to fix them. As pointed out above, the banks here in the U.S. have had the best profits in 6 years. But if things were so well here in the U.S., why are banks playing the derivatives game with more sub-investment grade derivatives on their books today than at the height of the 2008 crisis? Who will be the counterparty to these sub-investment grade derivatives when they come due? Some might say the Fed, but their balance sheet is still filled with all their latest QE.

Also, who was the counterparty to JPMorgan's $5 billion loss earlier this year? JPMorgan was its own counterparty as it took the hit on its balance sheet. Additionally, why don't banks mark to market the assets on their books today if things are so great for them? Why does the Federal Accounting Standards Board (FASB) play favor to them and no one else by letting them keep these assets at 2006 prices? Is this "business as usual?" Is this the same standard the courts dictate as to what a "prudent man" would do that investment advisors have to abide by?

A prudent man should be buying gold as insurance against the fact that the lender of last resort, the Fed and the ECB, as well as the Bank of Japan as you'll see soon enough, can't keep playing the game they are playing, waiting on the miracle of an improved economy. They are in too deep and there is no way out but pain for all of us. At least gold, as a store of value and "real" wealth, will protect your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a Precious Metals Dealer selling physical gold and silver.