As Elliot Wave practitioner and silver trader Avi Gilburt points out in a recent Seeking Alpha article, gold (GLD) and silver (SLV) investors are an emotional bunch. Upon first learning about the history of the Federal Reserve, the end of the gold standard, positions held by major banks in PM markets and historical purchasing power of monetary metals, I too was bitten by the bug and bought all the physical silver I could.
Despite a long history as stores of value, gold and silver are not what they once were. You can't go to the grocery store and buy a gallon of milk with a silver dime or fill your car up with gasoline in exchange for a silver dollar. You can't buy a car from a dealership with a 10 ounce gold bar. Today gold and silver are not money. They are assets and commodities.
While policymakers have enacted fiscal and monetary measures to combat a global recession that most agree began with the Y2K tech bubble, cash has gotten harder and harder to come by in substantial quantities for most citizens of developed economies. Cash may be losing purchasing power, but as long as it is the only form of legal tender and real wages continue to decline it will only see greater and greater demand.
Investors must always remember that they are a minority. Most people live paycheck to paycheck, have greater debt than assets and ultimately live beyond their means. They don't think about "tomorrow."
As I have said all along we are going over the fiscal cliff. While investors have been preparing (to varying degrees and in a variety of ways, as always), average Joes have not. Unfortunately for the Joes, "tomorrow" is finally here after a lifetime of leveraging "today."
Senate Majority Leader Reid confirmed earlier today that we are en route to a cliff dive. As the last two trading sessions - both starting green and ending red - have shown, U.S. stocks will take a beating as consumers deleverage rapidly, even if only for a brief period. January 2013 near the money puts on technology (QQQ) and retail (XRT) ETFs are bets I consider very low risk and very high reward, as explained recently.
Many analysts argue tax increases, budget cuts and the like sending the United States into a sharp recession are good for gold and silver, and bad for the U.S. Dollar (UUP). Today's market action would indicate they are half right (more likely they're totally wrong), with the USD and PMs soaring together on Reid's announcement.
While eventual systematic breakdown, inflationary policies or other dollar confidence killers may threaten reserve status down the line, King Dollar is still king for now. Silver in particular is largely in weak hands that will soon be in need of mortgage and meal money. Today's PM rallies should be faded by traders and ignored by long-term investors, as much lower gold and silver prices are imminent. Gold and silver also rallied briefly on QE3 and recent unemployment rate targeting announcements by the Fed, and neither rally held up. Gold and silver bullish sentiment may be at an all time high, meanwhile price action has been steadily negative. When sentiment drops off, gold and silver prices will join the U.S. economy and stock market at the bottom of the cliff.
That's not to say PMs won't climb right back to new highs, but first things first....
Disclosure: I am long UUP.