Gold And Sentiment, Silver's Utility, Liquidity And Debt

by: Emmet Kodesh

Someone recently dismissed buying gold as a fruitless matter of sentiment. This kind of "hard-bitten" practicality, familiar from Warren Buffett in recent years, is a gram of sense wrapped in ignorance. The Chinese generally are not sentimental people; those who operate the government of China have even less sentimentality. Yet the Chinese Central Bank has been buying 40 - 70 tons of gold monthly for the past two years, perhaps more. It is unlikely that they are ditching and hedging their "junk bond" Treasuries out of sentiment.

It also is not sentiment that leads them to conceal their official, for-the-record holdings of gold since 2009. They certainly have a stake in seeing the price of gold lag the markets to ease their continuing and increasing accumulation (about 66 tons/month in 4th quarter 2012).

Other nations buying gold in the past year and more include Brazil, Paraguay, Iraq, Venezuela, Turkey, South Korea, the Philippines and Mexico. Those who run Central Banks are many things but in their public function they are driven by power and gain, not sentiment. Radical devaluation of major currencies (the G8 and G20 are meeting to decide how to massage their race to the bottom) and central Bank suppression of interest rates in Europe and America has created a massive debt bubble and flight of institutional assets into markets whose out-performance is increasingly remote from structural and surface economic maladies. So bankers, strong hands and ordinary folks buy gold.

Far from being a matter of "sentiment" or eccentricity, buying gold during the past decade, especially the past five years of devaluation, debt and distortion is simply doing what the big boys do; it is a common sense hedge. That said, I remain unconvinced that ordinary investors ultimately will be able to profit, relative to dollar-denominated assets by holding gold at anything like the level of official investors. That does not mean do not buy, it simply means don't expect fair valuations and don't overweight.

The LIBOR scandal briefly surfaced after years of manipulation that affected nearly all the money in the world from student loans, mortgages and pension funds to municipal and state bonds, but its "settlement" makes plain that the biggest manipulators of the system, those who run and are the system, will continue to do so because the penalties are tiny compared to the gains. Moreover, underlings take the fall while the big fish get massive severance deals or continue to manage the game. The fines paid by Barclay's and UBS regarding at least five years of LIBOR (London Interbank Offered Rate) interest rate rigging barely register on their balance sheets. Mr. Geithner, who covered himself with an email to Mervyn King in spring 2008 (a preemptive touch buried by the NY Times July 3, 2012, while everyone barbecued and watched fireworks) will walk away unscathed as will the other major players. Tax-paying modern serfs already have paid and will continue to pay the piper until the shell game reveals there's nothing under the cups.

So hedging with gold is not sentiment but self-protection similar in impulse to the huge sums still parked in negative real return money market funds. Only in January did this trend begin reversing but while $60 billion went into equities little was withdrawn from MM.

That said, note that the junior gold miners ETF (NYSEARCA:GDXJ) is putting in a secular double bottom, sliding toward its Spring 2012 pit at $17.40. Given the increasing and substantial Central Bank purchases of gold one would say most gold companies, funds and ETF's are deep in buying territory but among the ways shake downs proceed is by resource nationalism and environmental regulation. Since the UN and NGO's began writing the script for States large and small, prompting the espousal of "environmentalist" rhetoric by developing nations it is likely that in these (as in other) matters emerging markets take cues from dominant banking - diplomatic tandems. So even now one only nibbles at those miners who have plentiful proven reserves and relatively low production costs and at the depressed [[GDX]] and GDXJ.

Consider Barrick Gold (NYSE:ABX) on Valentine's Day: a good earnings report and re-structuring of its troubled subsidiary African Barrick Gold (NYSE:ABG) sent shares soaring 5%. Yet by day's end, it gave back more than half its gains, which doesn't portend well. Note the sell-down occurred as Barrick was moving off a secular (post 2008 crash) double bottom just above $31/share. A similar doubled bottom was in process for Kinross Gold Corp. (NYSE:KGC) before its rebound Thursday that held up, at least for a day, better than did that of Barrick. Yamana Gold (NYSE:AUY) has even lower producer costs than Barrick; it has high target estimates ($23/share) yet its prices remain depressed at $15.50 after a weak end to 2012 and the political - fiscal crises in Argentina where it has major assets.

You can add to gold positions but do it in measured fashion. This is a game that the house intends to win. Those who hold will be glad when our macro-economic problems and the fiscal vandalism at the top grinds the markets down. But if you can't hold on, don't ride.

Before touching on silver, on debt, bonds and the socio-economic macro view, note that the Spider Gold ETF (NYSEARCA:GLD) and other paper trading vehicles often are touted as boons to little guys and gals who want to participate in this commodity. However, these paper contracts also allow the cadres that manipulate the LIBOR, on behalf of Sovereigns as well as themselves to make similar magic with gold. This bolsters the "faith and credit" (don't laugh) of fiat currencies and also effects wealth transfers from bottom up. Despite under-reported Central Bank purchases, gold is continuing a slide from its fall 2011 peak. Having rallied in late summer til October 4th, it has been retreating fitfully toward the resistance lows last May - July 23.The big boys buy and everyone else at the table grits their teeth or, if still positive, trims or folds their position: the racing indices beckon. But forgetting "sentiment," note that the 14% correction from the September 2011 peak is slight compared to the 130% 4-year run that preceded it.

The silver miners ETF (NYSEARCA:SIL) has performed less poorly than the gold juniors but like the silver bullion ETF (SLV), seems to be re-tracing its way toward last year's May-July trough. Sprott Physical Silver (NYSEARCA:PSLV) should be steadier but lately, Thursday, Feb. 14, for example, it fared worse than SLV, down 1.31% to 1.04% for SLV. You can pick up your 100% physical-backed shares in metal at Sprott but don't do it now. In the past week silver seems to have broken below the interim resistance it had formed during the 4th quarter and is heading toward strong support at $26.50 it often has tested. Silver Crest Mines (NYSEMKT:SVLC) bucked the trend rising 3.75% on stronger than average volume (120,000 traded on this penny stock now at $2.49; its 52-week range is $2.15 - 3.05); but another well-regarded junior, Fortuna Silver (NYSE:FSM) was down 3.10% to $4.38 on heavy volume 50% above its usual rate. As often happens, Silver Wheaton Corp. (NYSE:SLW) did less poorly than others in its sector, dropping .65% on average volume to $36.45. It has remained much closer to the top of its 52-week range ($22.35 - 41.30) than other companies and than bullion whether paper traded or bullion-backed like PSLV.

The continuing under-performance of silver is more puzzling than that of gold. As I have noted, silver's wide range of technological, industrial, consumer and currency-surrogate uses spans many sectors and asset classes. It should perform like a balanced fund that flies on economic strength and has braking power during retreats. Yet it continues to behave like a flighty currency although bullion purchases are just 10% of its exchange. Its industrial-technological basis makes it the preferred of the precious metals and it should be less subject to attack by short-selling. Unless the powers are sending a general message (buy other equities) they should have little interest in beating down silverware, circuit boards, anti-bacterial bandages, switches for appliances and water filtration. Yet the more calculation and urge to control enters daily life, the less rationality and wealth there is. Melville's Master of Arms John Claggart exemplifies this fact of life. Yet silver is in a good buying range. The pennant pattern now forming converges above $31 but did not hold. So expect surprises and remember that the descending wedge meets strong support below $27.

The Fed's bond purchase program helps our exports and debt service but creating digital dollars has created a bubble that by disordering credit markets could ravage equities too. Everyone should be mindful of this impending "cataclysm" as Michael Pento termed it in his February 13 podcast. The "debt restructuring" via stability mechanisms in Europe again is exposing its limits. Actual growth is subsiding in most major economies although American markets remain as remote from the fundamentals as they were in their great year of 1933 and three years more. 1933 remains on many measures the greatest year for equity-weighted portfolios since 1926 but as they say, "past results do not guarantee future performance." Billionaires like Jim Rogers or Thomas Kaplan of Electrum Group can afford mistakes on commodities; most people can't.

That's today's final takeaway: the numbers are broken; we are in a brave new world in most facets of culture, certainly financial and economic behavior. All systems reveal fungibility and distortion as intrinsic to social discourse and institutional behavior. Look at "The Bourne Legacy" or "The Dark Knight Rises" as typical of our era's shadow plays. The LIBOR was made to be manipulated. Games are being played and the world re-ordered. Still, at the end of the day, gold is NOT about sentiment, though for most people silver is a diversified and thus safer investment. "Junk silver," 90% silver coins until 1965 are nice in themselves and for those concerned with liquidity and value for future routine exchanges. Dark riders are aloft: stay safe, my friends.

Disclosure: I am long FSM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.