From the simplest of aphorisms to the subtler metrics the situation shouts "buy precious metals." Fundamentals of industry (for silver), commerce and fiscal exchange echo the message. Increasing buying in Asia (gold continues to sell at premiums in the Shanghai and Hong Kong exchanges), ongoing inter-state agreements and conferences calling for a gold-backed international reserve currency make the bullish case for gold.
With sentiment in the dungeon, black Bears, black swans and black flags all make a case for increasing allocation in precious metals and miners and for cashing out some gains in equities.
Start with the famous saying of Sir John Templeton that "markets are born in pessimism; grow on skepticism, mature on optimism and die of euphoria." With that as the pattern, precious metals will soon launch a bull run for pessimism on the metals is extreme. Hedge funds and other smart money types have halved their holdings in paper contract ETFs (NYSEARCA:GLD) and miners. Of all the sectors, mining is the worst and precious metal miners are the worst of the worst. In February 28 comments, Richard Russell notes that it is the most undervalued sector saying "silver and gold are both on the bargain table." In a Seeking Alpha piece, Dave Kranzler discusses sentiment as measured by the rgold metric, the 200-day MA divided by current price. He shows that 1.08 is a mediate reading and below 1 is solid buying territory. The ratio currently is at .948, anemic. The big black bear bestriding gold shows a degree of pessimism that roars buy.
Economic fundamentals make the same case. Governments in Japan, America and the EU are running their nations ever more deeply into debt. American debt reaches $16.5 trillion and working-age Americans with full time jobs are 58.7%. If the government released an employment rate figure every week instead of its "unemployment rate" term-of-art guesstimate there might be a revolution. In this fiscal year, the government is on a pace to run a $1.8 trillion deficit.
They're only digital dollars but seriously, painful facts will restore some congruity between markets and the economy and this will add value to precious metals.
Without strong hands intervening in the markets daily before and after hours via COMEX with huge "sell" orders when there are few to buy, the price of gold and silver would rise as the major currencies are devalued and the economy slides into the abyss prepared by extractive and regulatory overkill. Insider selling which includes top executives at large, high-profile companies like Google (NASDAQ:GOOG), Dollar General (NYSE:DG), News Corp. (NWSA, NWS) and BlackRock (NYSE:BLK) in late February rose from 9-1 to 12-1. Executives from S&P companies sold at a rate of 17-1, the highest reading on this metric since 2010. According to the Pavilion group, when insider-selling is at this level the subsequent six months see 5.9% declines in equity markets. Dennis Gartman wrote, "We are exiting all bullish positions and rushing to the sidelines." Insiders know the markets cannot run forever from an economy in which the proportion of those receiving entitlements to those working rises steadily and those relying on fixed income are strained or broken by inflationary policies. So equity markets have a Humpty Dumpty look while sentiment on precious metals is extremely pessimistic. Common sense, aphorisms and metrics say buy the unloved and ultra-depressed precious metals and mining sector. Indeed, big players in the paper ETF arena who dump GLD may be acquiring physical whose price they have helped drive down. When hedges should be cultivated who would uproot them? Central Bankers are attending World Gold Council Seminars on trading gold. This will increase both strategic buying and selling. Volatility at times will seem irrational but this is inevitable rather than unforeseeable.
The concept of black swan or unforeseen, perhaps unforeseeable events is cited often in discussions of markets and economies. The potential for such events and the patent bad faith and madness of government by fiat is a key reason that people hold precious metals, cash and land as defensive positions. So a brief consideration of the term is pertinent to our topic.
The black swan concept is an ancient idea: human foresight and knowledge are limited. Its buzz rises from the digital era, which has facilitated diplomatic and fiscal designs to unprecedented levels of artifice and impact. This affects markets generally and that part of the economy, which is the traditional alternative to chance and the veiled agendas of strong hands: precious metals and all values tied to agrarian conservatism. Consumer staples and commodities are as close to that as we come today.
A key feature of perceived or genuine black swan events is that they may be exploited by governments to pursue or simply declare changes of law, i.e., changes in the mechanisms of power, society's D.O.S. In this respect, black swans bleed into concerns about black flag socio-economic policies. It is clear, for example, that National Health Insurance Mandates will damage the practice and affordability of medicine, destroy jobs and savings and create systemic confusion. Fiat currencies rise and fall in relation to each other but in relation to precious metals their value falls every day. This too is bullish for gold although the worry and loss of faith it engenders is difficult to abide.
This prosaic aspect of the black swan concept arises from the information age and the digital systems that have enormously magnified the tendency to believe and act as if all events can be arranged and managed. They also embody the urge and enhance the ability to manipulate and control. But pride goes before a fall: man proposes and God disposes. This is not a new idea but ancient wisdom. The gap between knowledge and wisdom and, even more, between information and wisdom widens daily. At some level we sense this gap and it adds to pervasive concerns about the fragility and fakery in our systems. This too is bullish for precious metals. So are the various national, regional and multi-national actions toward a heterogeneous reserve currency backed amply by gold. China's reserve holdings, held two thirds in dollars could buy double the gold holdings of world central banks. Its increased buying is bullish.
"Reichstag Fire Syndrome" (RFS) is the dominant political method of the past century and more ("remember the Maine"). Crisis creation to achieve a scripted outcome plays havoc with lives and speeds socio-political change. This includes financial and economic changes in redistributing wealth, tax burdens and arrangement of primary social forms in families, education, medicine, alternative values (precious metal prices), divestment of national assets and more. By every measure the ship of State is capsizing and being capsized. When new security measures arrive to suppress terror, fix prices and ration goods and services the exits will narrow. Owning shares of Google, Exxon (NYSE:XOM) or Dollar General won't help but gold coins will. The most basic investing idea is to buy where prices are extremely and artificially depressed and trim where values are high. The best choices include physical gold instruments like Swiss Gold Trust (NYSEARCA:SGOL), Asian Gold Trust (NYSEARCA:AGOL), Sprott Physical Gold (NYSEARCA:PHYS) and Silver (NYSEARCA:PSLV) and miners with quality properties and plans whether juniors like McEwen Mining (NYSE:MUX) or majors like Goldcorp (NYSE:GG). In the general sell-down, IAMGold (NYSE:IAG) is 33% below its recent lowered price target and 65% below its 52-week high. NovaGold (NYSEMKT:NG) also is very depressed and given good news on its excellent properties and major buyers like Baupost and the Electrum Group is a buy. The Junior Gold Miners ETF (NYSEARCA:GDXJ) has made new lows since inception so it also should be considered. In short, pessimism reigns in precious metals and miners and in pessimism bull markets are born.
Disclosure: I am long NG. 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.