Its truly a rare bargain deal for precious metals this holiday season. While the masses chase the Black Friday and Cyber Monday deals the smart investor is buying gold, silver and the junior miners on a rare, possibly historic bargain sale. Many of the experienced precious metal investors and fund managers have never seen such a bargain situation in the junior miners. It is truly a rare discount in the precious metals complex which has had 12 straight years of back to back gains. The sector is entitled to take a breather and smart investors should use this time as a buying opportunity.(click to enlarge)
This comes at a time when quantitative easing is causing one of the great equity rallies in history despite the rising risk of a credit downgrade on U.S. sovereign debt. What we witnessed in 2011 when gold (GLD) ran to $1900 and silver (SLV) went to $50 may be just the beginning.
Investors are chasing the latest fads in bitcoins, social media and banks ignoring the great financial risks present from massive debts and entitlements. QE may be causing a rally in equities, yet the real economy such as employment is seeing no major benefit.
Don't get caught up with the bitcoin bubble which is a modern day tulip mania. Gold and silver may be on the verge of a major bullish reversal at $1200, possibly forming a double bottom. Gold and silver appear to be testing summer lows at $1200 where I expect many of the shorts will start covering and new buying should begin.
Most investors are caught up with what The Fed will do with taper and forget what The Fed has done with QE that may send precious metals soaring over the long term. Gold, Silver and the miners (GDX) especially the silver (SIL) and junior miners (GDXJ) may begin to outperform.
Conditions in the precious metals complex are very oversold and the large short position is bullish for a rally in the short term. Everyone may have already sold anticipating tax loss selling which has been predicted by many pundits.
I expect to see accumulation to reenter the market similar to the this past summer when gold went from $1200 to over $1400. This does not mean that we may see some more testing of the $1200 with a possible shakeout below.
Now some big banks are advising clients to go short gold and the miners. This may be one of the most dangerous and risky moves as there are many catalysts that could cause a spike higher rather than lower. Due to the banks shorting precious metals, gold is hitting prices way below the average cost of production forcing the big and junior miners to mothball projects. These cutbacks plant the seeds for the next major rally as supply is decreasing rapidly.
Already new discoveries were at an all time low, good mines have been taken over by corrupt governments all over the world with the rise of resource nationalism and now the financing market prevents new exploration. (click to enlarge)
This could lead us to a major supply shortfall in gold and silver over the next few years. The aggressive shorting could be setting the stage for a major snapback rally that could move violently to the upside.
Be prepared for a "W" shape reversal in gold, silver and the junior miners which have been basing for close to three years and are very oversold. Savvy investors may be a little early in claiming good times are here again. Better to be early then late.
The global economy and debt situation remains challenging and a major fiscal event could happen in the near term. Those coming late will have to chase powerful rallies. We have been seeing an outflow from the gold and silver ETF's as investors have been chasing equities higher. This may change soon as investors become more aware of the systemic risks.
For many months, we have heard that the Fed may taper quantitative easing through many mainstream media outlets. Now the time has come when the masses may have already priced in a reduction of quantitative easing, not realizing that quantitative easing may actually increase and may be ongoing to pay down soaring debts.
The Fed may have used the taper terminology in the press and the banks short the metals sector as a diversionary tactic to make an illusion that inflation is subdued. The equity markets are in a bubble and have moved way ahead of the economy where we see a record numbers of Americans who are exiting the labor force and are becoming unfunded liabilities. The U.S. debt crisis is far from over.
Look at Detroit and many other cities in bankruptcies due to unfunded liabilities. All across the U.S. deficits are rampant. Debts are strangling cities and municipalities. How soon investors forget that only a few months ago Detroit, the industrial and auto manufacturing center of the U.S., became the largest municipality in U.S. history to file for bankruptcy with unpaid debts of over $18 billion.
The Fed needs to protect these cities on the verge of bankruptcy by manipulating interest rates lower. This is done through quantitative easing. Talks of taper over the past few months have crushed U.S. bonds with yields doubling over the past year.
Over the past fifty years the U.S. has sent its industries offshore resulting in a massive transfer of workers from manufacturing into government. This needs to be changed. The job numbers continue to be awful with the unemployment rate going down for the wrong reason. More U.S. employees are leaving the work force.
Rising interest (TLT) rates could initiate the next decline in housing (XHB). The Fed must be very careful as they fear rising rates could spark more bankruptcies, higher unemployment and pop the reinflated housing bubble.
Look for gold and silver to bounce higher, which have been correcting since the July-August rally due to fears of tapering. I expect a bounce to occur after tax loss selling subsides.
There are just too many black swans, the Middle East crisis with Syria and Iran and the risk of rising inflation and debt debacle is great. Look for a rally in high quality junior miners advancing top notch gold and silver assets in friendly mining jurisdictions especially Nevada, Alaska, Ontario, Wyoming and Saskatchewan.
Gold and silver has proven itself throughout the history of mankind to be one of the only assets that is stable in a shaky world...not bitcoins. Look for continued weak employment data combined with debt woes that should support an accommodative Fed.
Gold and silver have been manipulated and shorted lower by fear-mongers who claims that the gold bubble has burst and that the Fed will tighten. I continue to disagree with this view.
The long term trend in precious metals remains higher and tapering should not occur as the U.S. deals the need to pay off soaring debts and the rising costs of Obamacare with cheap dollars. Gold and silver is entitled to a year off. Investors should in no way see this as an end to the rally but just a breather providing a secondary buying opportunity.
In conclusion, it may be time to continue buying gold, silver and the highest quality junior miners on sale trading at historical lows as tax loss selling season may provide exceptional deals at multi year lows. Only the best mining stocks with good management, properties, finances and who are active in stable jurisdictions will survive as this has been the worst decline in mining equity history.