Gold and silver are confidence insurance and for the last 10 years, I have had no qualms in saying that people have a natural instinct for gold and silver. Of course, that applies more when they are owned outright or physically or without leverage. Gold and silver have historically proven themselves to be the ultimate insurance against government-caused collapses of confidence. In today’s world, that is proving to be all too true.
As I have often written gold is the “magic bullet” around which all currencies dance as they are worth less in times of deflation and more in times of inflation. Gold is the average or standard that is always worth exactly what it should be worth. It is paper currencies that fluctuate wildly. So while gold was up a staggering $41.00 recently, it was for no other reason than this was the true worth of money as debt concerns, fiat printing of paper currencies and concerns over a possible downgrade to the prestigious United States “Aaa” credit ranking gave investors confidence as they sought a safe haven from the economic storm.
I have a hedge fund friend, Adam Smith, and he taught me that the market is much smarter than we are. When I asked him years ago how General Electric (NYSE:GE) could be worth $30.00 on one day and $45.00 the next day, he told me the reason was because that was what the market had determined the stock was worth on that day. The correlation is exactly the same with gold. How could gold be worth $1619.00 on Monday and be worth 1661.00 on Tuesday. The reason is that the market has factored in all of the possible variables, probabilities and concerns and the market had determined the value of gold.
Now we add to this mix the fact that both the Dow and the S&P have both breached key technical levels and we are getting set up for a perfect storm. Let’s take a look at the chart of the S&P on the close Monday.
A look at this chart will show that we have not only breached the 200 day moving average, we obliterated it. This is a very bearish signal as Monday we didn’t even take a pause as we closed down 33 points on the S&P.
For further evidence let’s take a look at the chart of the Dow from Monday’s close.
A look at this chart will show that we broke the key 200-day moving average and closed down 266 point at 11866 or 20 points under the 200 day moving average.
Both of these charts have indications that with all of the bad news that has come our way, it is beginning to look like a double dip. With the 1st Quarter GDP revised numbers at an anemic 0.04% last week, the terrible ISM numbers on Monday, the seeming dissatisfaction with the debt ceiling agreement by Wall Street - a plan that gave everyone something to hate, the layoffs that have been announced by Cisco (NASDAQ:CSCO), HSBC (HBC) and the banking sector and what I can only assume what will be terrible employment numbers on Friday I see a continued sell off of the market.
Despite what the professional economists say, the recession never really ended. The numbers were skewed to give the Feds something good to report but you don’t have to be a weatherman to know which way the wind is blowing. The fact is that most Americans believe that the 2008-2009 downturn never ended. Is it any wonder? Home prices have continued to fall, estimates are that 11 million homes have under water mortgages, banks have inventories of as many as 2 million foreclosed homes and have now begun to solve the problem by bulldozing the homes. Poof! No more problems. Wait a minute – big problem.
However, perhaps the most powerful example of the continued recession is the persistent unemployment. There are 14 million people out of work and a third of those have been jobless for over a year. May unemployment numbers were a body blow as the fragile economy added only 58,000 jobs and from what I have read and heard most of them were part time jobs. Experts seem to agree that the nagging unemployment rate will not improve until we start consistently adding 300,000 jobs a month at a minimum. Using that number, it would take at least 2 years at that rate for the economy to come back to what is traditionally considered a reasonable unemployment figure.
So in conclusion, with the myriad of “Black Swans” swimming around us, I feel my readers have properly positioned themselves in gold and silver both physical, ETF’s, closed end funds and mining stocks. For the foreseeable future I see gold and silver as the safe haven in the perilous economic waters.
I continue to recommend GLD on a pullback to 145, SLV as close to $38.00 as possible, PHYS below $14.00, PSLV as close to $16.50 as possible, SLW at $36.75, Barrick Gold Corp. (NYSE:ABX) at $46.00, Goldcorp (NYSE:GG) at under $48,00 and U.S. Gold Corp. (NYSE:UXG) (which is a junior miner that will not bear fruit until 2015) at $6.00 or lower. While UXG closed at $6.71 yesterday it will go under $6.00 on any eventual pullback on gold. One more a reader brought to my attention and studied was Alexco Resource Corp. (NYSEMKT:AXU). This company has Eric Sprott’s finger prints all over it and the shorts are trying unsuccessfully to kill it. I would advise everyone to take a good look at this stock because it won’t be long before this one is a winner.
Disclosure: I am long GLD, SLV, PHYS, PSLV, ABX, GG, UXG, ZSL.