Gold and Silver: Shaking Out The Weak Hands

 |  Includes: GLD, IAU, SGOL, SIVR, SLV
by: Mark Thomas

The gains in gold and silver in the last two moths show a marked acceleration; they obviously became too hot, moved too much and much too quickly. A parabolic move where the rate of ascent continues to accelerate usually ends a bull market. So we at Higher Gold welcome the current correction.

We still think gold and silver will remain at elevated levels, possibly for years to come, and will even continue to increase after they rest and consolidate some. We're getting that correction now from the $1917 high down to possibly $1650. We need to digest these gains and trade between $1650 and $1750 for a while. That will be disappointing to hot-money investors. In my retirement accounts and the ETF model portfolio, we reduced any leverage and short exposure to stocks yesterday, just in the nick of time.

The premium on the Sprott Physical Gold Trust (NYSEARCA:PHYS) has dropped from 5.4% to only one% in two days. When you combine the fact that your gold is stored at the Royal Mint in Canada outside the U.S., potential tax benefit, and the only ETF where the gold is actually stored and insured by a subsidiary of the Canadian government. This is where I'm seeking to expand my exposure to gold currently. I have been waiting to buy about $10,000 in non-retirement accounts, and I just bought half my position. So now, I'm will be fully invested in my retirement and more liquid cash investments in 80% gold and 20% silver.

The gold market had become very, very overheated going up day after day. I'm relieved it stopped going up almost vertically and has pulled back 6.8% from its overnight high of $1917. It would be normal for gold to pull back another 2-3%, and have a full 10% correction shake out hot money and balance the long and shorts in the futures markets. When I first went all-in on silver, it had a 10% correction and I was sweating it. I thought, "I knew I was too late and now I'm getting burned." Then I went back over my work and I said these trends behind the market are so strong this is just temporary. I wrote that my conviction in my thesis will not be shaken. That is where we are again today. Just remember the bad fiscal and monetary policies of governments, the pathetic state of the world's developed economies, and the inherent instability of confidence in the world's financial system are, and will continue to be why gold and silver go higher over time. The rest is just the ebbs and flows of day-to-day news and a lot of noise.

Long-term, what is happening in the world economies and currencies markets is so much bigger of a trend than what is happening in a few days in the precious metals. A crisis of confidence that began three-and-a-half years ago has ebbed and flowed from panic to stability and then back to panic again. Whenever there is doubt about solvency in the world financial system it is a very fragile situation. Multi-billion dollar institutions that borrow short and lend long are vulnerable if any sustained fear arises about their liquidity. It is amazing that bankers still make that same mistake after Bear Stearns and Lehman Brothers' collapse, but they just can't help themselves when cheap credit and low rates almost force them to. Then Ben Bernanke a couple of weeks ago lit the fuse on a monetary bomb that has rocked both the bond and gold markets. Most investors and especially the stock market didn't know what to make of this move, but the gold and silver market took off and has made consistently higher prices ever since.

The Federal Reserve pledged to keep rates low until at least mid-2013. The yield curve flattened and gold started to take off. There are many implications of such an irresponsible Federal Reserve:

  1. Savers and investors are forced into higher-risk assets. Savers are punished with even lower rates. Basically, the Fed is forcing the savers of America to continue to bail out speculators, banks and a dysfunctional corrupt government.
  2. Destroyed even more credibility by basically saying we don't care what inflation might rise to, our sole objective is to revive the economy artificially and to hell with our dual mandate of price stability. The result has and will continue to be a weakening dollar further eroding the purchasing power of your income and accumulated savings and wealth. If you let banks borrow at only 0.25%, instead of making new loans they will own government bonds and just pocket the spread with little risk. He actually should be raising the fed funds up to about 2%.
  3. The market is hoping for more from Bernanke this Friday at the Fed's Jackson Hole retreat. The market still hasn't fully figured out that they got quantitative easing three two weeks ago in a different form than the first two. They still might inject liquidity, but they will probably wait for even more clear evidence of a further weakening economy.
  4. One of the highest longer-term correlations of gold prices is when real interest rates are negative, gold prices climb. Right now inflation in the U.S. is actually about 3.5%, not the 1.7% they claim. However the fed funds rate is only 0.25%. That equals a real negative return of 3.25%, and that is before taxes. Until we have a sustained series of interest rate increases, like above 1.5-2%, gold and silver prices will continue to rise. The great thing is the Fed jut promised that won't be until like 2014 at the earliest.

These are just some of the reasons that if you're still worried about being too late in this precious metals bull market, you can still buy for the first time or add significantly to your gold and silver holdings. I'm not trying to sell you any, just explaining and informing you about why we do. The rest is up to you, you can choose to see your savings and wealth continue to depreciate or appreciate.

Disclosure: I am long GLD, IAU, SGOL, PHYS, GTU, SLV, PSLV.