Gold: 2012 Trade Of The Year

Includes: AGQ, DGP, GLD, SLV
by: John Dalt

What happened to gold and silver? How in the heck did the best investment for the last eleven years turn into the worst investment in the last four months? Well not exactly the worst investment, you could have been long Netflix (NASDAQ:NFLX), Research In Motion (RIMM) or Molycorp (MCP) for some real pain.

Here is a chart of GLD for the last three years. Gold has been on a great run, as we wrote on 12/13 when we expected GLD to respect its 150-day moving average and bounce higher going into the end of the year.

GLD 12.29.11
(Click to enlarge)

The last time GLD fell below its 150-day moving average was in 2008-2009. On 10/21/08 (during the initial shock of the credit crisis) GLD closed 12.6% below the 150-day moving average. GLD is trading 6.8% below the 150-day moving average today.

Will we see an extreme discount in GLD like in 2008? Why would we? In Oct. 2008 Hank Paulson was testifying before Congress (lying) about the need to enact TARP so the Treasury could buy Troubled Assets. Congress did enact it, and immediately the Troubled Assets became AIG, GM and Chrysler rather than mortgage backed securities. But that is water under the bridge.

Where are we today? Zero to one-fourth of one-percent interest rates from the Federal Reserve…promised through 2012. $1.7 trillion dollars worth of quantitative easing (printed money) pumped into the U.S. economy. The European Central Bank just sent over $600 billion dollars into the European banking system to increase liquidity. The euro is breaking support by falling through $1.30

Europe is broken ...

And all the king’s horses can’t put it back together again.

What is a person to do? Buy Gold and Silver. Don’t be sucked into the short term pain that hedge funds are creating. The present market indicates a big holder, or holders, are liquidating their position(s). The present market suggests some big banks (NYSE:JPM) were short silver and had to get out. Present market action reflects the after affects of the MF Global implosion and frozen commodity accounts.

Gold is on track to gain 8% this year, turning in an annual gain for the eleventh year in a row. GLD is down 15.6% from the high on Sept. 6. December has seen the biggest monthly drop since 2008.

According to Bloomberg, gold has a negative 0.48 correlation to the dollar on a 30-week chart. A figure of minus 1 means the two always move in opposite directions. The dollar has gained 8% since the end of October.

Where will the buyers come from to push gold higher in 2012? Adrian Day Asset Management’s namesake believes banks may add 600 tons of gold to reserves in 2012, the most since 1970.

Forbes calls much of the end of the year movement in precious metals “position-evening and book-squaring.” Forbes observes the euro has fallen to a fresh eleven month low and Italian bond yields are on the rise. Jim Wyckoff, of Kitco News, writes “More important for precious metals … will be how gold and silver market price action fares during the first two weeks of the new year — once all market participants are fully back in the game.”

It is not fighting the market to buy when offered a discount. Warren Buffett calls daily stock pricing a voting machine but a weighing machine over time. Because of liquidations and fear, the vote this month has been sell … sell … sell precious metals.

What will the weighing machine tell us over the next 12 months?

Gold is our Trade of the Year in 2012

Gold will continue higher in 2012, just as it has for the last eleven years! Can GLD go lower from here? Yes, maybe a little or a lot; if the dollar continues higher, if the U.S. budget is balanced, if eurozone countries don’t leave the eurozone and default on their debts, if no European banks go bankrupt, if Ron Paul is elected president.

As much as our heart would like to see all the things happen in the last paragraph, we will go with our brain and buy gold and silver.

Disclosure: I am long DGP, SLV, AGQ.