In this author's last article, the issue of the ECB's enormous LTRO money giveaway was addressed. Your writer predicted that this "back-door" money printing program would have a profound effect on the high levels of liquidity needed to spur precious metals prices, as well as other assets, even though it was targeted at bolstering the sovereign debt of various bankrupt European nations.
As predicted, European banks have started to use part of the money to buy Spanish and Italian bonds. Yields have come down. The article also predicted that gold, silver and platinum would go up. That also happened. A snapback will usually occur immediately after a manipulation event. That's why investors should buy into falling prices, rather than following "momentum".
However, the expectation of short term price appreciation was not the focus. The article predicted a big hike in long term precious metals prices. The short-term price could fluctuate downward just as easily as it moved upward, depending on a number of factors, not the least of which is the continued potential for manipulative activity through the middle of March, 2012.
Another big LTRO is on the way at the end of February. There is talk that this new episode will involve the printing and distribution of more than $1 trillion worth of Euros. Based upon the timing of the next Euro LTRO, the exasperation of the leaders of solvent Euro-nations with Greece, and the existence of an $18 billion dollar debt payment, due March 20, 2012, there is an even chance that Greece will default before then, possibly even next week.
Default events tend to send physical precious metals buying into a frenzy. However, paper prices often travel in the opposite direction. The so-called "spot" price is not set by real world supply and demand, in the shorter term. It is set by a small group of derivatives players in London and New York. Short term prices are governed by the capricious whims of banks and hedge funds. Most educated market participants know that the spot price is basically a phony price. Yet, it is still widely accepted, even by mining companies and metals dealers who should know better.
Be that as it may. If we are looking at a Greek default, spot prices for gold, silver and platinum may rise or fall on the news, but, once the ripple effect of a Greek default makes its way through the financial system, spot prices for precious metals are likely to recede, rather than rise. Institutional long liquidation will happen even in the midst of a huge LTRO in Europe.
Liquidation is likely to be heavier if the banks that run the International Swaps & Derivatives Association (ISDA), tell their "determinations committee" representatives not to declare Greek nonpayment, as a credit default "event". That is very likely since the same banks that control ISDA would be called upon to pay billions if they acknowledge that a Greek default has occurred. For more information on the use of ISDA as a means of avoiding payouts on credit default swaps, see this article.
If Greece defaults, and ISDA members find some excuse not to pay, a lot of hedge funds, smaller banks, insurers and other financial institutions are going to be forced to raise cash, in some other way, quickly. This will cause even higher levels of distress selling than might otherwise be the case. Such times are ideal for manipulators.
Distress selling acts as a base for catalysis of a bigger fall at relatively low cost. A small downward movement can be turned into a collapse of paper dominoes. Central bankers may be willing to provide both more paper money and more physical gold than usual to fund the attacks. With confidence in paper currencies deeply eroded, they won't want prices jumping from high levels, once the largest episode of money printing in history is announced.
The main thing standing in the way of this is intense demand for physical gold, and a long-standing shortage of physical silver and platinum. That's why being a bit bearish about the short-term outlook for gold, silver and platinum does not mean being bearish in the long term. Regardless of the existence or lack thereof of manipulative activity, the long term outlook is extremely bullish.
The upcoming probability of a manipulation event, should not be viewed as a time to sell, but as a time to buy. If you sell, in anticipation of buying back cheaper, a number of things could get in your way. Greece might not default on the timetable expected. Furthermore, capricious changes in mood, or even the reading of this article by a person involved in price manipulation, could cause big changes in the sequence of anticipated events. You might lose your metal forever if you play the game too hard.
Every asset, whether equities, gold, silver or platinum is supported or inhibited by unique sets of market forces that manipulators can only affect on the margins. Platinum, for example, is now selling below its marginal cost of production. Unless prices rise, platinum supply destruction will commence. Mines will close and prices will be forced up. This fundamental cannot be defeated by any manipulator.
Similarly, intense investment and industrial demand for silver makes physical silver hard to obtain, according to reliable sources like Eric Sprott and James Turk. These men must buy large quantities for their clients, and have repeatedly noted the delays inherent in sourcing physical metal. The perturbations of price that may occur in the OTC derivatives markets in London, or futures markets in New York are irrelevant.
So, how do you know when to buy and sell? Apparent "tape painting" makes technical analysis difficult or impossible. The most astute technical analysts get their buy and sell predictions wrong, more often than not, when it comes to precious metals. The only way to trade them successfully is NOT to trade them at all. It is wiser to simply wait for, and buy whenever events create artificially low prices.
Holding through the long term bull market requires a strong stomach, and gritting teeth, on occasion. There will be a lot of natural and artificially induced ups and downs. But, you should not sell until real rates of inflation are lower than available interest rates. But, how do you determine that, given that the statistical data from desperate governments, like that of the USA, are so bad?
Don't make the mistake of selling just because interest rates rise a lot. Dollar denominated buyers can turn to www.shadowstats.com, which uses the American government's 1980 formula for the Consumer Price Index (CPI) to calculate the true inflation rate. The inflation rate, in December, for example, was 10.7%, even as the government was telling us it was less than 3%. That's a negative 8.3% return, if we assume a 2.5% rate on long term CDs or bonds. That's something Mr. Bernanke doesn't want you to know.
But, even if average CD and bond rates rose to 11%, if the true inflation rate is 25%, the negative yield is 14%, which is worse than it is now. The higher the negative yield, the higher precious metals prices will go, regardless of the interest rate level. And, the world does seems poised for much higher inflation.
Even Fed Chairman Ben Bernanke hinted at it during his testimony before Congress. He warned of a sudden severe dollar crisis if deficit spending doesn't come under control. So, if you've got maturing CDs or bonds or if you can get rid of them without high penalties, it wouldn't be a bad idea to do so. Put the cash into demand deposits, instead. This website can help you find the most flexible, highest rate checking and savings accounts. Use demand deposit cash, at appropriate times, to quickly execute buy orders.
We've talked about precious metals. But, where else can you find a store of value safe from the inevitable crisis that will afflict the US dollar and other paper currencies? Real equity values have dropped dramatically over the last decade. The drop has simply been masked, in nominal terms, by paper money devaluation. The institutional "dash for cash", likely to be precipitated by a big Greek default, is likely to accelerate that process in the shorter term.
We can expect central bankers to come to the rescue once again, constituents, because big banks and insurers own a lot of equities. They will surely force prices back up by printing more money. That will cause an increase in stock prices just as it will cause an increase in precious metals prices. But, the problem with stocks, in the long run, is that too many people own them, and, for that reason, valuations are too high.
Over $469 billion has been pulled from U.S. equity mutual funds over five years. I don't have the exact numbers, but, probably, even more has been pulled in Europe and Japan. Baby boomers will continue to retire in even larger numbers, over the next few years, and equities liquidation will continue. The sad reality is that on central bank intervention and paper currency debasement is holding up nominal equity values. With some exceptions, stock prices will continue to decline, though not as fast as currencies are debased.
Governments will do everything in their power to inflate stock prices. Newly printed money is always targeted to the stock and bond markets. This is the opposite of the situation with precious metals. Because they have already been inflated by government policy, most stocks do not provide good long term investment value. Nevertheless, because of the temporary "dash for cash", opportunities may arise in the context of a Greek default.
If you buy low enough, in spite of the fact that equities are broadly overvalued, you will be able to make a lot of money as they rise again. Individual companies may always buck the trend, but success in broad stock investing will now depend almost completely upon liquidity injections and removals. Accurately predicting interventions by central planners is the key to making money.
Stock investors will need to be fleet footed. They must be ready to exit stocks before induced bubbles collapse. The most important issue will be nominal versus real gains. When I speak of collapsing stock bubbles, I am not only speaking of nominal stock prices. So long as central bankers keep printing money, nominal stock values can appear to rise or stay steady, depending on how much and how fast the money is printed.
But, fast rising costs in an easy money environment are going to squeeze company profitability. As stock prices continue to "rise", they may actually be collapsing precipitously. As an investor, you won't see it, unless you know the true inflation rate. You may end up paying taxes on capital gains, even though you actually have less buying power, after the gains, than you did before.
Stocks are likely to rise over the long haul, in nominal terms, even as they are falling in terms of buying power value. Investment in S&P 500 ETF (NYSEARCA:SPY) or a Dow Industrials ETF (NYSEARCA:DIA) will preserve your capital better than investing in bonds. However, precious metals seem the wiser investment, at least for the next few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.