2013 Gold And Silver Forecast: New Highs As The Dislocations Continue

Includes: AGQ, DGP, GLD, SLV
by: David Urban

It was proclaimed many times during 2012 that the bull markets in gold (GLD, DGP) over only to find the yellow metal up once again for year as we head into the final week of 2012.

For 2013, none of the problems which plague the world have been resolved and the bull market appears set to continue into 2013.

The massive bond purchase programs now being implemented by the Federal Reserve continue to cause massive dislocations in the fixed income markets as it becomes increasingly difficult for banks to earn a reasonable spread on loans as evidenced by compressing Net Interest Margins across the board.

The Federal Reserve will now be purchasing $85 billion dollars per month in Treasury and mortgage backed securities or $980 billion dollars if both programs remain in place over the course of 2013. Healthy economies do not need this much stimulus to maintain economic growth.

The more the Federal Reserve throws its weight around the bond markets the more it creates dislocations by not allowing the true price and yield discovery.

In terms of Central Bank purchases and sales the world has become split between two diametrically opposing camps, those who are implementing quantitative easing programs and showing weak economic growth (US, Europe, and Japan). These countries have been net sellers or not in the market in the past few years and those who are not implementing quantitative easing programs and showing economic growth (China, Mexico, and Brazil).

This dichotomy has yet to be fully fleshed out the press but it indicates a clear demarcation between two sets of ideologies. Those pursuing growth programs and those choosing to muddle through kicking their respective cans down the road.

In the US, political gridlock continues with negotiations over the fiscal cliff and debt ceiling taking center stage. Even if an agreement is reached it is unlikely to solve the core fundamental issue. $1.6 trillion in tax cuts over 10 years is a drop in the bucket when compared to a $1.2 trillion dollar yearly deficit or $12 trillion over 10 years.

The additional problem of $16 trillion dollars in debt pushes the US up against its debt ceiling on a regular basis moving the country ever closer to a Japanese style debt trap.

Currently, the interest rate on US debt stands at approximately 2.3%. Just a 1% increase in the interest rate from current levels will add $160 billion in interest expense every year to the budget deficit.

Bull markets end in manias where buyers stampede into a sector buying wherever they can at whatever the prevailing rate. When gold hit $1900 and silver hit $50 in 2011 last year people were not lined up to buy but to sell, a very important distinction when people attempt to call an end to the bull market in gold and silver (SLV, AGQ).

The underlying fundamentals that supported the bull market in gold and silver more than a decade ago remain firmly in place today, more so than ever, as governments in Europe and the US monetize their debts rather than take the appropriate steps necessary to ensure strong economic growth.

During this bull market it has been marked by spurts of growth followed by a year to 18 months of consolidation and that consolidation period is ending. During 2013 investors will see gold charge to new all-time highs while silver tests the high made just a few years ago before moving to new all-time highs. Each move to new highs in gold has been an approximate 50% move from its previous high indicating the final top in this leg will be in the $2,900 area and given the policies being enacted by the Federal Reserve and EU the breakout point to start the rally may be closer than anyone thinks.

In terms of an end to the bull market that is still far off in the distance. Remember back to the last two bubbles, real estate and the Internet. In the case of the Internet people were stampeding to purchase Internet stocks with no inventory or revenues because the IPO's were all for the 'next big thing' which would revolutionize shopping and put the malls out of business.

For real estate you had to own multiple homes and flip them to new buyers because housing never went down, it always went up year after year and the last housing bubble was fueled by loans made to people that had no jobs or income yet qualified for $250,000 homes.

We have yet to hit that phase where people switch from sellers to buyers stampeding into jewelry shops nationwide seeking to buy gold and silver because it will be worth more a year from now.

When that happens it will be time to sell but not yet. In the meantime, buy gold and silver.

As for the recent selloff, it has more to do with the tax treatment of gold and silver than any fundamental reason and investors would be wise to prepare for a rally at the start of 2013.

Disclosure: I am long AGQ, SLV, DGP, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author also owns 2015 LEAPS on AGQ.