Is Gold's 12-Year Bull Run Finally Over?

Includes: GLD, SLV
by: Dave Kranzler

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, said "Buy when there's blood in the streets, even if the blood is your own."

I know the Federal Reserve and the ECB would like the answer to that title question to be "yes." After all, for every dollar or euro the price of gold rises, it invalidates the U.S./EU-nation two-prong strategy of debt-financed Government big deficit spending fiscal policy and Central Bank money printing to finance that deficit spending and to keep the banking systems solvent.

However, this policy strategy is catastrophically unsustainable. At some point the systems in the U.S. and Europe will be crushed under the massive and still-growing debt loads and money supply. It is my contention, based on this, that right now is the best time to buy physical gold and silver since the bull market started a little over 12 years ago.

For starters, I have to admit that sell-off of the past few days has instilled in me a sense of unflattering humility, as my bottom call over the past couple of weeks was clearly early. But anyone who can claim to pick an absolute top or bottom in any market is either delusional, a historical track-record revisionist or an outright liar. In the business of forecasting markets, "horse-shoes and hand grenade" accuracy usually suffices to make investors a lot of money.

The question an investor needs to ask is "have the fundamentals underpinning the reasons to own gold changed?"

First, and foremost, have the big Central Banks stopped printing money or is there any end in sight to this money printing? At least in the U.S., and contrary to the occasional Fed-speak that QE has to end soon, since QE started in March 2009 the monthly run-rate of printing has increased. Anyone who thinks the Fed can possibly stop printing at the end of 2013, when the Fed balance sheet will have increased over the year about 35% from just under $3 trillion to just over $4 trillion, has not "played the tape" to think about what would happen if the Fed stopped printing.

What would happen? The dollar would shoot through the roof, choking off exports and manufacturing, the Government would have to massively cut spending or face the prospect of significantly higher interest rates in order to induce big money to invest even more in Treasuries. In short, those consequences would send our economy into a serious tailspin.

Speaking of the dollar, has anyone noticed that since this last leg down in gold started, the dollar has actually dropped by quite a bit? On April 7th, the dollar hit a high of 83.66 (USDX June contract). Currently the dollar is at 81.79. During the sell-off in gold during the last 3 days, the dollar actually fell in value. As anyone who has traded currencies knows, a 2.3% move in a currency over 5 trading days is not insignificant. This dollar move lower is counter-intuitive and does not support the capitulative sell-off action in gold/silver. It would be interesting to know why the dollar has not moved inversely higher with the sell-off in gold.

How about the demand for physical gold and silver? In this latest sell-off, the nationwide market for silver eagles has almost completely dried up. Those dealers that have inventory are charging spot +$6-7 per ounce. That's a 28% premium. Bags of 90% coins are trading for 38% premiums at dealers who have supply. A serious shortage of silver has developed because the spot price is way too low to balance the supply and demand.

What about the demand out of China and India - which combined "consume" about 33% of the annual mined supply of gold? Here's an article from Reuters that describes the buying in India and China last night:

The decline - gold has dropped 12 percent since Friday - resulted in brisk sales in parts of India and China, which together account for more than a third of global gold demand, according to the World Gold Council. Gold drop spurs demand in Asia

A flood of Indian buying emerged last night, as the lower price of gold is being greeted by the start of the Indian wedding season seasonal buying: Happy Indians Moreover, we subscribe to a daily global gold market report, which reports Indian import premiums. Last night the ex-duty import premium was nearly $42. This premium varies directly with the level of demand. In 7 years of following this report, I've never seen the import premium in India this high, which means the buying in India last night was massive.

My point here is that, at some point, the current price of gold/silver is going to have to adjust significantly higher in order to balance out the global supply and demand of physical gold. Besides creating a lot of fear with precious metals investors, the only real thing this sell-off in the metals has created is that it has intensified demand from U.S. retail coin buyers and big eastern hemisphere buyers.

With fear running rampant and with "the gold bull market is over" calls being promoted all over the financial media, it takes a strong stomach to start buying into a sector in which there is literally "blood in the streets." But for those that think of themselves as a successful contrarian investor, now is the best time to buy into this sector, in my view, since the bull market in precious metals started in 2000.

If you want to put some potential rate of return parameters on what kind move to expect, I strongly believe we'll see a move analogous to the one that started from the bottom in 2008: Gold went from about $700 to $1900; silver went from about $8.50 to $50; and the HUI index went from 150 to 632 - many individual junior mining stocks increased percentage multiples more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. The fund I manage is long physical gold, silver and mining stocks