Gold And Silver Dead Cat Bounce And More Carnage To Come Or All In?

Includes: GLD, NUGT, SLV, USLV
by: Doug Eberhardt

Last week we saw some real carnage in the gold and silver markets. In two days, April 12 and April 15, we saw the price of gold fall over $200 and many in the financial media came out of the woodwork saying the gold bull was over. Since that time we have had a move off the low of $1,322 reached April 15th to the current price of just over $1,470, a nice $140+ pop back up in price. Silver yesterday was up more than $1.30 at $24.24 This leaves investors wanting to know, have we hit bottom in gold and silver and will this be the 13th year straight of higher gold prices or will we continue the pattern of lower lows?

In September of 2011, the dollar hit a low of 74.14 as seen in the following chart. Below that you will see the chart as to where the dollar is today, April 26, 2013, currently sitting at just below 83 on the index.

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From November of 2011 to today, you can read what my comments have been about the gold and silver markets in an article I wrote last Monday, Gold and Silver Doom and Gloom or Crack Up Boom?

Some highlights from that article;

"I said I believe we get one more push down in gold and silver." "I believe the domino's will start falling in the eurozone and Japan first." "Gold is still in its second and longest phase. The professionals will still try and buck you off the gold and silver bull." "Market Makers love to move markets they can control." "I fully expect over the next few months the Market Makers to test and break the 200 day moving averages lower on both gold and silver. Why not make them scream UNCLE? That's what they do!"

Well, last Monday we got that fall in price where the price was pushed down producing the candlestick long tail down that typically signifies a reversal in price as seen in the chart below. And a reversal in price is what we got since that time, but is it sustainable?

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Short Term Thinking vs. Long Term Planning

To answer the question of where we go with gold and silver prices from here, we need to separate long term from short term analysis. In the short term, those who have favored gold as a hedge against inflation or even an insurance policy against the unforeseen have taken a lot of heat from those who have been profiting from their short term trades betting that the gold and silver prices would fall. Some traders are good at trading and more power to them. Yet 2/3 of the professional fund managers can't even beat the indexes. Even the Hedge Fund Managers didn't fare well in 2012:

While some famed hedge fund managers managed to generate big gains for investors, the average hedge fund returned just 6.2% in 2012, according to Hedge Fund Research. With all three equity indexes up between 7% and 13%, that batting average could be called mediocre at best.

No one said timing the market is easy, yet these investment managers make millions in trying.

Short Term Perspective

Anytime you get a steep fall in price like we saw with gold, you will typically get a snap back in price. What an investor needs to know in looking for an entry point with the snap back of over $140 we have already had, is whether the price will keep moving higher, or is this a dead cat bounce. Investopedia has a good explanation of a dead cat bounce as follows:

A dead cat bounce is a price pattern used by technical analysts. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after price drops below its prior low. Short-term traders may attempt to profit from the small rally, and traders and investors alike may try to use the temporary reversal as a good opportunity to initiate a short position.

Perhaps we should all put on our professional manager hats and just do the opposite? But that's not a bright thing to do it seems. This isn't a game; it's your hard earned money you want to protect. And this is where you need to separate short term thinking from long term planning. Those trading short term can claim the victories and mock those who think long term when it comes to precious metals. Long term investors in gold and silver don't really care because they believe gold and silver over time can maintain wealth. They understand that the Fed is doing all they can to keep their game going and the Fed is good at what they do. But they also understand the eventual consequences of Fed action.

The short term play from a candlestick long tail down as in the chart above has been to just go long anything gold or silver, whether it be the ETFs like GLD or SLV, or perhaps for those who like to take risk, the triple leveraged NUGT or USLV. The time for this type of play may have passed, however.

Long Term Perspective

When buying metals today, you are buying it at a discount of where we were at the highs of 2011, at just over $1,900 an ounce for gold and $49.50 for silver. Are you a short term "I want to make profit type investor" or are you implementing an asset allocation into a beaten down sector and waiting for that sector to return to favor? What many who criticize the latter don't understand are you can be both and not every gold investor puts all their money into gold and silver because they think the world is going to end.

There are many out there who view metals not by price, but by preservation of wealth over the long term who obtain some peace of mind knowing that whatever happens with the financial system, they possess what has historically shown to have purchasing power. Perhaps their parents lived through the Great Depression. Perhaps they came from a country where they saw their currency devastated by missteps by the ones in control. Perhaps they see a debt clock that is fast approaching $17 trillion on its way to $20 trillion and higher with no real plan to curtail it as Congress only discusses trying to reduce budget deficits (spending more than earned) rather than reducing expenses. Are these people to be mocked and laughed at because they see the world differently? Time will tell who has the last laugh, but my experience tells me those who possess gold and silver won't be laughing at the expense of others. Typically it is only the younger ones who laugh at them because they have not experienced any type of downturn in their lives.

Most long term investors prefer to hold the physical metal. There is something to holding it in your hands they want in having access to their wealth if need be.

Supply Shortages

In March I was one of the first to point out the silver shortages as a disconnect between price and product availability and delays in delivery. It is now one month later and one of my suppliers is completely out of all silver products and the premiums have shot up on every silver product. Silver American Eagles are now over $5 above spot price and silver Canadian Maple Leaf over $4 above spot. While I do believe this to be a temporary thing, for those who buy physical metals, the 100 ounce silver bars seem to be the best buy, or 1000 ounce bars of silver if one can afford as they are substantially closer to spot compared to the coins. Last summer the 90% silver bags an investor could get at spot price plus commission. Today they are $5 or more over spot plus commission.

But as of today, the same supplier is completely out of all gold American Eagle coins and Canadian Maple Leaf coins and won't have any Maples delivered until May 15th. The reason is the Mint's are not producing fast enough to keep up with demand.

This is the first time I have seen shortages in gold.

I expect the various Mints to catch up in supply within the next 30 to 60 days, but one should think about what's really going on here for a moment. These shortages are occurring with the prices of gold and silver falling. Most of the investors in the world are still not that familiar with gold and silver or how they fit into a properly diversified portfolio. Imagine what would happen to supply, if either more became aware or the price took off again, especially to record highs? Many investor wait for record highs to occur before they invest, instead of buying at the lows. It's just human nature for some who really don't do their homework in advance or understand the precious metals market (which is most people unfortunately).

Today's Advice on Investing in Precious Metals

Jobless claims fell yesterday and the stock market is off and running, over 14,700. All seems well in America, at least on paper. People have been trying to chase returns and since banks are paying virtually no interest, the stock market has been the place to be. This is true for some gold investors as well, at least those who have sold their ETF holdings at higher prices to chase the stock market returns. My clients aren't selling their physical metals, and my calls to my suppliers has shown that no one is selling. This underlying strength tells me the real story, coupled with disappearing product and higher premiums.

The dollar was getting hit yesterday, down .34 to 82.60 as of today with gold responding positively. This relationship still matters. With the Boston bombings have dominated U.S. news; it seems everyone has forgotten about Europe and their problems. I haven't. These two regions still make up just over 70% of the Dollar Index. Here are reasons for concern that could be dollar bullish by default.

From the Guardian: Public confidence in the European Union has fallen to historically low levels in the six biggest EU countries, raising fundamental questions about its democratic legitimacy more than three years into the union's worst ever crisis, new data shows.

Japan is going all out to weaken the Yen. "The Japanese GDP failed to grow in Q4 from Q3 levels. The unchanged economic performance followed two quarters of declining GDP." This weakening of the yen was given full approval by the G20.

Many in the U.S. gold market analysis like to talk about sentiment and how it is negative for gold in the states. But the gold market is worldwide. Sentiment in other areas, have shown that gold is an attractive investment everywhere, not just in the U.S. Sentiment can change on a dime, but for now, I see perceived U.S. strength that has benefited the dollar, fueled the stock market and kept the 10 year Treasury well below the 2% mark as seen in the following chart. Until we see some weakness in the dollar, the 10 year and treasury, we may see some more pressure on gold and silver prices ahead.

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My advice is still to dollar cost average into a position in gold and silver. But after this recent run up in price to the present level of $1,470an ounce for gold, I wouldn't be chasing it. Silver has been a bit of a laggard compared to gold recently, and is showing greater signs of weakness, despite the more than $1 plus run up in price yesterday as it breaches $24.00 an ounce. $1,500 and $25 would be the round figures I see as resistance and the potential for the last and possibly final leg down for precious metals. Whether you think ETFs like GLD or SLV are the way to go or buying the physical metal is up to you. Maybe a little of both wouldn't be so bad, but I would be patient and wait for the next leg down.

By the end of May, I will be writing a positive article on gold and silver with an 80% probability of being right and how it will fit in with the above analysis. Either way, from a long term perspective, I see any purchase of metals below $1,500 on gold and $25 on silver as a good entry price because I believe in the years ahead they will be looked back upon as a good buying opportunity.

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. Gold Dealer selling gold and silver bullion coins and bars