Gold And Markets Married By Fiat: PM Collapse Precedes Markets

by: Emmet Kodesh

"For those of us paying attention, the ice keeps getting thinner and thinner and at some point the ice will simply break." (John Hathaway, 5-03-13)

John Hathaway is Senior Director of Tocqueville Asset Management fund group. For 15 years he has managed Tocqueville Gold (MUTF:TGLDX). He has worked in finance for forty years and to his recent comment above on the economy he added:

"The derivative books of the seven or eight largest US banks are completely opaque and incomprehensible. They are going to be big trouble in the future. The world is falling apart..."

Prominent Columbia University Economist Dr. Jeffrey Sachs shares this view on the "criminality" and opacity of the financial system.

The thesis for PMs (precious metals) is intact, and so are the danger flares for the economy: the G20 nations are insolvent, most of their CBs are devaluing currencies, joblessness is increasing, retail sales in America are sagging and shrinking in Europe: but the markets are soaring. The fundamentals and financial system have parted ways. The times are badly out of joint, it is the stuff of tragedy.

First I give the context then I offer suggestions on this time of heightened chicanery and terrors of every kind. The fiat system and, indeed, the West is at the climax of its identity crisis and the masters of the game are imposing the glory of the Emperor's new clothes that grow more blatantly threadbare each day. We must live with fraud.

Gold and the markets are conjoined by interventionist fiat fiscal policies in a fractious dysfunctional relationship from which coherence has been banished. Like Victor Frankenstein stalked by his monster, gold and the markets tremble in their diverse ways around the issue of their unhappy union, the Economy. This love-hate child has been damaged by fiat interventions and its subordination to financial-diplomatic games that afflict it with diseases, vanishing jobs, lower real income and net worth, hidden but inexorably rising costs: failure of values in all forms. The economy is a kind of elephant-man in whose sad ruminations we are trapped and which at any time may rise up and strike its forebears. The markets and those who tout them deny its illness and blame the physician, PMs and sound money. Retail sales slowing toward negative turf and PMI manufacturing at 50.7 echo what we lived through from 2005-1Q 2009. Wealth consolidation events are coming with increased frequency like waves in a storm, like birthpangs of a new order.

PM mining stocks are slumping into a pit that seems bottomless. It is like the "limbo rock" song that asks, "How low can you go" and the answer is lower than you thought possible, lower than any fundamental measure indicates. But we are in an era whose method is manipulation of sentiment and belief. That is, we are in an irrational era in which fictions are defended at all costs: the greater the lie-fiction, the greater are the efforts and resources marshaled in its defense.

As ex-USD trade agreements spread amid growing global awareness (no doubt shared in London, DC and NYC) that the USD is doomed as a world reserve currency, as QE guts USD worth, bullion banks and too-big-to-jail institutions that serve "the controlling oligarchy" muster their suasion against alternative sources of value, especially those held by members of their own nation whose autonomy they mean to break to facilitate their control of all aspects of life. Those who are buying PM bullion (coins) are paying expanding premiums over spot price while the U.S. Mint takes the swag and intermediaries profit, too. From 1981-2002 PM prices were stagnant: it can happen again. The basics say PMs should rise but the powers have the ability to create facts on the ground. The Goldman Sachs short sell just proved it.

The word is out against gold: Barron's reports that late June options and puts against the gold miner ETF (NYSEARCA:GDX) triple the open contracts. The put/call ratio is 4.4 and GDX and junior Au miner ETF (NYSEARCA:GDXJ) fell Tuesday 2.96% and 4.49% respectively. GDXJ keeps making new lows since inception. Gold even is slumping against the doomed Yen. The take down may be contrived, but it is here.

Thus, despite inviting valuations, if you already have PM miners as 10-20% of your nut, hold them or trim your holdings. If your income stream is adequate you can add a bit at these levels or the next big dip which probably will be this quarter. It is important to remember that the sell-off was a paper-triggered event of cascading stops, margin calls and algorithm trades. If you entered since April 15, you're fine: hold or add PMs depending on your investable cash. Nibble at the inflated indices and hope that the masters of Metropolis can keep the "heart machine" pumping and whipping the markets into froth: the finish line is in sight for fiat economies.

The financial attacks on gold and multi-faceted attacks on its kin the mining sector are a hubristic intervention that will be echoed when the economy that fiscal gaming has deformed rises like an iceberg to wreck the Titanic of the soaring indices. Revenues mostly fall, earnings are fudged: the P/E looks reasonable but is as misleading as government stats about jobs and inflation.

Price action on May 7 made the combination of hostility to PMs and negative sentiment plain: there was a stark contrast between the gains of diversified miners like BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Vale (NYSE:VALE) and Freeport McMoRan (NYSE:FCX) and nearly all PM miners from giants Gold Corp (NYSE:GG) and Barrick (NYSE:ABX) to mid-tiers Eldorado Gold (NYSE:EGO) and Kinross (NYSE:KGC) to juniors like McEwen Mining (NYSE:MUX), whose red numbers were high. The writing is on the wall. You must hold or begin trimming down this sector unless you are a recent entrant with ample cash flow. Yes, the valuations are good and will get better. Sentiment is about as negative as it can get. If you are looking at a loss, hold tight unless you definitely need more cash before 4Q 2013, when PM miner estimates are strong as noted in this recent piece.

Those of you who need or wish to avoid miners may use low cost index funds like Vanguard S&P (NYSEARCA:VOO), small cap value (NYSEARCA:VBR), yes, capture some dividend: the NASDAQ has the farthest to go even to approach its nominal high. For income, try oil and gas energy play Vanguard Natural Resources (NYSE:VNR) with its annualized yield of 8.8%, paid monthly. Also try the diversified oil, gas, agriculture and bullion Sprott Natural Resources (OTCPK:SCPZF) that pays monthly to the tune of 10.4% annually. The Reit ETF (NYSEARCA:MORT) has been solid for a year and even if the markets and economy stumble, REITs' minimal costs and huge profitability should sail.

Global REITs like the Vanguard ETF (NASDAQ:VNQI) has been stellar YTD but it is difficult to read the global situation except for the negatives which are clear. Outside the fiat bloc there is lucidity on PMs: as I have discussed often, wealth is being shifted West-to-East, the betrayal of Chiang Kai-Shek in 1949 signaled this as did the Nixon-Rockefeller "opening to China" in 1973. I have been explaining that a new reserve system is being born in agony and blood: the narrative is being fulfilled. Western oligarchs see China as a model of socio-governance because Communists know how to manage human inventory. It is a sad truth of these times.

Also, start easing out of paper contract PM surrogates like the gold ETF GLD and silver (NYSEARCA:SLV). Get rid of these media that facilitate manipulation. They were created for gaming and destruction: avoid them. Beware those that encourage their purchase.

To protect yourself you must participate in these markets but have a defensive core sized to your situation and time horizon. This core could be 10-70% of your holdings depending on when you want the cash at hand. Unfortunately, at this juncture one cannot rely on PMs in the short term for wealth preservation. For those who can hold there will be ample practice in gritting one's teeth and muttering imprecations about the frailty, fakery and immorality of a fiat system. The West was born in identity theft and is dying in the same way: what goes around comes around: the wheel will come full circle.

Some of us experienced the euphoric breaking of traditional norms in the late 1960s and the entrance to the heralded and lethal Aquarian Age. We now must endure the state that follows history, the state that baffles sense: the period when government is "in your face" and saving the remnant is the task at hand. Look out for new lows in PMs and keep an eye cocked for the fall of the fiat markets.

Disclosure: I am long OTCPK:SCPZF. 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.