Gold, Silver And Platinum Update: What's A Warning Worth?

Includes: GLD, PPLT, SLV, TLT, USD
by: Michael Filighera

Precious Metals - Outlook Update

Gold and silver dropped into support zones after hitting resistance hard two weeks ago. The corrections may still be in progress but on a near-term basis appear complete, or nearly so.

Platinum (PPLT)

I'm not sure it was widely noticed but platinum is again trading at parity with gold. Historically, platinum usually trades at a premium to gold, and the at the end of 2011 was trading at a $150 discount to gold. The trend should continue to favor a return to platinum maintaining a premium over gold. For more detail see my article: Platinum: Once in a Lifetime Opportunity for Strong Gains.

The correction off of the recent high at $171 continues to unfold as expected. The support zone at $156.75 to $155.70 remains the likely area to complete the move. An additional support zone at $152.20 to $147.70 remains important as a break below this zone would suggest at least a test of last years $133 low.

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Silver (SLV)

Silver dropped right into the support zone at $31.05 to $29.75 reaching midway at this weeks low of $30.73 . The potential for another dip into the zone is high until a clean break back above $32.30 occurs. A break below $29.75 with momentum would suggest a larger correction (off of last years highs) remains in force, with prices headed below $25.65 before all is said and done.

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Gold (GLD)

The support zone at $161.10 to $158.10 has held thus far, while the oscillators have reached oversold readings supporting the advance to resume. Confirmation of this week's lows via a break back above $162.70 would be needed before the potential for an additional drop into the support zone is negated. A break below $158.10 with follow through would negate rally potential for now, with a quick drop to $145 - $140 in the cards.

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What's a warning worth?

Commodity traders learn very quickly that good news (increase in supply) for commodities is usually reflected via prices moving lower. Conversely, bad news (decrease in supply coupled with an increase in demand) for commodities will be reflected via higher prices.

Supply and demand factors rule market prices and have since the beginning. Volatility swings can add both positively and negatively to price movement(s).

These simple concepts also hold true for money. When money is in excessive supply, its value is debased. Historically, when this has happened, the social mood towards the economy is generally negative. I am a believer in the power of words. With that in mind, take a look at some synonyms for "debased":

debauched, decadent, degenerate, degraded, demoralized, depraved, dissipated, dissolute, jackleg, libertine, loose, perverse, perverted, rakehell (or rakehelly), rakish, reprobate, sick, unclean, unwholesome, warped - Source

Do the words listed above that are synonymous with "debased" form a positive or negative image in your mind? What's a warning worth?

Slowing economic activity (a slowing demand) has historically reduced inflationary pressures. Thus the generally accepted rule would be that periods of recession are deflationary rather than inflationary. History, though, shows that while it is a general rule, it is not an absolute rule. Case in point, the recessions of 1973 - 1975 and January through July 1980 (precursor to the recession of 1981-1982.) Both were accompanied by high inflation, per the reported CPI data. See my article: Purchasing Power of Gold During Periods of Inflation and Deflation for a clearer look at economic conditions as a result of and during times of inflation and deflation.

Currently, yields on bonds are low, (Does zero count as low?) The stock market is high - both the DJIA and NASDAQ 100 posting new rally highs. The economy is improving, expanding, showing signs of resiliency. This is based on analysis of "lagging" indicators.

The Index of Lagging Indicators is published monthly by The Conference Board, a non-governmental organization, which determines the value of the index from seven economic variables. These components tend to follow changes in the overall economy.

The components are:

  • The average duration of unemployment (inverted)

  • The value of outstanding commercial and industrial loans

  • The change in the Consumer Price Index for services

  • The change in labor cost per unit of output

  • The ratio of manufacturing and trade inventories to sales

  • The ratio of consumer credit outstanding to personal income

  • The average prime rate charged by banks


The indicators of a leading nature - of coming change continue to signal a big shift is looming. As previously discussed I believe a major capital shift is starting to take hold. The 800 lb gorilla in the corner of the room, debt, has been lovingly cared for and attended to by the finest on a global scale. Thus far, each time "debt" runs out of bananas, the global monetary system has easily "controlled and contained" the situation with a growing, burgeoning, eye-popping credit expansion.

Serious food for thought: At the end of the 2011 Fed fiscal year and using GAAP-based accounting, Federal obligations totaled $81 trillion, government bonds in issue totaled $11 trillion in 2001 and $31 trillion in 2011. Keep in mind there is no chance that taxes could be raised anywhere near enough to tame and bring the growing deficit into balance.

News stories out of Europe over the past couple of weeks suggest that the Greek debt crisis has been avoided and solved. Really? Greece shreds 100 billion euros worth of debt thru default, which in "normal times" would be considered deflationary, as Germany finally agrees to replace the lost currency with new debt. Sounds reasonable right? Sure I guess if the status quo remains unchanged. Credit expansion can continue unabated as long as there is the means (taxpayers) to pay it back. If that ceases to exist, the pendulum will begin to swing in the other direction - expansion will be replaced with defaults. An inherent danger within a fiat currency monetary system is reaching its credit limit or the end of credit expansion. Historically, Germany has seen the results (defaults and bankruptcy), twice in the last century in 1923 and 1945. Is Germany going for the triple play? Rescue packages on a sovereign level will not go on unabated. It isn't financially realistic.

The Greek bailout was not warmly embraced by German or Greek taxpayers. In Athens rioters went on a rampage. What is a warning worth?

Here is the United States, state and local governments are beginning to feel past mistakes in promising pension benefits and financing seemingly unlimited spending with debt. Witness if you please, Vallejo and Stockton, California, Jefferson County Alabama or Montgomery County, Maryland - the first three have filed Chapter 9 bankruptcies. As has Harrisburg, PA. Rockland and Suffolk counties in NY are pleading for help from Albany. The giant game of "hot potato" appears to be ending as the list grows.

Bankruptcy the reneging on debt - is deflation. The recent flood of capital moving in bonds (the mass exodus to safety -- you've got to be kidding!) has left investors holding near zero yields while bond values begin to melt away - this is deflationary. Public service and many union retirees (a number that is about to go parabolic) are still counting on receiving benefits even as the flood of city and county bankruptcies grows. And when the real mess hits the fan, the media will be buzzing about how "suddenly it all happened". What's a warning worth?

Both the Treasuries and the U.S. dollar may be giving clear signs of trouble dead ahead. In Treasuries (NYSEARCA:TLT), expectations would be for an additional drop to new yield lows (bond price high) as a final exhaustive flee to safety move. The pendulum is about to begin swinging in the other direction and once the momentum gains speed there will be no stopping it. Look for Treasury yields to soar and prices to fall.

Treasuries (Click to enlarge)


Conclusion - What's a Warning Worth?

With the warning signs building, I purposely have asked the question "What's a Warning Worth?" Don't ignore the signs and fall down the path of complacency. Opportunities should continue to be plentiful no matter what the final market outcomes are. For those willing to approach from an informed position, the opportunities will appear like low hanging fruit on a tree. Understanding where the opportunities are will be key. A major capital shift seems underway and thus far is going unnoticed. Due diligence is vital at this stage. If you see that the "writing is on the wall" but it is in a language you don't understand - don't ignore the warning - find an accurate translation.

Disclosure: I am long GLD, SLV, PPLT.