Way Too Early To Take Profits on Gold & Silver

By Clint Siegner*

It was no fun investing in precious metals for most of 2011-2015, but the past few months have sure been a blast for buy-and-hold investors. Silver prices are up 22.5% year to date, and gold isn’t far behind.

Now that there are some profits available to take, some metals investors wonder if they should grab them. The answer for most people is not yet — not even close.

Yes, there are gains. But the real question for investors isn’t whether or not there are profits, it’s whether there are better options for their investment dollars. What other assets have a better risk/reward profile? Cash? Stocks? Bonds? No thank you!

Central planners at the Federal Reserve and perma-bulls on Wall Street keep telling us the world is fixed, but a whole lot of us aren’t buying it. The focus remains on picking the right safe-haven asset for what promises to be volatile times.

Measuring Risks v. Reward

And picking it ahead of the crowd means positioning yourself for profits as other investors flock to safety behind you.

The U.S. stock market is just a pinch below all-time highs. Current stock prices have less to do with corporate profits and more to do with bubbles and inflation. The price-to-earnings ratio across the S&P 500 index has only been higher on a handful of occasions. And each time, a high PE ratio was a signal for investors to sell, not buy.

Investors might consider the traditional safe-haven alternatives to precious metals – cash and bonds, particularly U.S. Treasuries. Unfortunately, there are no bargains in those markets either. Bond yields are near historic lows, and cash still yields next to nothing.

Not to mention that government and central bank policy which is hell-bent on creating inflation makes any bet on these paper assets a guaranteed loser over time.

Today, the U.S. government carries more than $100 trillion in combined debt and entitlement obligations, and the meter just continues to run. Almost no one expects politicians to eliminate deficits or cure the metastasizing growth of programs such as Social Security or Medicare.

You Are Being Targeted for “Financial Repression”

Officials have clearly signaled their preferences when it comes to dealing with these obligations: devalue the dollar and suppress interest rates. This is also known as “financial repression,” a condition where savers are punished with negative real rates of return.

Until that changes, investors should avoid holding a large amount of U.S. dollars or, even worse, fixed-rate debt. Now is the time to favor bullion and other tangible assets instead.

Financial Repression

If another asset appears better positioned to deliver capital preservation or if the risks to capital fade, it will be time to sell some of your physical gold and silver. For now, the risks are extreme, and most other options look awful.

Here are a few signs which would signal it is time to lighten up on precious metals:

  • Positive real interest rates. Negative real interest rates (i.e. interest rates that are below the inflation rate) destroy savings. Three-month T-bills currently offer 0.23%. That makes the real interest rate substantially negative, even using the government’s politically manipulated Consumer Price Index (CPI) figure. T-bills and other interest-bearing vehicles won’t be an attractive alternative to physical gold until their real yields turn positive.
  • An end to permanent deficit spending. Our government has been consistently spending more than it collects in taxes for decades. With every dollar borrowed comes additional incentive to stay the course on dollar devaluation, the preferred long-term strategy for dealing with suffocating debt repayment and overwhelming entitlement obligations.
  • A Dow:gold ratio of 5:1 or less. At the climax of the last secular bull market in gold in 1980, one ounce of gold could buy one theoretical share of the Dow Jones Industrials. Right now, it would take 14.6 ounces of gold. As the precious metals bull market resumes, history tells us that gold (and silver) will outperform the general stock market by many multiples. Of course, everyone must assess the situation for themselves, accounting for their own personal circumstances. Individuals may find good reasons to sell metals and raise cash; an emergency, buying a home, etc.

*

Clint Siegner

Fear and the Fed: Gold and Silver rise, Equities and Jobs fall

 By Clint Siegner*

Fear TradePrecious metals banked another solid week of gains as investors looked for alternatives to the stock market and U.S. dollar. Both gold and silver pushed through important technical resistance levels. Metals bulls hope to see markets enter a virtuous cycle; improving charts followed by more speculative long interest leading to improved charts.

There is some evidence this may be happening.

TFMetalsReport.com reports the inventory of the largest exchange-traded gold fund (GLD) bottomed in December. It has since rallied sharply as 1) speculators are buying shares in the ETF in volume and 2) GLD “authorized participants” — mostly bullion banks — are covering short positions.

The U.S. equity markets will command most of the focus this week as trading continues to be volatile. The S&P 500 has fallen back to just above key support level in the 1,850 range. If support fails, we’ll have an interesting week.

One wonders if the U.S. can be far behind should economic data continue to disappoint. Former Fed chairman, Ben Bernanke, expects our central bank to add negative rates to the tool kit for fighting recession. And Bloomberg reported that the odds of negative rates, while still relatively small, are rising.

Reasons to Be Cautiously Optimistic on PRECIOUS Metals

Precious metals markets are picking up steam. Last week’s price performance was the best we have seen in months and both gold and silver broke through some important overhead resistance levels. The weekly gains stacked on top of the very strong showing in January. So where do we go from here?

Metals prices are riding higher primarily based on two drivers; fear and the Federal Reserve. Let’s take a look at both for clues about what to expect in the coming months…

It looks increasingly like the world economy is headed for trouble. Fear may be on the rise. Investors are grappling with some pretty lousy economic data, and last week was no exception. The ISM Manufacturing Report showed the fourth straight down month for factories, and the biggest drop in manufacturing activity in more than a year.

Even more problematic, Chinese manufacturing hit a 3-year low point, and the outlook there is grim. The Baltic Dry Index — which tracks costs of ocean freight for commodities such as grains, base metals, and coal — dropped to its lowest level ever last week. Demand for raw goods globally continues to sink.

Jobs CutMain Street America was hit with announcements totaling more than 75,000 planned layoffs in January — 42% more than the same month last year. The retail sector is particularly hard hit. Wal-Mart announced it will close 269 stores globally and 16,000 people will lose their jobs. Macy’s expects to cut nearly 5,000 from its payroll.

But retail certainly isn’t the only sector struggling. Job losses in the oil and gas sector are huge, and Caterpillar recently announced plans to close 4 plants in the U.S. and China.

American consumers are responding to the recent bad news. The key Personal Incomes and Outlays report published a week ago revealed they are battening down the hatches — spending less and saving more.

Wall Street is also feeling the pain. The market for high yield “junk” bonds is deteriorating. Lenders, desperate for better yield in a world dominated by artificially low interest rates, aggressively loaned money into volatile sectors such as oil and gas. Much like the collapse of subprime home lending in 2008, it looks as if those bets may go bad.

In fact, markets are dealing with increasing fears of default everywhere. Risk is jumping significantly for some of the world’s largest banks. The cost to insure the debts of many of these behemoths via credit default swaps spiked massively in recent days.

Virtually all of these institutions are larger than Lehman Brothers. Should even one of them collapse, it will likely be much more difficult to contain the chain reaction that follows.

Fear looks likely to persist and may even accelerate in the coming months. Thus far in 2016, precious metals have been big beneficiaries as investors look for safe havens. That’s an encouraging sign given gold and silver futures missed getting much safe-haven buying the last time the economy slid toward recession in 2008 — at least initially.

With regards to Fed policy, officials there want you to know their decisions are “data dependent.” Lately the S&P 500 seems to be the data they care most about. Just a few weeks ago the consensus was for four additional rate hikes in 2016. Since then the S&P 500 has dumped nearly 10% and the official Fed-speak, as well as the consensus for further hikes, completely reversed.

Our central bankers are now talking about cutting the funds rate back to zero and even the possibility of Negative Interest Rate Policy – NIRP – much like we predicted late last year.

The next FOMC meeting is in March. Odds are we will see officials become even more dovish between now and then. If that occurs we can expect even more weakness in the U.S. dollar and strength in precious metals.

It is important to note that if we get a major shock in the markets — akin to the collapse of Lehman Brothers in 2008 — then all bets are off with regards to metal prices. As happened then, traders may initially be forced to sell precious metals futures along with just about everything else to raise cash and cover margin calls.

This time around, however, metals are at a cyclical low with all speculative money having already been completely flushed out. So far, so good.

Legendary investors going for gold, copper and coal

By Frank Holmes, CEO and Chief Investment Officer, US Global Investors

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

These giants of the investing world have just given huge endorsements for gold, coal, copper, and precious metals

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TVlast week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.

Late last month, Freeport became the first major miner to announce production cuts in response to depressed copper prices, which have slipped around 19 percent since their 2015 high of $2.95 per pound in May. This reduction should remove an estimated 70,000 tonnes of copper from global markets, according to BCA Research, and eventually help support prices.

Platinum and palladium miners in South Africa, a leading producer of both metals, also announced job cuts and mine closures, as platinum has slipped more than 16 percent this year, palladium a quarter.

But Marc sees opportunity, as I do. In my keynote speeches earlier this year I suggested that 2015 would see a bottom in cost-cutting due to divesture and slashing of capital expenditures, and that in 2016 we should see higher returns on capital.

Furthermore, using our oscillators to measure the degree to which asset classes are overbought and oversold, we find that commodities are extremely oversold right now and currently bouncing off low negative sentiment. The smart money is buying.

When asked if he thought commodities had reached a bottom, Marc had this to say:

I would rather focus on precious metals—gold, silver, platinum—because they do not depend on industrial demand as much as base metals and industrial commodities.

Marc was referring, of course, to China, the 800-pound commodity gorilla, as I’ve often described the country. The Asian powerhouse is currently responsible for nearly 13 percent of the world’s commodity demand, followed by the U.S. at a little over 10 percent.

China's demand for commodities is huge
click to enlarge

But as I discussed recently, China is transitioning from a manufacturing-based economy to one that emphasizes services, consumption and real estate. Commodity demand is cooling, therefore, and we can expect it to cool even further. Aside from the strong dollar, this is one of the key reasons why prices have plunged to multi-year lows.

Commodities Seeking an Upturn to Global Manufacturing

The JPMorgan Global Manufacturing PMI continues to decline as well. Since its peak in February 2014, the reading has fallen 4.5 percent. The August score of 50.7, just barely indicating manufacturing expansion, is the sixth consecutive monthly reading to remain below the three-month moving average.

I’ve shown a number of times in the past that when this is the case—that is, when the one-month reading is below the three-month trend—commodity prices have tended to trade lower. Unlike other economic indicators such as gross domestic product (GDP), the PMI is forward-looking and helps investors manage expectations. Based on our own research, there’s a strong probability that copper and crude oil prices might dip three months following a “cross below.”

The opposite has also been true: Prices have a stronger probability of ticking up three months after the one-month crosses above the three-month.

Commodities and commodity stocks historically rose three months after pmi "cross-above"
click to enlarge

This is why we believe prices will have a better chance at recovery after the global PMI crosses above its three-month moving average.

I have great respect and admiration for Druckenmiller, Soros, Icahn and Marc—all of whom are clearly bullish on commodities—but we would prefer to see global manufacturing growth reverse course.

In the meantime, low commodity prices are a windfall for many companies in Europe, Japan and the U.S. Metals and other raw materials are at their lowest in years, which is the equivalent of a massive tax break for the construction and manufacturing sectors.

Low gold prices are also expected to generate high demand in India as we approach fall festivals such as Diwali and Dussehra, not to mention weddings. According to estimates from Swiss precious metals refiner Valcambi, demand could reach 950 tonnes by the end of the year, compared to 891 tonnes in 2014.

 

Dearth of gold articles!

Apologies for the apparent dearth of gold and precious metals articles from me published here this week.  Its not that I haven’t been writing – I have – but most of my work in the past week has been going direct to Mineweb – my main source of income –  so you can still read my thoughts and comments on what’s happening in gold and silver – and sometimes in other metals too – (notably platinum in the past week) so you can always read them there.

Here follow links to some of my recent Mineweb articles.  I’d hate to deprive you of my thoughts however obscure they may be!  Apologies if you have already read all or any of them

China gold demand up 17% ytd

Russia cools gold reserve additions in January

Platinum price puzzles

Can platinum regain its premium over gold in Q2-Q3?

Have the big banks been manipulating gold and silver prices?
 African mineral development risk: The best and worst nations

And my latest – published today:

HK January gold exports to China confirm strong demand

Gold breaches $1300 – but beware potential headwinds

Gold is teetering on making a significant breakthrough through the $1300 level but there could also be some adverse factors which could bring it back down again.  Another post submitted to Mineweb.com for publication on that site.

Lawrie Williams

While gold breached the $1300 level in overnight trading last night this is obviously way too early to call this the start of a consistent gold price uptrend, although it is obviously a very encouraging start to the year for gold bulls recently enhanced by the Swiss national Bank’s decision to drop the Swiss franc’s peg to the Euro.  The question now facing us is whether or not a sustained breakthrough can be achieved.  At the time of writing the price had fallen back into the high $1290s but was again testing the $1300 level.

The European Central Bank (ECB) is widely anticipated to announce that it is to implement a Quantitative Easing programme and buy government bonds to try and help stabilise the Eurozone economy at its meeting tomorrow.  But apart from some kind of knee-jerk reaction when the decision to do so, or kick the can further down the road, is announced we don’t see this having any serious price impact given many of these factors have already been taken into account in the recent gold price advance anyway.  Either way the Eurozone continues to have significant problems.

Greek elections come up on January 25th.  Opinion poll figures suggest the outcome is probably still too close to call, but there is a real chance that the anti-austerity, and anti-EU Syriza party may well win – but whether it might win by a sufficient majority to hold power on its own is much more uncertain.  The latest opinion polls put Syriza as gaining more ground and now ahead by between 4 and 6.5%, but whether this lead is sufficient to give it an outright majority should it win – even with the extra 50 seats in parliament given to the winning party to help it form a government under the Greek system – is far less certain.  Pundits put it a few seats short of an outright majority should this be the case.  While Greek public opinion appears to support many of Syriza’s proposals, particularly those in cutting back the current austerity programmes and reneging on the country’s debt, it also appears to favour remaining in the Eurozone and worries about that may prompt a last minute swing to the longer-established political groups and yet deliver victory to the incumbent New Democracy party and its allies.

What is particularly significant about the Greek elections, though, is that if Syriza does win it could send shockwaves through the whole of the Eurozone.  Many countries have seen the rise of ‘alternative’ political parties – not least in the UK (UKIP) and France (Front National). Britain’s highly regarded Economist Intelligence Unit points to the rise of these alternative ‘populist’ parties as having the potential to create substantial changes to voting patterns – it also cites Denmark, Finland, Spain, Sweden, Germany and Ireland as having spawned political parties which could lead to unpredictable results in their next electoral polls.  A Syriza victory would likely give a significant boost to these other populist options and potentially lead to major political instability throughout Europe and the break-up of the single currency, if not the EU itself.

Political instability is, of course, manna for the gold bulls as people rush to buy the precious metal as providing some form of stability as it virtually always has in the past.

Taken with continuing strife in the Ukraine, with major potential still for destabilising escalation which could spread to other former Soviet countries, and the huge political and military impact of fundamentalist Islamic groups in the Middle East with potential to spread to North Africa, and now also in West Africa with Boko Haram, the world is beginning to look increasingly fragmented – all positive for gold.

But there is near-term downside risk for gold too, as pointed out in the latest Precious Metals Weekly newsletter from specialist analysts, Metals Focus. The group believes that the recent positive factors are all temporary and expect that the upturn in gold will eventually lose its momentum.

Looking beyond the positive euphoria of the past few weeks, Metals Focus sees three major headwinds develop for gold, likely in the second half of the quarter. First, it is likely that US interest rate expectations will return with a potentially adverse impact on  gold in North America in particular. Second, Eurozone concerns should probably wane. Third, the current strength of physical demand, fuelled by pre-Chinese New Year buying, will eventually subside.  Should these three factors indeed concur, the consultancy believes that investor sentiment towards gold will quickly evaporate. They stress that their field research so far suggests little conviction by institutional players that there is a genuine change in trend for the price and that recent positioning favouring gold seems to be mostly opportunistic rather than strategic.

So, as usual, the path of the gold price is perhaps impossible to call with so much depending on often unpredictable geopolitical events to give it the occasional upwards or downwards spurt.  The fact that the first three weeks of the current year have seen a plethora of events and market activities which have largely benefited gold so far does suggest that we are going to see a turbulent year ahead which will likely provide, at various stages, both upwards and downwards pressures on precious metals prices.  Where this will leave them in 12-months time is anybody’s guess although we would err on the positive in our own predictions.

About Lawrie Williams and LawrieOnGold.com

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Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary.  He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

He has worked in mines in South Africa (gold, uranium and platinum), Canada (uranium), Zambia (copper) and U.K (coal) and holds a South African Mine Managers certificate.  He also worked as a gold mining company analyst for one of the major South African mining houses. He left South Africa to join Mining Journal as Financial Editor and worked his way through that organisation to edit Mining Magazine, and then join the Board.  He was Managing Director (CEO) of the company for 13 years up until it was sold in 2001.  During part of this period he was also President of Nevada-based U.S. company Mining Media Inc which was publisher of North American Mining magazine.

Following his time at Mining Journal he became editor, and then General Manager, of Mineweb.Com, taking it from lossmaker to becoming highly profitable before taking partial retirement in 2012.  Since then he continued to write for Mineweb up until September 2015, and now writes for other organisations including Sharpspixley.com as contributing editor, Seeking Alpha and for Johannesburg Stock Exchange special supplements and his articles are picked up and linked to by numerous websites around the world.   Again these articles mostly concentrate on precious metals markets and mining.

LawrieOnGold.com has been set up as a vehicle to publish articles by Lawrie Williams not published elsewhere and will also link to some of his other articles. It will also include contributions from other selected specialist writers as well as links to other carefully chosen articles of interest to those interested in the precious metals sector.

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Have gold and silver really bottomed this time?

Have gold and silver really bottomed this time?

Lawrence Williams

Precious metals bulls have been calling a gold and silver price bottom throughout the recent years of price declines.  Will they be correct this time around?

LONDON

At the recent Mines & Money conference and exhibition In London there was a perhaps surprisingly upbeat feel given the poor performance of metals prices over the preceding 2-3 years.  While this optimistic mood seemed to apply to precious and base metals producers alike, as is the norm nowadays it was the gold companies which were looking for the biggest upside.  Perhaps this was because those that can nowadays afford to participate in an event like this – it is expensive to exhibit and to attend – are those who are going to survive in the current price environment come what may.  But perhaps even more prevalent was the perceived view that things were at last truly bumping along the bottom and that the only way forward was up.

There are a lot of factors supporting this latter viewpoint, but it’s probably just as well for the bulls out there not to get too carried away as many of these bullish factors have been around before and still prices have continued to be driven down.  But this time perhaps the optimists do have a point.

On gold and silver demand, this appears to be riding high.  Chinese Q4 demand as represented by Shanghai Gold Exchange withdrawals has been just as strong as it was in the 2013 record year.  True demand had slipped pretty badly in Q2 and Q3 compared with a year earlier, but it has staged a huge pick up since the end of September.  But perhaps even more significant has been India’s return to the gold buying spree with November gold imports https://lawrieongold.com/files/tag/officially put at 150 tonnes, although some assessments had even suggested it might have been as high as 200 tonnes….

To read full article click on: http://www.mineweb.com/have-gold-and-silver-really-bottomed-this-time/