Guest Post: Is Gold At A Turning Point?

Tyler Durden's picture




 

Submitted by Adam Taggart of Peak Prosperity blog,

There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so.

In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.

A Hard Look in the Mirror

The past two years have not been kind to holders of the precious metals. The price of gold is down over $500/oz since the record high (nominal) price it hit in August of 2011. That's a decline of 28%. Silver has seen a decline of 56% over the same period.

A healthy amount of that decline came in the past seven months, which have pretty much seen a steady price deflation punctuated by sharp (and historic) downdrafts:

On top of these grim charts, daily headlines touting, often with delight, the demise of gold appear nearly everywhere in the media.

And forget about PM mining stocks. They have been absolute widow-makers for investors:

(Source)

It's hard to argue that PM mining stocks aren't the most hated sector in today's markets. The chart below shows that last month, the bullish sentiment on gold miners dropped to 0%. Can't go any lower than that:

Wasn't reckless central-bank money printing going to flood the world with paper currency, sending gold prices and those of its "poor man's" sister, silver to the moon? Weren't the markets going to crack as the unresolved economic and financial rot in the U.S., EU, and Japanese systems became further exposed, sending capital fleeing into the bullion market and driving prices much, much higher? Weren't escalating mining costs going to march up the price floor for the precious metals?

Why haven't any of these scenarios happened? Were we wrong in our reasons for purchasing gold and silver?

Are we the clueless patsy at the poker table?

The Way of the World

These are very understandable questions to be asking. You wouldn't be human if you didn't.

So, it's wise to return to the #1 lesson of investing: Never fall in love with your positions. Be sure to question your rationale regularly and often. Remove emotion from your decision-making, look to what the data tells you, and continually ask yourself: Ignoring my past decisions, would I purchase this investment today? If the answer is no, lightening up your position is almost always the right decision.

Chris and I follow the precious metals markets on a daily basis, and we frequently challenge the logic behind our support of them. But at this time, we can find nothing nothing that has happened over the past two years that invalidates the principal reasons we've laid out for owning precious metals. You can review these reasons in detail on our foundational report, The Screaming Fundamentals for Owning Gold & Silver.

The hard truth for us investors is that secular market trends take time to play out. Nothing moves in a straight line. And they are many false signals along the way. There are no sure bets, no risk-free winning options to pick.

But the good news is that the laws of physics and rationality always prevail in the end. If you can identify the right endgame and position yourself for it patiently, the messy volatility along the way really won't mean much in the big picture.

But Has Anything Really Changed?

Let's look at the key reasons why we originally recommended that investors look to the precious metals as a safeguard:

  • Negative real interest rates
  • Fiscal deficit spending and unserviceable sovereign debts
  • Loose, if not reckless, monetary policies
  • The price of newly mined ounces continues to climb higher and higher, due both to reduced ore grades and higher costs for fuel and equipment.

Negative real interest rates have always been supportive of gold prices. While admittedly that's not been the case for the past two years, we now see that historic relationship re-expressing itself.

After all, when the return on cash savings is virtually nothing and the money printers are running, inflation eats away at fiat purchasing power. Gold, as money, offers protection from this.

Perhaps things are different this time, but we're thinking not.

The degree of fiscal and monetary recklessness has taken us by surprise, both for the intensity of the actions already taken, but also for the fact that financial markets have adjusted to the practices and now treat them as normal, if not desirable. While the U.S. deficit has been declining from its record highs, much of that is due to accounting shenanigans, all while our dangerously high debt-to-GDP ratio (as well as those of most other developed countries) continues to worsen.

Mining costs have been on a steady march upwards over the past decade, setting an average "all-in" cost floor now very close to the current price of gold:

Even exploration costs have skyrocketed, which, importantly, is happening in parallel with a marked decrease in discovery volumes: 

(Source)

Gold, it seems, is getting both harder to find and harder to get out of the ground.

And to the above list of original fundamentals, we must sadly add several new drivers:

  • MF Global proving that client accounts can be looted and then drawn into a lengthy and unsatisfying bankruptcy/creditor process
  • Cyprus proving that the banking system intends to make depositors pay for its mistakes
  • Politicians openly calling for various wealth taxes to be levied on anybody who has managed (dared? bothered?) to save up funds

And one last big one: a new secular change in rising interest rates that threatens to create havoc in world economies and financial markets across the world.

(Source)

After a decade of low and declining interest rates, yields are back on the rise. The low cost of debt that the markets have become used to has created a worldwide bubble in bond prices, about which experts like Bill Gross have been increasingly vocal in issuing dire warnings. A popping of this bubble will increase borrowing rates for governments/business/consumers, depress home prices, make mortgages more expensive, and basically act like kryptonite to any "recovery" in the world economy.

Wall Street has certainly taken notice. And it's worried about the implications:

In a Shift, Interest Rates Are Rising (The New York Times)

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.
 
As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil.

Bond bubble threatens financial system, Bank of England director warns (the guardian)

A key Bank of England policymaker has warned of the risks to global financial stability when "the biggest bond bubble in history" bursts.
"Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted."

60% chance of global recession: Pimco (CNN Money)

Pimco's founder and co-chief investment officer, Bill Gross, argued last month that central banks' ultra low interest rate policies and ongoing bond-buying programs have resulted in a financial system that is "beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions."

Lastly, there is the wild-card possibility improbable, but certainly worth considering because of the gains to be had of gold being re-monetized as a means of balancing and settling international accounts.  Should that transpire, gold will be worth many multiples of today's value.

The Light at the End of the Tunnel

For all the reasons above, the bruised precious metal investors out there should still sleep well at night, secure that the foundational rationale for holding gold and silver remains intact.

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Thu, 06/13/2013 - 12:37 | 3654393 icanhasbailout
icanhasbailout's picture

Shorter version: Gold - BTFD

Thu, 06/13/2013 - 12:42 | 3654415 slaughterer
slaughterer's picture

Author misses one big counter-argument: Tapering leads to lower PM prices.

Second counter-argument:

Blythe will read this article and then monkey hammer PMs once retail has bought the dip once again.  

Thu, 06/13/2013 - 12:48 | 3654438 nope-1004
nope-1004's picture

I love those charts.  CPI down to nothing, mining input costs rising.  It appears CPI is calculated "ex-everything".

Joke.

 

Thu, 06/13/2013 - 12:54 | 3654469 flacon
flacon's picture

$1,380 is NOT the price of gold.  Gold has no price. It's a shame that we can't see what it's really worth in dollar value just yet. But soon enough. 

Thu, 06/13/2013 - 14:09 | 3654723 NotApplicable
NotApplicable's picture

This quote sums up the entire strategy of the government/fed.

"The degree of fiscal and monetary recklessness has taken us by surprise, both for the intensity of the actions already taken, but also for the fact that financial markets have adjusted to the practices and now treat them as normal, if not desirable."

It's the exact same thing as when you go into a grocery store, and are numb to the ever high prices as compared to X number of years ago. The past becomes one big blur as you get used to paying the higher price.

Question is, just how long can each of us continue to muddle through this New Normal?

Thu, 06/13/2013 - 14:23 | 3654774 PlausibleDenial
PlausibleDenial's picture

You will never know the value of gold until you need it....

Thu, 06/13/2013 - 15:15 | 3655032 augustusgloop
augustusgloop's picture

same with Pb

Thu, 06/13/2013 - 14:31 | 3654805 gorillaonyourback
gorillaonyourback's picture

You r right. The golden jackass jim willie speaks very about this topic. We invade libya and mali to steal gold just to deliver gold to the banks. The gld sells large sums of gold driving down price ,the banks buy it.

Thu, 06/13/2013 - 14:58 | 3654925 Bay of Pigs
Bay of Pigs's picture

That's just one point this author misses among many (FED, COMEX, JPM, POMO, naked shorts, etc...)

What a complete waste of time reading MSM dogshit like this. 

Thu, 06/13/2013 - 13:13 | 3654537 Silveramada
Silveramada's picture

charts in a manipulated world mean very little... the dilemma of gold vs paper should not be a dilemma

http://zysites.com/silververitas/

Thu, 06/13/2013 - 12:54 | 3654470 oddjob
oddjob's picture

Who in the USA is buying Gold?...ZIRP is subsidizing the banks to take it down, when the free money stops it will go up, not down.

Thu, 06/13/2013 - 13:04 | 3654508 THX 1178
THX 1178's picture

+1 I believe you are right

Thu, 06/13/2013 - 13:10 | 3654527 Canadian Dirtlump
Canadian Dirtlump's picture

Isn't that perverse. Using freshly printed money in the crimex casino to short sell paper, and pay premiums for cash settlement.

 

you need to get to work with that hat of yours mister.

Thu, 06/13/2013 - 13:13 | 3654528 SRSrocco
SRSrocco's picture

However, the Commercial Banks now are NET LONG GOLD whereas the Hedge Funds are now NET SHORT.  At some point in time we are going to see a huge Short Squeeze as the Commercials have transfered the short exposure to the Hedge Funds.

Furthermore, the top gold miners have to HIGH GRADE to produce profits.  This means in a few years, they will have much lower ore grades which means much higher costs:

The Big Squeeze Continues in the Top Gold Miners
Thu, 06/13/2013 - 13:58 | 3654684 SILVERGEDDON
SILVERGEDDON's picture

Is gold at a turning point ?

Is the pope Catholic ? 

Does a bear shit in the woods ?

Are corporations a cancer ?

Is Bernanke a retard behind the curtain of Oz ?

Are Zero Hedgers BTFD Bitchez ! ????

What is your point, zipperhead - spit it out. 

Thu, 06/13/2013 - 16:11 | 3655390 fuckitall
fuckitall's picture

"Tapering leads to lower PM prices."

There won't be any tapering.

Thu, 06/13/2013 - 13:37 | 3654618 Midasking
Midasking's picture

Currency digits are being created by the Trillions and that can't stop or things go oofty magoofty.. a word to the wise should be sufficient. Got Gold? or you really believe in the Bernank? http://tinyurl.com/lq63ahd

Thu, 06/13/2013 - 14:04 | 3654707 Dingleberry
Dingleberry's picture

I'd be more concerned if Heli-Ben was at his turning point. Mortgages at 4% now.

Gold just sits and does nothing. I don't think it really cares.

Thu, 06/13/2013 - 12:37 | 3654394 LawsofPhysics
LawsofPhysics's picture

Wake me when it's under $300 an ounce (dollar cost average on my physical holdings).  Then I might care.  One simply rule applies in today's market; when fraud is the status quo, possession is the law.

Thu, 06/13/2013 - 13:44 | 3654638 IrritableBowels
IrritableBowels's picture

The record is broken and the horse died long ago.

Thu, 06/13/2013 - 14:40 | 3654841 LawsofPhysics
LawsofPhysics's picture

Does not change the purchasing power of the physical one bit. That's the great thing about gold.

Thu, 06/13/2013 - 12:37 | 3654395 Rodders75
Rodders75's picture

Yeah but where the f*** is inflation?

Thu, 06/13/2013 - 12:39 | 3654404 LawsofPhysics
LawsofPhysics's picture

For starters, plot the cost of diesel, food, education, and heatlh care over the last 5, 10, 15, or 20 years.  Certainly you expect to live for more than 20 years (although your government might not want that)?

Thu, 06/13/2013 - 12:42 | 3654416 EmmittFitzhume
EmmittFitzhume's picture

exactly! How do you prevent inflation? Ignore this things that are inflating

Thu, 06/13/2013 - 12:52 | 3654439 fonzannoon
fonzannoon's picture

October 27th 2013

"A report surfaced today that JPM' gold vault has been receiveing massive notices to deliver several tons of gold. According to inventory reports JPM has not shown ay gold in their vault, eligible or otherwise, for weeks. Initially, delivery requests were being settled in cash. Lately though, those notices were not being settled in cash, but instead with photographs of Jamie Dimon's balls. In other news the dow closed up 135 points and gold was down another $25 on the day".....

Thu, 06/13/2013 - 13:09 | 3654518 jbvtme
jbvtme's picture

what's the ask on dimon's nuggets?

Thu, 06/13/2013 - 13:23 | 3654567 TheEdelman
TheEdelman's picture

You all laugh... until you see the photo

Thu, 06/13/2013 - 13:53 | 3654667 nugjuice
nugjuice's picture

Yeah, they will be covered in the saliva of our elected officials

Thu, 06/13/2013 - 12:49 | 3654441 InTheLandOfTheBlind
InTheLandOfTheBlind's picture

if pms were to go to the values they should be at, the "there is no inflation problem" crowd would be eating their own words... this is motivation enough for the fiat fucks to manipulate

Thu, 06/13/2013 - 13:06 | 3654514 Rodders75
Rodders75's picture

 

The overstated inflation danger

 

http://im.ft-static.com/m/img/railBg.gif); font-family: Arial, Helvetica, sans-serif; font-size: 16px; line-height: 18px; background-repeat: no-repeat repeat;">
http://im.ft-static.com/m/img/components/common/standfirst-border.png); background-attachment: scroll; background-position: 0% 0%; background-repeat: repeat no-repeat;">
http://im.ft-static.com/m/img/components/common/standfirst-border.png); background-attachment: scroll; padding: 0px 0px 14px; font-size: 21px; line-height: 27px; margin-bottom: 9px; background-position: 0% 100%; background-repeat: repeat no-repeat;">A high rate may be a risk in the very long run – but right now the risk is that it may be too low

 

 

 

 

 

 

 

 

 

 

 

Almost three years ago, at the World Economic Forum’s “Summer Davos”, in Tianjin, I heard a Republican politician say that the US would be in hyperinflation within two years. I was stunned. Yet a large number of people believe that hyperinflation is coming. If the US is in trouble, so, surely, is the UK. Is there anything in such predictions? The answer is: possibly, in the very long run. At present, however, the risk is that inflation may be too low, not too high. Paradoxically, that increases inflation risk in the long run.

 

http://www.ft.com/intl/cms/s/0/e779acb2-d1de-11e2-b17e-00144feab7de.html...

Thu, 06/13/2013 - 13:18 | 3654550 LawsofPhysics
LawsofPhysics's picture

Dear paid troll

please plot the price of diesel (per gallon), your favorite food (per ounce), heathcare costs, and education (tutition per year) in dollars over the last 30 years.

 

Must be our "lying eyes".

Thu, 06/13/2013 - 16:43 | 3655559 Herd Redirectio...
Herd Redirection Committee's picture

Martin Wolf, fresh from the Bilderberg meeting.

Thu, 06/13/2013 - 12:43 | 3654421 EL INDIO
EL INDIO's picture

Where are you living ?

Thu, 06/13/2013 - 12:57 | 3654488 Meme Iamfurst
Meme Iamfurst's picture

 

 

So....are you a banker or do you work for the govenment?  One of the two, no other explaination for such hog wash.

Unless,you were kidding, in which case I will give you my Harharharhahahaha, now.

Thu, 06/13/2013 - 13:05 | 3654511 Vooter
Vooter's picture

Make a list of everything that's gone up in price over the last decade (or two or three) and another of everything that's gone down in price over the same period, and then get back to us....

Thu, 06/13/2013 - 12:39 | 3654405 greatbeard
greatbeard's picture

The good news is the patient looks great.  The bad news is the patient is dying.

Thu, 06/13/2013 - 12:45 | 3654428 F. Bastiat
F. Bastiat's picture

Socialism is like an ideolgoical AIDS virus.

Fri, 06/14/2013 - 17:57 | 3659541 MeelionDollerBogus
MeelionDollerBogus's picture

where's the socialism?

All I'm seeing here is Fascism

Thu, 06/13/2013 - 12:40 | 3654410 Canadian Dirtlump
Canadian Dirtlump's picture

THe market will turn when there is a legit supply shock, or the world shits the bed. I'm comfortable with either, and we'll likely see both.

Thu, 06/13/2013 - 12:41 | 3654413 Buzzworthy
Buzzworthy's picture

I'll take the wild card possibility for $500, Alex.

Thu, 06/13/2013 - 12:42 | 3654417 nope-1004
Thu, 06/13/2013 - 12:54 | 3654472 Almost Solvent
Almost Solvent's picture

Just like in Goodfellas - when the DOJ attorney grins and nods his head at the Judge, this case will be dismissed post-haste.

 

Thu, 06/13/2013 - 16:47 | 3655582 Herd Redirectio...
Herd Redirection Committee's picture

"Plaintiffs Charles and Mary Ann Strange are the parents of Michael Strange, a member of Navy SEAL Team VI who was killed when the helicopter he was in was attacked and shotdown by terrorist Taliban jihadists in Afghanistan on August 6, 2011."

The way I understand it, those SEALS were already dead (murdered/silenced) and the helicopter crash was the cover story, the way you 'write off' the bodies, make things nice for the death certificate, the official story, and the family back home (who in this case, rightly, didn't buy the story).

Thu, 06/13/2013 - 12:42 | 3654418 F. Bastiat
F. Bastiat's picture

There are three proven antidotes to tyranny:

God, gold, and guns.

Thu, 06/13/2013 - 12:50 | 3654448 knukles
knukles's picture

Gosh... and on what side of that truism rests our leadership?

Thu, 06/13/2013 - 13:06 | 3654512 THX 1178
THX 1178's picture

Our leadership likes guns... and gold... but only for themselves. No one else.

Thu, 06/13/2013 - 13:58 | 3654685 upWising
upWising's picture

And far too many in the "leadership" THINK they are god(s)

Thu, 06/13/2013 - 13:12 | 3654532 Kirk2NCC1701
Kirk2NCC1701's picture

Call my finicky, but I prefer Gold, Guns and Ammo.  Unless you use golden bullets.  ;-)

Thu, 06/13/2013 - 13:25 | 3654574 F. Bastiat
F. Bastiat's picture

Your mind is your sharpest weapon; continuously hone your blade with the simple truths of mankind's nature.

Thu, 06/13/2013 - 14:52 | 3654887 tenpanhandle
tenpanhandle's picture

"There are three proven antidotes to tyranny:

God, gold, and guns."

 

Unfortunately there are four very stubborn symptoms to overcome:

government, graft, gulags and goons.

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