Gold & Silver Smack Down – 2013 Redu or Buying Opportunity?

This Week:

• Another Smack Down in Gold & Silver
• 2013 Redu or Buying Opportunity?
• World Gold Council: Price drop likely to spur demand
• This Maths Show Why Negative Interest Rates are Very Likely in the USA

Prices and Charts

Gold and silver both took hits to the jaw yesterday.

For gold in NZ Dollars this took the price down well below the 200 day moving average.

It’s important to note that where the price sits today is at the top of the range that has proven to be strong support since April. That is the range between $1750 and $1775.

So in the long run this range could well prove to be an excellent buying zone.

Of course there remains a chance of the price dipping all the way down to the long term rising support line at $1650.

However we are now close to a 50% retracement of the rise from the lows of late December from around $1560 up to $1945. This is not an uncommon occurrence after such a sharp run higher as the one we saw at the start of 2016.

Our guess is we see the price hold around these levels. But that is, of course, just a guess.

Silver really took a beating yesterday. It plummeted to touch the 200 day moving average (MA) line. We’ve redrawn the rising trend-lines to reflect a less steep trend. This coincides with the 200 day MA and the horizontal support resistance line.

With the RSI (blue circle) also now close to overbought, the odds favour a bounce higher from here.

The NZ Dollar has also pulled back sharply dulling slightly the fall in local gold and silver prices. The Dollar is now below the 50 day MA and touching the lower Bollinger band, so a bounce from here is likely. But a test of the 200 day MA like we saw in late May is now on the cards.

2013 Redu or Buying Opportunity?

After such a sharp fall in gold and silver yesterday we get the impression many are now wondering if we are to see a repeat of the massive decline we saw in 2013.

This morning we read a good summary from Jim Rickards as to why the price fell and what he personally did as a result. We can’t find too much to disagree with.

“Gold had its biggest one-day loss in almost three years yesterday. The question is why.

There was no shortage of explanations (as usual). The main theme was that the dollar is getting stronger partly due to sterling weakness on new Brexit fears. The market also took the view that a December rate hike is likely (we agree) and higher rates also add to dollar strength.

The dollar price of gold is simply the inverse of dollar strength. A strong dollar means a lower dollar price for gold, and a weak dollar means a higher dollar price for gold. There’s more to the picture, but that’s a good place to start any analysis.

This sentiment was captured in a quote in The Wall Street Journal from a respected commentator:

“The market is coming to terms with what may be a new burst of dollar strength and a U.S. economy that is strong enough to bear an interest rate increase,” says Linn Group strategist Ira Epstein. “This is where you step away from gold.”

The problems with this analysis begin with flaws in the assumptions. The first flaw is that a Fed rate hike is a sign of economic strength. Normally, that would be the case, but not this time.

The Fed is actually hiking into economic weakness because they want to raise rates before the next recession hits, so they can lower them in the recession. If that sounds like hitting yourself in the head with a hammer because it feels good when you stop, you’re right, but that is what the Fed is doing.

A rate hike is a replay of the Fed blunder in 2015. By raising rates while the economy is still weak, the Fed will cause a stock market correction (or worse) and cause a flight to gold as a safe haven — exactly what happened in December 2015, the last time the Fed hiked rates.

Once the stock market tanks and the economy flirts with recession (if we’re not already in one), the Fed will quickly revert to its dovish mode and start to weaken the dollar as part of the ongoing currency wars. Then gold will be off to the races again, with miners going up even more.

Tuesday’s drawdown in the gold price was also a reflection of “weak hands” getting washed out of the market. The weak hands are those in the paper gold markets such as gold futures and ETFs that are using margin or derivatives (such as options).

Their losses are magnified by the use of leverage, and they are forced to put up fresh margin money or face liquidation. Often, these weak hands dump their positions as fast as possible. That selling begets more selling, which feeds on itself and so on until the market finds a new level.

London-based gold guru Andrew Maguire said this last night:

“Close to a staggering 1,000 tonnes of paper gold has been rinsed out in the paper gold markets today… This takedown is a complete joke, and the wholesale market is all over this paper takedown. This is a desperate effort by Western officials to cover massive pre-Brexit short positions put on by their agent bullion banks near the $1,275 level.”

Maguire hammered the point that “Western officials” deliberately waited for a Chinese holiday before smacking down on gold-silver prices. Still, China will be back to business on Sunday night, buying gold and surely capitalizing on the gold discount. Meanwhile, the ever-vigilant People’s Bank of China (PBOC) is not asleep at the throttle, and was yesterday actively buying gold into this dip.

My senior geologist for Rickards’ Gold Speculator, Byron King, had this to say:

“My contacts across the industry — from mines in the desert to trading floors across the world — believe that yesterday’s gold price crash was a manipulated event, designed to flush out paper traders with weak hands. Gold prices should firm up and consolidate, and then the yellow metal will make its next move upward. Right now is a buying opportunity for everything on the shopping list.”

The rate hike/strong-dollar scenario is strictly temporary. Soon the reality of lower growth, lower rates and a weaker dollar will sink in. Then gold will make up today’s lost ground and surge higher.

I was on a conference call Tuesday morning when I first noticed the price action in gold. As soon as I finished that call, I dialed my dealer and bought more physical gold. I consider this lower price point a gift and an opportunity to add to my allocation at an attractive level. You should too.”

Continues below

World Gold Council: Price drop likely to spur demand

The World Gold Council today also issued a report where they argue the fall in price is likely to lead to a pick up in demand:

“Following a remarkable performance year-to-date, the gold price fell by over 3% on 4 October. The move seems to have been driven by speculation of a scaling back in the ECBs asset purchase programme, combined with rising expectations of a US rate hike in December.

 

The fall triggered stop-losses and further tactical selling.

 

We believe that a shift in monetary policy need not signal lower gold prices. The price dip will likely result in physical demand from consumers, long term investors and central banks. The broader market environment of ongoing low and negative interest rates, coupled with continuing political, economic and policy uncertainty remains unchanged, and are generally positive for gold.”

 

Source.

We’ve read how so far this year China and India have backed off on their purchases. As they quite wisely prefer to buy at lower prices. So it would make sense that we may see a pickup in demand from them too.

Data from Bullionvault shows for private investors this is already the case:

“We can’t say if gold and silver will now jump back and deliver quick-fire gains to new buyers.

But away from the derivatives and ETF markets, Tuesday saw a jump in physical gold and silver demand amongst private investors.

Customers yesterday traded £9.2m ($11.8m) of physical gold and silver between them. And for every seller, there were with more than 7 buyers in gold, and more than 5 buyers for every seller in silver.”

So we think this indicates we could well find a meaningful bottom around these current levels.

This Maths Show Why Negative Interest Rates are Very Likely in the USA

The mainstream view is that the fall in gold was driven by the expectation of a rate hike by the Fed in December. However Simon Black of SovereignMan.com shows how in the slightly longer run negative interest rates actually seem far more likely in the USA:

“…in every single recession in modern US history, interest rates were always MUCH lower at the end of the recession than they were at the beginning.

So if historical averages are any indicator, the next recession should begin some time between now and mid-2019, with an interest rate cut of 2% to 4%, presuming it’s just a mild to average recession.

This isn’t some wild fantasy.

Even the government’s own Congressional Budget Office recently revised its projections, stating that America’s prodigious (and rapidly growing) $19.5 trillion national debt “blunts” the prospect for meaningful economic growth.

Now, here’s the problem–

Interest rates right now are at historic lows. The effective Federal Funds Rate as of the first of this month was just 0.29%.

So unless the Fed raises rates by a LOT, and does so VERY quickly, the United States is virtually guaranteed negative interest rates in the next recession.

Negative rates, of course, are almost invariably accompanied by capital controls– legal restrictions to trap savings in a failed financial system.

We’re already seeing early signs of capital controls in Europe and Japan where interest rates are already negative.

European depositors suffer bank withdrawal restrictions, plus there’s strong momentum to ban physical cash (the natural remedy of negative interest rates).

This is just the beginning. And as anyone who has lived under capital controls can attest, they are destructive to your savings and standard of living.

Unfortunately negative interest rates are the most likely course of action.

Because if the Fed actually does start raising interest rates beyond some ceremonial 0.5% to 0.75% range in 2016 or 2017, they risk destabilizing the entire system.

Higher interest rates mean asset prices will fall, including real estate, stocks, and bonds.

That’s a huge problem for the Fed, which owns trillions of dollars worth of bonds and real estate securities.

In addition, the Fed is extremely leveraged, with capital of less than 1% of its total balance sheet.

So if asset prices fall by just 1% after the Fed raises interest rates, they will become insolvent.

It’s hard to even imagine the fallout and consequences of the world’s most important central bank going bust.

Higher rates also risk bankrupting the federal government, which is already borrowing record amounts of money just to pay interest on what they’ve already borrowed.

Plus, higher rates may slow down the US economy where both productivity and GDP growth have ground to a halt, even now when interest rates are at historic lows.

Talk about a rock and a hard place.

If the Fed raises rates significantly they will create all sorts of financial catastrophes, including engineering its own insolvency and stoking a recession that they’re trying to prevent.

But if they don’t raise rates then they’ll be forced to implement negative interest rates in the next recession.

This isn’t some far-fetched prediction, simply a common sense view of publicly available data and modern financial history.

The alternative is to assume that the Fed possesses some magical fairy dust to fix everything without any consequences…

… or that there will never be a recession ever again until the end of time.

This is absurd thinking.

Look- it’s pretty obvious where things are headed. This isn’t a political problem. It’s an arithmetic problem. And the math doesn’t add up.”

Source.

And as we’ve been saying, with interest rates low and heading lower in much of the world, the risk remains for even lower rates here in New Zealand. Lower than the 1.75% that bank economists are talking about.

If the USA eventually ends up with negative rates, we could get close to that here too.

This could still play out while the trend in longer term non central bank set interest rates actually moves higher. This is the trend change that will really surprise people just like it did when the opposite happened at the end of the 1970’s. That was when interest rates started to fall.

What to Do?

We think the charts show that we are likely in excellent buying zones for both gold and silver.

The risk remains in sitting on the sidelines expecting an even larger retracement. We don’t expect this to be a repeat of 2013 when gold and silver just kept plummeting lower.

So if you’re wanting to buy but can’t overcome the fear of lower prices, there is an option. Take a position now and hold some cash back just in case we see even lower prices ahead. Then at least you will have a foothold in the market and some financial insurance in place.

Just reply to this email for a quote or phone David on 0800 888 465 if you have any questions.

This Weeks Articles:

Doug Casey on the Self-Identified Elite Thu, 6 Oct 2016 12:27 PM NZST The danger for the world today is that we head even further along the path of centrally planned economies than we already have. History shows that this is not the path to freedom and success. Doing Casey points out the dangers the elites pose and how they are in fact very forthright in making their […] Read More…

50 Slides for the Gold Bulls – Incrementum Chartbook 2016 Tue, 4 Oct 2016 3:55 PM NZST Ronni Stoeferle at Incrementum has released a 2016 Chartbook for those of us that prefer images to words. It’s a trimmed down and image only version of his “In Gold We Trust 2016” report that we shared back in July: In Gold We Trust 2016 – Out Now! In an email this week he said: […] Read More…

You Better Get Used to Negative Interest Rates Tue, 4 Oct 2016 12:45 PM NZST While negative interest rates are prevalent in Europe, the risk of interest rates going even lower here remains. Even though low and negative rates have caused asset bubbles and as you’ll read below also heightened the odds of bank failures and system risk… You Better Get Used to Negative Interest Rates By Justin Spittler Negative […] Read More…

Biggest Risk to NZ Banks (and Deposit Holders) Thu, 29 Sep 2016 3:02 PM NZST This Week: Next Crisis Cause: Deutsche Bank and EM Debt or Pensions? Bonds Are Super Risky Sell Stocks and Buy Gold RBNZ Considers New Banks “Dashboard” But Biggest Risk Is NZ Offshore Funding Prices and Charts Spot Price Today / oz Weekly Change ($) Weekly Change (%) NZD Gold $1817.70 – $3.80 – 0.20% USD […] Read More…

Today’s Prices to Buy

1oz NZ 99.99% pure gold bar

$1831

1kg NZ 99.9% pure silver bar

$898 (price is per kilo for orders of 1-4 kgs)
$883 (price is per kilo only for orders of 5 kgs or more)

1oz PAMP Suisse 99.99% pure gold bar

$1874

1kg PAMP 99.9% pure silver bar

$927

1oz Canadian Gold Maple 99.99% pure gold coin

$1902

1oz Canadian Silver Maple 99.99% pure silver coin
(Minimum order size tube of 25 coins)

Tube of 25 $804.50
Box of 500 $14,800
(Fully insured and delivered)

Note: Prices are excluding delivery 1 Troy ounce = 31.1 grams 1 Kg = 32.15 Troy ounces Request special pricing for larger orders such as monster box of Canadian maple silver coins Lower pricing for local gold orders of 10 to 29ozs and best pricing for 30 ozs or more. Foreign currency options available so you can purchase from USD, AUD, EURO, GBP Note: Your funds are deposited into our suppliers bank account only. We receive a finders fee direct from them only.