Sean Brodrick: I’ve recently recommended more positions in precious metals to my Red-Hot Global Resources subscribers — and I may recommend more, soon.
That’s because there are three rock-solid facts — and one red-hot rumor — lighting fires under gold and silver prices.
This will come as a surprise to many in the markets, because investors — disgusted by months of depressed prices in the metals — have sold gold and silver and put their money to work elsewhere.
Good! This gives us time to position for the next big rally before Johnny White Shoes and the Wall Street herd catch on.
Fact No. 1: Investors Are Stocking Up on Silver
The spot market price of silver jumped to its highest level in two months on Tuesday. Here’s a weekly chart showing the action in the iShares Silver Trust (NYSEARCA:SLV) through Tuesday morning …
You can see that silver, as tracked by the SLV, already broke through overhead resistance (horizontal line) from earlier this year. Now, it is testing its big weekly downtrend (diagonal line).
I think silver could be poised for an explosive move higher. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!
This is happening at a time when, according to a Bloomberg story, U.S. Commodity Futures Trading Commission data show that “Speculators cut bets on higher prices by 72% since the end of February, mirroring changes in their copper wagers, which turned bearish in May.”
But do you know what else is happening? The holdings in silver Exchange-Traded Funds are climbing higher and higher.
Specifically, according to recent reports, investors bought 797 metric tons of silver through silver-backed exchange-traded products this year and now hold 18,093 tons, equal to more than eight months of global mine output.
So, while Wall Street speculators have cooled on silver, investors who buy silver ETFs — and who presumably have a longer time window than speculators – are adding to their positions.
I think this is happening partly due to investor anticipation of more money-printing by the world’s central banks. Just this week, the People’s Bank of China injected a record 220 billion yuan ($34.6 billion) into the financial system.
The People’s Bank of China used so-called reverse repos, exchanging its cash for borrowers’ securities for an agreed period, in an effort to boost current levels of market liquidity. All that liquidity has to flow somewhere, and commodities like silver can float higher.
This comes after China’s central bank already lowered bank reserve requirements in May and cut benchmark interest rates in June and July to goose economic growth – more liquidity!
Now, everyone is watching what happens when Fed Chairman Ben Bernanke speaks at a conference in Jackson Hole, Wyo., at the end of this month. The expectation is that he will announce another round of quantitative easing (basically printing money and handing it out to the big banks).
And then on Sept. 6, the European Central Bank will meet to wrestle with its sovereign-debt crisis. There are hints that some form of money-printing may be part of the solution.
Is money-printing bullish for silver … and gold?
But that’s not all …
Fact No. 2: White Metals Are White-Hot
It’s not just silver that is heating up. Platinum is sizzling, too, for different reasons, which I’ll get to in a minute. But the fact is, the white metals seem to be leading gold higher.
Let’s look at the recent one-month performance in the ETFS Physical Platinum Shares (NYSEARCA:PPLT) vs. silver as tracked by the SLV and gold as tracked by the SPDR Gold Trust (NYSEARCA:GLD) …
Platinum is moving higher because miners at Lonmin’s giant platinum mine in South Africa went on strike; then a riot erupted that left 34 miners dead – gunned down by police. Ten other people were killed in clashes between rival unions.
Chaos doesn’t seem too strong a word to describe the situation. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!
To put this in context, South Africa holds more than 80% of the world’s reserves of platinum. So, you can see why platinum prices have shot higher.
But the question is, what if the strikes spread to South Africa’s other mines?
There are fears that strikes could spread to South Africa’s coal and iron mines. The gold mines don’t have much membership in the union that is calling for strikes, so they may be safe … for now.
However, Mineweb’s general manger and editorial director, Lawrence “Lawrie” Williams – a highly respected expert who used to work in South African mines – writes that the Association of Mineworkers and Construction Union (AMCU), which is behind the strikes, may be moving in to some gold mines.
While South Africa’s gold production is way off its peak, that country still supplies about 10% of the world’s gold.
It all sounds risky to me, and risk has to be priced in.
Fact No. 3: Seasonal Forces Favor Gold … and the Miners.
‘Tis the season to be buying gold.
Now is when we normally see prices start ramping up for India’s festival season, Christmas and the Chinese New Year.
These are all big buying seasons for gold. And it shows in a chart of gold’s monthly price performance …
August already saw gold get off to a great start. History leads us to expect a strong finish to the month, and to every month for the rest of the year!
And for investors, the big question is, what would a gold rally mean for gold miners? Well, there is one more chart I want to share with you, a seasonal chart of gold miner performance …
Gold stocks, as measured by the NYSE Arca Gold BUGS Index (HUI), have historically had a great time from August through November, including average returns of 8% and almost 3% in August and September, respectively.
Historical performance will only get you so far. The proof is in the pudding, and we’ll know soon enough. I believe that gold miners have been depressed so hard, for so long, that when the big move comes, it could be enough to send traders’ heads spinning around.
These are all hard facts. Now, let me share a delicious rumor that has been adding spice to the markets recently.
Now for the Rumor: China’s Buying a Boatload of Gold!
MarketWatch reported “unconfirmed speculation” that China – the world’s No. 1 producer and second-placed consumer (at the moment) – is gearing up to buy up to at least 5,000 to 6,000 metric tons starting before the end of the year.
To put that in perspective, global gold mine production has averaged roughly 2,600 metric tons per year over the past five years, according to the World Gold Council.
So, the rumor is the Chinese would be buying at least twice the world’s production of gold. Wow! If that’s true, just wow!
We know that other central banks, especially emerging-market central banks, have been adding to their gold hordes hand-over-fist. This, in turn is one way we know the world’s financial crisis isn’t over.
But if China is accumulating gold — a lot of gold — that puts a floor under the price of the yellow metal. And that, in turn, puts the risk to the upside.
The Best Ways to Play the Move in Metals
If we’re on the cusp of the next rally, the three ETFs I’ve mentioned here today — PPLT, SLV and GLD — will be worth a look.
But I think the real outperformance will be in select gold miners. They have been beaten down into the dirt, and they are leveraged to the underlying metal.
When their big move comes, it could be ballistic. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!
My Red-Hot Global Resources subscribers know what I’m talking about. Heck, we added two miners on July 31 that were recently up 7.4% and 14% from our tracked entry prices. As the price of the metals moves higher, the profit margins of these companies get wider and wider.
I can’t wait to see what happens next. And when you join today, you’ll be among the first to know … and what to do, to take advantage of it!
If you’re doing this on your own, be sure to do careful due diligence.
Good luck and good trades,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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