Gold and silver are sliding sharply just as I predicted, even though the long-term fundamentals remain as bullish, if not more bullish, than ever!
Consider this week’s action: Gold has plunged more than $41 since the beginning of the week … now more than $120 since its record high of $1,432 on December 7 (a loss of 8.37%) … while silver has shed almost $1 so far this week, and a whopping $4.71 since its peak of $31.27 on January 3, a loss of more than 15%.
Gold has broken key support at the $1,325 level, and as I pen this issue, it’s trading at $1,310 — well below a weekly sell signal at the $1,327 level.
That puts gold on a likely path to its next support level in the $1,220 area.
You can see gold’s action on this chart.
If the $1,220 level gives way, we could see gold fall to the $1,050 level.
I do not expect gold to fall that low. Gold will likely find support at the $1,220 level, and then start forming a consolidation pattern that will lead to its next major leg up, to new record highs.
Now let’s look at silver’s chart. Similar to gold’s, silver’s short-term pattern is quite bearish. I expect silver to seek the $25 level, initially, where some decent support should reside.
However, silver is a notoriously manipulated and volatile metal. Plus, several of my technical indicators show that it could fall to as low as the $22 level. So don’t be surprised if you see silver plunging more than gold in the days ahead.
I can hear the questions, so let me broach them now …
Q: Larry, why are you so bearish on the metals?
A: Only short term! Long term I am actually more bullish than ever, now that the precious metals are putting in a normal, healthy, cyclical pullback.
Q: Why are gold and silver falling when there are no bearish fundamentals out there, and in fact, the fundamentals remain extremely bullish?
A: As I’ve often said, don’t trade only by fundamentals, especially in the shorter-term time frames. If you do, you will almost assuredly lose a bundle.
Fundamentals, such as the weakening dollar, eroding confidence in government, the sovereign and municipal debt crises, exploding demand for tangible assets, and more — are years, and sometimes decades in the making, and decades in duration.
They do not change overnight, or in a matter of weeks or even months, for that matter.
So never base investment or trading decisions on short-term fundamentals.
Q: The economy seems to be improving, yet inflation is picking up. Shouldn’t the former be viewed as bearish for precious metals, the latter, as bullish? What’s your view?
A: First, the economy is not picking up. All we’ve seen is some bottom-bouncing. The U.S. and European economies are in a very deep recession, if not a depression, and they will remain stuck in the mud for years.
Meanwhile, inflation is picking up all over the world. The inflation that we are seeing is due to the weaker dollar, and largely due to the fact that virtually all natural resources are in short supply vs. demand, which is mainly coming from Asia and emerging markets.
Don’t forget that 84% of the world’s population lives in emerging markets, and they are leap-frogging from the 19th century, in essence, to the 21st. The demand that it is causing is overwhelming any diminished demand we are seeing in the other 16% of the world.
But even if I’m wrong, and the U.S. and European economies improve, it would be longer-term bullish for the precious metals as well, as it would mean the Fed’s money printing would be leaking out into the economy, and the dollar would get hammered even more.
If you own core gold investments, from physical gold to gold mining shares, ETFs, etc. — I recommend holding them, but with an appropriate hedge, such as those I suggested last week: the PowerShares DB Gold Short ETN (NYSE:DGZ), an exchange traded note that seeks to profit from declining gold prices, and the ProShares UltraShort Silver ETF (NYSE:ZSL), an inverse ETF designed to move up at roughly twice the pace of silver as it declines.
And of course, stay tuned to my Uncommon Wisdom columns on when to lift those hedges. Better yet, become a member of Real Wealth Report so you can get all of my recommendations, specific timing moves, flash alerts, and all opportunities. At a mere $99 a year, it’s one heck of a bargain. Just click here now to join.
Now, some food for thought. Specifically, a quote from an article I just read in the Bangkok Post about emerging markets. The author, Ben Hirschler, put it this way …
The three words that characterize the last decade have been ‘Made in China’. The three words that are likely to dominate the next decade will be ‘Owned by China’.
Mr. Hirschler hit the nail on the head. In the next few years, you are going to see an EXPLOSION in China’s acquisitions of U.S. and other foreign businesses.
I have no doubt about it. First, China’s government has more money in its piggy bank than any country on the planet — more than $2.85 trillion. And, China’s government is still a big partner in many of the country’s biggest companies.
Second, China is still searching for and looking to acquire, in a big way, natural resource sources all over the planet.
Third, President Obama just opened up the United States to more Chinese investment at his recent meeting with President Hu.
Perhaps most important of all, China’s top businesses are exploding with revenues and profit growth. In 2005, China was home to 16 of the 500 largest companies in the world, the Global 500.
Today, it owns 46 of the largest, an increase of 187%!
Moreover, in 2005 the total revenues of China’s 16 companies that were ranked in the Global 500 stood at only $464.5 billion, or one-fourth the revenues of the top 16 U.S. companies in the Global 500.
Today, China’s 46 Global 500 companies are spinning off $1.921 TRILLION in annual revenues, or 44% of the revenues spun off by America’s 46 companies in the Global 500.
And mind you, China has a population more than FOUR times the size of the United States, and, it’s still early in its long-term growth phase, still opening its economy, and poised to grow for decades.
That’s not to say China will not have its share of setbacks along that long-term growth path. It will. But they won’t be as frequent or as sharp as most analysts lead you to believe.
There’s a level of nationalism that exists in China that you simply can’t understand, unless you’ve been there, on the ground, as I have many times. The Chinese are on the march forward, big time.
Till next week …
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD 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, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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