Weekly Market Report 4/15/13
Gold
Today’s Update
Cyprus’ Gold not significant
Step back and look at what is happening
So what is the best strategy?
Will history repeat itself?
Silver
Recommended Investment Commitment and Diversification
The initial reason behind Friday’s dramatic selloff in Gold was a statement by Mario Draghi, the President of the European Central Bank (ECB). During a press conference last Friday, Draghi said that the money raised from the sale of Cyprus’ Gold will go towards covering the losses from the emergency loans to the country’s banks. Cyprus will be forced to sell the 14 tonnes of its Gold reserves, worth €400m ($520 million.) The funds will be used to pay back part of the 10 billion Euro ECB bailout that is allowing Cyprus to survive its current financial crisis.
Friday’s announced pending sale of the 14 tonnes of Cyprus’ Gold caused the London Gold PM fix to be lowered to $1,535. After reaching that price level (breaking a major support level) the chartists and the day traders shorted Gold, helped by reports that a 4 million ounce (124.4 tonnes) sell-order (worth $6 billion at current prices) by a large investment bank (Merrill Lynch) spooked the markets; which then in turn attracted further selling all the way down to $1,477. This drove up the volume of Gold traded on the COMEX, reaching 375,000 hundred-ounce June contracts (37 ½ million ounces.) This was clearly too much for a relatively quiet Friday market trading to handle, and the initial pressure resulted in waves of selling. Many of the professional day traders covered their short positions (with a nice profit) in the aftermarket when Gold dropped below $1,500 per ounce. I also saw margin call selling near the close, which helped drive down the price at the close.
Although reports from the Middle East and Asia over the weekend showed extraordinary physical demand for Gold and Silver, retailers reported that the current bargain prices increased their sales from five to ten times normal. However, today’s margin and panic selling in Europe and the U.S. drove the Gold price down below $1,400 per ounce. Additional fears of an increase in margin requirements on the commodity exchanges also accentuated the selling, driving Gold down to $1,350 per ounce and Silver to $23 per ounce.
I think that the Chinese, Indians, and many Central Banks, are buying forklifts so that they can load up on Gold this week, as they love to buy cheap Gold. I believe Gold and Silver at these ridiculously low prices are easily the opportunity of a lifetime.
Cyprus’ 14 tonnes by itself does not represent a significant amount of Gold, but the concept that the ECB can force a European nation, during a financial crisis, to sell their Gold as partial payment for an ECB loan is scary. The fear that PIGS countries, (Portugal, Italy, Greece, and Spain) would also be forced to sell significant amounts of Gold was the real negative in Draghi’s statement. Most Eurozone finance ministers have discounted this premise, because although it is relatively easy to force a small economic country like Cyprus to act, it would be virtually impossible to force Italy, Portugal, or Spain to do any more than pledge their Gold as collateral for a loan. And as for Greece, they already have their long term ECB & IMF loans and selling Gold was not part of any agreement.
Step back and look at what is happening
When an individual, corporation, or country is going bankrupt, one of the final stages is to sell off the assets to keep them afloat while they try to fix the monetary problems. Whether it is your neighbor selling the furniture, or a Sovereign government selling the Gold from their reserves, it is a sign of pending bankruptcy.
Historically, governments that are destroying the value of their currency with excessive printing, massive debt, and monetary stimulus, are guaranteed to have serious inflation. The last ditch effort is to discourage Gold ownership while selling off the Gold, while governments, corporations, and investors from countries with trade surpluses and strong economies (like China, India, Brazil, South Korea, and Russia) buy the Gold. The increasing volatility in the Gold market is telling me that the financial crisis is coming sooner than I anticipated (in my Hyperinflation 2013 booklet released in February). If you wish to review the booklet please visit: http://www.coinmag.com
As U.S. citizens we need to focus on the value of precious metals in our own currency. As long as the U.S. fundamental’s currency debasement continues with increasing monetary stimulus and massive debt, we must commit between 25 to 35% of our investment capital into Gold and Silver.
I believe the current low price of precious metals is an opportunity of a lifetime to protect your U.S. Dollar denominated assets. If the value of Gold and Silver continues to drop by 5%, add another 5% to your holdings unless the fundamentals change (which I strongly doubt). Selling for a profit on major rallies is based on your personal needs for the capital. History has proven this strategy to be very successful when your assets are kept in a depreciating currency.
We have seen similar price corrections in the Gold market before, only to rally back to set new record highs. In October of 2008, Gold dropped from $1,011.25 to $712.50, based on news that the IMF would be selling major tonnage of Gold into the market. After the sale was completed, Gold rallied back to over $1,016 per ounce in 2009. Now it’s the Eurozone talking about Gold sales and the markets are reacting in a similar matter. There is major long term price support at the 2011 lows of $1,309.00 per ounce, and being able to buy Gold at today’s price is truly an opportunity of a lifetime.
Silver, along with Platinum and Palladium, have followed the Gold price lower. Silver closed last Friday at $26.33 per ounce on the COMEX, down $0.89 for the week but reaching a low of $25.73 per ounce in Friday’s after-market trading. Silver’s major long term support is at $23 per ounce, with major resistances at $28 per ounce. Any additional purchases should be done in the $23 price area to minimize risk.
Recommended Investment Commitment and Diversification:
Precious Metal commitment: Minimum of 35% of investment capital
Diversification: Gold 55%, Silver 40%, Platinum & Palladium 5%
Diversification includes 50% in long term investment quality rare coins and 50% short term bullion products
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