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Research for Online Investors

12/13/11

Precious metals didn’t like the answers out of Brussels.  What!  The ECB is not going to print money?  There is more to be written on this topic…the debt crisis is not over yet and before it is, we believe the European Central Bank will have to engage in quantitative easing.  They will end where all central banks end, the buyer of last resort for debt that no one wants.

We find the promise that Greece was a one-time situation, that bondholders will not have to take write downs in the future particularly hollow.

Germany had to force losses on Greek bondholders because of political pressure at home.  German voters don’t like spending their hard earned money to bail out lazy Greeks and fat bankers.  But, when you force banks (bondholders) to take losses on “safe” sovereign debt, who is going to buy “safe” sovereign debt in the future?

It is not surprising Italian and French interest rates have moved higher since 50% “haircuts” were forced on bondholders.  Precious metals held up in the euphoria Friday that a deal had been struck, but fell out of bed on Monday.  Here is a chart of GLD for the last three years.

We have drawn the 150-day moving average that has acted as support for the last three years.  The last time GLD was below the 150-day average was 1/20/09.  Since then we count eleven times the 150 was tested, and it held each time.  Here is another chart of GLD for the last five months.

We have drawn a horizontal line intersecting the market closing on 8/5/11.  This was the Friday before S&P downgraded U.S. debt.  The market gapped higher on Monday the eighth.  One consideration in technical analysis is that gaps will be filled and retested in the future.  This gap was filled and looks to have supported GLD when it fell on Monday.

A good argument can be made by gold bears that the market may retest 155 (the low on 9/28/11).  We think there is a good entry point here if you have been looking at precious metals, but waiting on a pullback to get in.  We might be at the absolute bottom, or we are within four percent of it.

One of the concerns in precious metals right now is the MF Global bankruptcy.  Trader’s accounts have been frozen, and I read yesterday about lawsuits over ownership of contracts.  UBS claimed some customer account contracts as collateral against loans.

This is causing some precious metals enthusiasts to leave the futures market, opting instead to buy the metal of their choice outright.  We are not “gold bugs” or collectors. We still believe precious metals should be in every investor’s portfolio.  The easiest way to trade or invest is through GLD for gold and SLV for silver.  This allows you to press a button and buy and then press a button to sell when you want.

Silver may represent the best opportunity over the long term, as it is currently at a 53 to 1 ratio.  It takes fifty-three ounces of silver to buy one ounce of gold.  This ratio is too high.  It may not correct immediately, but it should close over time.  Because silver has industrial uses, the price fluctuates on economic numbers and as a store of value.

We like DGP (Double Long Gold ETN) and AGQ (Double Long Silver).  These give you double the movement if you have the stomach.  They are not perfect doubles because of “tracking error” but will do better than one to one.

Quote:
But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.—Frederic Bastiat

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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