Precious Metals = Trade
Research for Online Investors

6/27/12

We called Gold the Trade of the Year for 2012 on Dec. 29, 2011.  Right now we have mud on our face.  In our prediction of another great year for gold, we admitted the shiny stuff could go lower for the year if; the dollar continued higher, the U.S. budget was balanced, if eurozone countries don’t leave the monetary union, if no European banks went bankrupt or if Ron Paul was elected President.

Where is the economy and why is gold lower?  The dollar has continued higher because the euro has been falling and the Federal Reserve has not initiated quantitative easing.  The U.S. budget is not balanced, but Germany has stood its ground to force fiscal accountability in the eurozone.

No eurozone countries have left the eurozone and while their banks have been propped up, they have not failed.  The reported runs on banks have been because of sovereign risk rather than bank risk.  The blurry line between sovereigns and banks in Europe makes this a difficult call.

Here is a three year chart of GLD with the 150 day average we referenced on 12/29 when we recommended Gold as the Trade of the Year.

Warren Buffett never hesitates to trash gold as an asset.  We have written about our disagreement with him on this.  We look at gold as a currency, the oldest in the world.  Currencies are a store of value but vary in their weight against other currencies.  Right now gold and silver are losing value to fiat currencies.

With austerity the buzz word in the eurozone and the House of Representatives slowing the budget abuse in Washington, why should gold and silver go higher?  We have negative interest rates which are normally good for precious metals because the cost of holding is low, but the velocity of money can be compared to snail racing.  Commodity prices point to deflation rather than inflation.  This is not a good situation to store value in precious metals.

Our Long-Term portfolio subscribers closed our gold and silver positions earlier this week as we expect more weakness ahead.  The conclusion must be that precious metals are a Trade not an Investment.

You don’t invest in dollars, Yen or Euros; you trade them.  Precious metals are the same.  Investments should make a return like a business or a stock that pays a dividend.  Trades are entered for anticipated profits (and losses).  It is imperative to know the difference.  Many forget this and we have been guilty also.

When we recommended Gold for 2012, we planned to hold it through the year, confident it would increase in value and we could book a nice profit.  Like any asset that does not pay a dividend, you have to sell it to make money!

When do you sell gold and silver?  When it is profitable.  When will we recommend buying precious metals again?  When the Federal Reserve announces QE3, when the ECB prints euros to buy European bonds and increasing the size of their balance sheet, and finally when the dollar breaks to move lower.

Tomorrow will be a fun filled headline risk extraordinaire day.  Before the market opens; U.S. Weekly Initial Jobless claims and GDP numbers will be released.  The Supreme Court will announce their decision on the constitutionality of Obamacare.  European Leaders will start their two day meeting in Brussels.  Will we see fist fights?  The House of Representatives will vote to hold Eric Holder, Attorney General, in contempt of congress.

The business programs are full of pundits with opinions on how to trade these events.  I just offer that volatility will increase.  The market feels like it wants to move higher going into the end of the quarter.  Large funds can move markets if they want to, and they want to look good when they report to their customers!

The Mailbag:
I just finished watching the Michael Burry Commencement speech you highlighted in MarketToday.  Beyond neat.  Can I forward MarketToday to some of my friends so they can watch it?---Long-Term subscriber T.M.

John’s reply:  Please feel free to forward any of our MarketToday articles to friends.  We try to write good news and source material for investors and everyone that wants to be current on politics and economics.

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