Arms out wide for the great gold & silver closing down sale

5 mins. to read

That “barbarous relic”, the shiny yellow metal that has so entranced people for millennia seems to have finally broken the 13 year bull run that began in 2000. Reasons put forth are legion, from the ending of QE (and which we postulated as a portender of potential price weakness at the beginning of the year – see image below & link), to forced central bank sales, several large institutions liquidating positions to meet margin calls or redemptions due to the plunge in Japanese bonds, through to poor old John Paulson now likely down to his last few billions (all say aaaahh!), finally throwing in the towel on his heavy under water long positions…

During the last two sessions, gold has endured a sell off almost without equal with the future falling today by the largest amount in 30 years. It’s safe to say that out and out panic and forced liquidations have been in play today. Stop orders weere seemingly triggered on the break of $1500 with the yellow metal trading at $1360 as we write – almost back to our beginning of year target as documented in this guide –

Bear Market entered

Over the last 5 sessions the precious metal has lost over 15% and entered bear market territory decisively. This is a massive sell off that looks to have caught many investors off guard. Even though we have been a relatively lone bear on gold since the middle of last year, a few weeks ago we refrained from this stance due primarily to the European situation which could we thought was likely to trigger risk off trades and so push gold higher. It seems that there are others factors weighting on gold right now however and which look to finally close the book on the long 13-year gold rally.

After hitting an all-time high of $1,920.80 on September 2011, gold has now lost over 30% of its value from e peak and the loss since the beginning of this year alone is around 20%. Silver has also suffered the same fate. The metal is trading at just $23.19 at the time of writing – the weakest value in more than two years and off more than $26 since the all-time high registered on April 2011 at $49.81. Silver is down more than 53% since that time and 23.5% this year alone.

The sell-off in both the precious metals intensified last Friday and extended overnight to the Sunday Asian session. There are several factors weighing negatively for sure but in the case of silver we think the sell-off has gone too far and would not be surprised to see a sharp snapback during the remainder of the week to over $27. The metal is as oversold now as it was in September 2008, May 2011 and also May 2012 (seems there is a 12 months cycle low in recent years). On each occasion, the metal rallied by an average of almost 20% over the next few sessions and we wouldn’t be surprised to see a similar move and have indeed positioned ourselves long around the current levels.

The Cypriot connection

With a bailout agreed for Cyprus at €23 billion, the country will have to come up with €13 billion of its own funds – much more than the initially agreed €7 billion. To raise the necessary funds, Cyprus is imposing hefty losses on bank depositors, adopting several severe austerity measures and, worryingly for the gold bulls, also selling gold reserves. Even though the country’s gold reserves aren’t that much relative to other central banks, the idea of the central banks selling gold reserves instead of accumulating is a new phenomena. The fear is Portugal, Italy, and Spain will also follow suit.

Over the last few years, central banks have been an important demand source for gold, at least offsetting the loss in demand for jewelry, and investors are concerned with what could happen this year if this source of demand stalls… Portugal, for example, holds 382.5 tons of gold, the 14th highest in the world, and most certainly concern if they start selling…

John Paulson the subprime king

The sale of gold by central banks is a major blow for the gold price, especially when the news is mixed with the uncertainty surrounding QE3. It seems investors weren’t able to discern from FOMC minutes when QE3 will end, and they fear it will be sooner than first expected (again refer to our gold guide at the bottom of here to see how we flagged this at the turn of the New Year). At the same time, inflation is not picking up as expected and thus the “gold appeal” isn’t as strong as many gold bugs have hoped. What led John Paulson and other macro players to back gold was the continuing quantitative expansion along with a rising US debt profile which just contribute to the continued debasement of the US Dollar. Unfortunately for him, the US Dollar has been quite strong this year and inflation is controlled so far hence pointed fingers that he is now capitulating and suffering the ultimate irony…

Adding to the derailing factors list, Chinese data delivered overnight was a disappointment. The Chinese economy grew at a 7.7% pace in the first quarter (annual rate) and much less than the expected 8%. Fixed asset investment and industrial production are decelerating too. These data wholesale triggered liquidations in commodities in combination with raised margins. In short, the panic button is being hit.

We have suggested that the gold mining sector is ripe for buying in recent weeks and we have been 20-30% too early on this call. That is the nature of bottoms – there is no bell and the excessive sell off generally goes much further than you could ever imagine… However, the analysis that this was based upon remains sound and so we argue that for those with available liquidity, the opportunity presented today is even more compelling. We doubt that purchasers of ABG, AVM, AMA, POG, KAZ, AUE etc will look back on a portfolio basis with regret in 6-12 months time. This is the buying opportunity of the last 5 years since the 2009 lows in our opinion. Check out our picks here –

We make the following stocks Trading Buys today – 

Petrapavlovsk @ 142p

Amara Mining @ 38.5p

ENRC @ 237p

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