This Week in Barrons – 8-12-2012
“Gold and Silver were mixed with dirt, until Avarice parted them” … proverb
Anyone that has read us for any length of time knows that I am a big fan of physical gold and silver. I began our gold buying in 2001 and added to our holdings right up into the $1500 per ounce range. I began silver accumulation in 2007, at around the $13 level, and bought it into the high $30's. All along the way we've talked about how prices do not reflect reality, because gold and silver aren't priced by physical supply and demand. Their prices are set by paper trading futures, derivatives, forward leases, swaps, and government interventions. These prices have been manipulated for decades. In Gold there was the "London Gold Pool" of the 60's that set the price at $35 an ounce, and bought and leased gold daily to keep that price locked. Silver started being manipulated by the Coinage Act of 1965, and President Johnson himself stated, “Investors should not try and look for gains in silver because the US would dis-hoard their stockpile.” It doesn't get much clearer than that.
J.P. Morgan Chase (JPM) is usually the target of silver manipulation – because on any given day they might be short one-third of the ENTIRE silver production for a full year! In fact, Andrew McGuire (a silver trader) went to the CFTC and told them that a manipulation would occur on a specific day, and "bingo" – on that exact day and time – the price moved to the levels he suggested. At one time I believe there were more than 14 separate lawsuits about silver manipulation. Recently a Financial Times article said that they are close to shutting down the CFTC investigation into silver manipulation due to lack of evidence. So are all the silver traders just nuts – or is the CFTC covering up for JPM? Is this an example of the foxes guarding the hen house? Well, ‘Yes’ everyone sees the manipulation, but it’s difficult to prosecute the perpetrator when the perpetrator is the U.S. Government.
The gigantic shorting that you see at JPM isn’t because JPM has some issue with silver. It’s a clear case of “Don’t shoot the messenger.” JPM is simply one of the vehicles the Government uses when they're executing their monetary policies under the cloak of the ESF (Exchange Stabilization Fund). This is a fund our government uses to “push metals around” in order to extract the highest advantage for them in their banking/currency contracts. Big banks – like JPM – become the trading platform to do their dirty work. JPM is not doing the manipulation – it’s just carrying out the trades for the true manipulators – the U.S. Government.
Some feel that because Uncle Sam himself is doing the manipulation, there's no hope that silver will ever really break free. I do not believe that. While the government does it’s best to keep gold in line (because it's viewed as a competing currency to the dollar), silver is a different animal. Along with being a currency, silver (unlike gold) is also used in industry. Except for all the gold that's been lost to shipwrecks, most of the gold (ever mined) is still here. Silver however gets depleted as it's used in technology, aerospace, and medical. There is less and less silver available each and every year, and at some point the shortage of the physical metal itself, will push the price higher. Yes the manipulations will continue, but they will continue at a much higher price level.
This past week, silver went into ‘backwardation’. That is when the physical price at the present is higher than the futures price in months to come. That suggests that investors do NOT want to give up their bullion. With the possibility of the ECB and our own Federal Reserve going crazy next month (carpet bombing the planet with fiat dollars), it is no wonder that people are holding onto their metal. We are about to enter a period of severe inflation.
So ‘Yes’ the price is manipulated, and ‘Yes’ the price doesn't reflect true supply and demand. And ‘Yes’ I am still accumulating the metal because I feel that the situation will be changing. I have predicted a silver price of $70 to $80 an ounce, and still believe it will get there. Considering that's about 3 times more than its current price, it's our opinion that Silver is still one of the best investments one could make. Besides, as they debase our currency into oblivion, silver and gold just continue to make sense. And, if the Central Bankers want it, I feel comfortable wanting it too!
The Market – The Plot Thickens…
We saw the market roar higher on the hopium that Mario Draghi is going to get Angela Merkel to go along with his plan to have the European Central Bank (ECB) act like our Federal Reserve, and buy up all the toxic debt, thus relieving Spain, Italy, Portugal, etc. of their debt burdens. Currently the market is trading sideways – not wanting to give back the gains it's made, but it has NO volume to bust over the resistance zone. The volumes on even the biggest ETF's like the SPY are trading on levels like we’re used to seeing on Christmas eve. Yet, the markets continue to inch and claw their way higher.
In a technical sense, we are looking at the market try and work off an overbought situation by doing the ‘Pause and Shuffle’. That's fine, and very well may work. Everyone knows that the Fed is cooking up something in the background, and nobody wants to miss it. In the past several days a Boston Fed Head was out saying it's time the Fed did something about the economy. Now this particular gentleman doesn’t vote – but he’s out there talking because it's the wink and nod to investors that ‘something’ is in the works. It’s coming – it’s just a matter of when – and that’s why the market is holding up here.
Judging by the way the market has held up (with no volume, and large overhead resistance at the 13,300 level), my guess is that they are going to continue crabbing sideways and just barely "up". I can't see them letting a meaningful pullback hit when we're just a couple weeks from the Jackson Hole meeting, and then the German vote on the constitutionality of participating in the ESM. I could see a couple hundred points peel off on some weak trading days, but right now I'm comfortable saying we've got a 70 to 75% chance of going higher.
I took some money off the table this past week – but I’m still leaning long into this market, and so far it's working well. If the Europeans do what Draghi wants at the same time our “Fed Goes Wild”, we are going to see a rally of epic proportions. Now we still have the German vote on September 12th, and if they declare that they cannot participate in the scheme, all bets are off. I believe that the German courts will do an "about face" and go with the program.
So, I think we're going slightly up. I also think we're going to get the "accommodations" both here and overseas that will lead to a really sharp rally into year end. Now, the only reason we're not 100% invested is the German vote. If they don't go with the plan, then all of this could implode. So we’re leaning long – but not over-exposed.
Currently I’m holding:
- - SYNC – in at 11.15 (currently 9.96) – held over earnings – my error!
- - SPY – in at 135.75 (currently 140.87) – stop at 139.00
- - MRO – in at 26 (currently 27.74) – stop at 27.00
- - GDX – in at 42.50 (currently 44.85) – stop at 43.50
- - MLNX – in at 107.50 (currently 112.17) – stop at 110.00
- - CLF – in at 45 (currently 44.85) – stop at 44.00
- - PBR – in at 21.80 (currently 21.95) – stop at 21.30
- - X in at 22.24 (currently 23.31) – stop at 22.80
- - TEX in at 20.17 (currently 21.96) – stop at 21.10
- - WRES in at 2.63 (currently 2.95) – stop at 2.80
- - GLD (ETF for Gold) – in at 158.28, (currently 157.16) – no stop ($1,619.70 per physical ounce), AND
- - SLV (ETF for Silver) – in at 28.3 (currently 27.20) – no stop ($28.06 per physical ounce).
A couple stocks I’m watching are IBM over 200, and Intel (INTC) over 27.50.
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.