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I pulled the two above graphics off of Kitco’s homepage. I copied the first one last Thursday in anticipation of today. First let me explain what they are and secondly I will explain why it will be a problem. If you recall, it was one year ago that all of a sudden gold dropped from the $1,600’s into the high $1,200’s over 3 days…for no apparent reason. I say “no apparent reason” because the “excuse” given was that the Fed would maybe taper later in the year which was supposed to be bearish for gold and silver…even though the latest QE was not “bullish” to begin with. Don’t get me wrong, “QE” was and is bullish for gold but… the metal was capped with the sale of naked futures to “show you” that it wasn’t. In any case, let me wish you all a “Happy Anniversary” tongue in cheek.
Please study the above graphic closely (and sorry it is not formatted better but I am a computer dinosaur). Focus especially on the “1yr change.” You will notice that as of last Thursday, the number was a -$262. As of today (after the $30 “forced” smash) that number is only -$58. Without hitting the price today we would be looking at -$28. Do you see where I am going with this? Markets are now all about “momentum.” They always have been but they are more so now and with the use of futures and derivatives…the “momentum” can be created, aided or halted to paint a picture that “proves” the (ir) case. Never mind earnings, supply and demand or any other fundamentals…they can be masked or hidden and then you are told …”See? Look with your own eyes.” It doesn’t matter how obvious it is that “counterintuitive” explains everything.
So gold is now down year over year $58 today vs. $262 just 3 trading days ago, all this means is that gold was down a couple hundred bucks in 3 days last year, right? Well yes it was but now the problems begin because “year over year” comparisons will again start to stick out in the public’s eye. For 12 years straight, gold rose and in many of those years was the best performing asset on the planet. I believe that the decision was made that gold (and silver) had to be smashed to break the “momentum.” By breaking momentum…”sentiment” would also get a dent which was important because the bottom of the barrel was coming into view.
But…here we are now and the “year over years” is going to turn “up.” They are going to turn up at a time where stockpiles have been depleted AND mining supply has shrunk because of price. Price (low) has also enticed demand from all over the world. If you recall the exponential gold and silver price rises of the late 70’s, it was U.S. centric…now it is global. It is global and there is now wealth all over world as opposed to being concentrated in the U.S. …which is a very big problem for the money printers. The more that they print…the more they are putting ammunition in the hands of potential buyers… all 7 billion of them!
In my opinion, what we have been through over the last year to 2 years should be equated to one last “haymaker” thrown by a tired and aging “ex-champ.” Supply and demand does not lie. We know (and have known for 15 years per Frank Veneroso and others) that demand was far outstripping supply. We also logically know that the supply to meet the demand had to come from somewhere. That “somewhere” could only logically have been from Western central bank holdings. We also know that this supply by definition is “finite” and will one day run out. Smashing prices one year ago did only one thing, it bought some time. So far this “time” has equaled 1 year in duration.
So how much time is left? I nor anyone else knows, what I do know is that the “sting” a year later doesn’t hurt so much anymore and we are entering a point where if you bought a year ago, you are a “winner” (you really shouldn’t think this way but everyone does). Here is my point, we have seen demand increase dramatically because value buyers stepped up to the suddenly much lower prices…now (soon) I suspect we will see the “momentum” buyers again step up to the plate.
Did the big drop hurt sentiment? Of course it did. Did it kill sentiment dead? No it did not because just like the Spring season when plants start to grow again, so again will sentiment. The only way to retard sentiment and keep it from growing from this point forward is to keep knocking the price down…year after year after year. This cannot be done as the mine supply will not come forward if prices drop further and further below the cost of production. “They” shot themselves in the foot by smashing price because it created the unintended consequence of pulling value investors off of the sidelines in huge fashion. Now they have the loaded gun of manipulation pointed at their other foot, they can fire it again but either way they will create more demand. They can allow prices to move higher from here and invite the “MoMo’s” to hop on board or they can retard prices further and create more value buyers to step on board.
Since we are now very close to the year over year price turning upwards, they will soon need to figure out which “foot” to aim at.