Silver To Eclipse $100 On Skyrocketing Chinese Demand

With gold and silver rebounding, today acclaimed money manager Stephen Leeb told King World News that silver is now setting up to eclipse $100.  Leeb believes that China, which has been the primary driver in the gold market, is now going to push the silver price over $100 as their consumption of physical silver is poised to skyrocket.  Here is what Leeb had to say in this powerful and exclusive  interview.

Leeb:  “We are seeing massive demand for photovoltaics out of both Japan and China.  We are also continuing to see massive demand for silver in the Middle-East for this type of energy infrastructure as well.  Eric, KWN readers need to understand that the demand for silver is literally set to explode because of the enormous increases in demand for physical silver because of photovoltaics….

“While all of this is happening, the mainstream media is saying that China is about ready to fall apart.  But the reality is that China plans to urbanize a remarkable 200 million people over the next 10 to 15 years.  Well, the cost is roughly $50,000 per person.  So China is going to be spending a massive amount of money for materials — copper, lead, zinc and especially silver.


Gold: Short-Term Trade or Long-Term Opportunity?

We recently asked Daily Pfennig® readers to weigh in on their personal expectations for the price of gold by the end of 2013. Readers were given a range of outcomes from which to select, spanning from below $1,000 per ounce to more than $1,900 per ounce by year-end. The distribution of answers, shown below, shows a strong skew toward gold prices at year-end being higher than the current $1,358 per ounce level as of May 20.

Gold: Short Term Trade or Long Term Opportunity?

In fact, 84% of respondents indicated that they believed the price of gold would be greater than $1,300 per ounce by year-end, with the largest distribution expecting the price of gold to be between $1,601 and $1,900 at the end of the year, or between 18% and 41% more than the current $1,357 price level.1 Conversely, only 16% of Pfennig readers expect the price of gold to fall below $1,300 per ounce over the next seven months of the year.

It should not be surprising that Daily Pfennig readers’ results are skewed toward the upside in terms of price expectations for gold, especially considering that most of them are inured to view gold as a potential hedge against U.S. dollar exposure, and by extension, the outlook for U.S. economic stability. From this perspective, the analysis of monetary fundamentals has not changed materially since gold prices reached a peak of $1,900 per ounce in September 2011, shortly after the first ever downgrade of U.S. sovereign debt by Standard and Poor’s.2 On the contrary, many could argue that monetary fundamentals have deteriorated since September 2011 based on increased debt levels, continued deficit spending, and an acceleration of Federal Reserve bond purchases, known as quantitative easing.

Longer-Term Confidence in Gold Overwhelmed by Short-Term Trading Pressures
Despite this backdrop, gold spot prices have fallen nearly 30% since the peak in September 2011, dropping 19% since the beginning of 2013. Furthermore, bearish sentiment for gold by money management firms and traders continues to increase with selling pressure, as shown in weekly Commitment of Traders reports from the U.S. Commodity Futures Trading Commission (CFTC) indicating short gold futures-and-options positions reaching notable highs.

This apparent disconnect between monetary fundamentals and current pricing sentiment for gold may be explained by the difference between short-term and longer-term objectives for investors.

Analyzing the flow of recent market intelligence, short-term traders can make a reasonable argument for the drop in gold prices. On the margin, reported U.S. economic fundamentals appear to be improving with housing markets stabilizing, unemployment levels dropping, and confidence returning to U.S. markets. Recent comments from regional Federal Open Market Committee (FOMC) members insinuating a slowing in Fed bond purchases only help to support this trend. Certainly, strength in U.S. equity markets has attracted a great deal of global attention from investors. The resurfacing of U.S. confidence has been reflected in the recent strength of the U.S. dollar, placing even more price pressure on commodity markets priced in U.S. dollars. With higher U.S. equity markets and commodity prices lower, U.S. consumption may be poised to increase and help to advance U.S. Gross Domestic Product (GDP) growth. Not surprisingly, bullish trading in gold does not fit well into this market narrative.

However, short-term complacency in markets often provides longer-term investors with opportunities to acquire forms of insurance at lower prices. Readers who have considered buying out options for portfolios immediately after a market sell-off are well aware of the increased cost of this protection. Similarly, the time to purchase homeowner’s insurance is not after the flood or hurricane, but when expectations for these potential events are low. It therefore stands to reason that as near-term prospects for a catastrophic market event begin to fade, the price for instruments that help to hedge against breakdowns in the dollar or market would become less expensive as a result. This, in all likelihood, does not mean the nature of these events should be considered off the table.

In this light, market participants with short-term negative views on gold pricing are not necessarily being irrational by selling positions, while longer-term investors can appropriately add to positions at lower prices to dollar-cost average to enhance strategic positioning.

What Kind Of Gold Investor Are You?
Purchasers of gold at this point in time should strongly consider what type of investor they intend to be, as well as evaluate the objectives of holding gold in terms of a broader wealth strategy. Investors looking to trade gold on a short-term basis, both long and short exposure, should be aware that while the trend in gold remains downward, a short-covering rebound—given the level of short interest in the futures market—could be abrupt. Conversely, continued strength in the U.S. dollar and marginal improvements in the U.S. economic outlook could very well maintain a selling bias. Ask two different market strategists which way to invest, and you will likely get three separate answers.

Investors looking to gold as a longer-term investment or as part of a broader wealth management strategy should consider the original premise for holding gold. The longer-term purpose of allocations to gold as part of a portfolio strategy may include protection against a weaker dollar, purchasing power security, hedging U.S. dollar investments, hard currency exposure, store of value, or as a diversification asset, just to name a handful.

Arguably, the more pressing questions for investors looking to add to current positions relate to timing and amount of exposure. Unfortunately, these answers are not found in investment strategy textbooks, but rather come down to personal risk tolerance, investment horizon, and return objectives. Nevertheless, perhaps an old saying that Wall Street analysts like to apply may be appropriate for some inspiration: “If you liked it at $1,600 an ounce, you’ll love it at $1,300 an ounce!”


Charts to Provide Perspective for Gold Bulls

By Jordan Roy-Byrne, CMT

Most chartists use daily or weekly charts. Few look at monthly charts. I don’t know of anyone (myself included) who pays any attention to quarterly charts. We decided to take a look at the quarterly chart of the HUI gold bugs index. It is below and we note the two big downturns in the market. Also note the importance of 300 which has been support for the past seven years.

Some have chided your humble author for saying that the gold stocks are still in a bull market. After all, these two big downturns invalidate any assertion of a bull market. Right? Well, the previous bull market in gold stocks also included two large downturns. Within the 1960 to 1980 bull market, the first correction was 61% and lasted about two years. The next correction was 68% and also lasted about two years.

Even more intriguing is the similarities between the gold stocks over the past five years and the Nasdaq from 1987 to 1990. Both markets crashed and then quickly recovered to a new marginal high. Furthermore, note the price action in the Nasdaq during late 1989 to 1990 and compare it to the price action of the gold stocks over the past 15 months.

Like the Nasdaq, the HUI formed a bullish double bottom (A,B) and advanced quickly and strongly. Both markets then fell apart. The Nasdaq declined 31% in only a few months. That was almost as bad as the first crash! The gold stocks have declined about 40% in the last six months.

After its bottom in 1990 the Nasdaq gained nearly 16-fold over the next 10 years. Following its second massive downturn within the 1960-1980 secular bull market, the Barron’s Gold Mining Index advanced nearly 7-fold in the next six years. This is not to say that the gold stocks are likely to repeat the same pattern. This is to show that there is a strong historical precedent for the current downturn to occur in the context of a major bull market.

Ok, I know what you thinking. Jordan, why didn’t you provide this analysis weeks or months ago? The answer is, we’ve been aware of these charts and that is one of many reasons why we’ve slowly “scaled into” positions. We’ve told premium subscribers what our favorites are and how we plan to scale into and build those positions over the spring and summer months. On March 1 we wrote: As for the short-term, we began scaling into positions last week but maintain plenty of cash to be deployed (potentially) at our strong targets of HUI 336 and HUI 300.

Currently, the market remains in a bottoming process. We don’t know if Thursday’s low at 317 marked the bottom or not. Judging from the quarterly chart it looks like we could see a test of 300 or a temporary break of that level. On the other hand, Wednesday’s selloff occurred on record volume and Thursday’s reversal was quite strong. There is a chance a small head and shoulders bottom could be developing. Strong follow through on Friday would certainly raise the odds that 317 was an important low.

In any event, we are moving closer and closer to a major bottom and a large rebound in percentage terms. Weeks ago we noted the extreme pessimism in Gold was beyond the 2008 low by most metrics. Sentiment towards gold stocks is even worse. Traders and momentum players think the sector is one big joke. Mainstream funds who have the slightest interest in the sector are focusing on the metals and not the shares. I can’t recall a sector that has ever been this hated within a secular bear market. It is quite amazing. That aside, we are quite confident that the sector is days to a few weeks away from the start of a very strong rebound. Be advised that there are hundreds of mining stocks and stock selection is critical to achieving strong returns. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains in the next few years then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT