The 18th century author Oliver Wendell Holmes suggested not to put your trust in money, but your money in trust. What about gold and silver? Can you trust them to be the safe haven again they’re supposed to be?
2011 was a turbulent year for precious metals, gold and silver in particular. Silver spiked to a new nominal all-time high on April 25. Gold outlasted silver and recorded a new nominal all-time high on Sept. 6.
Time has a way to obliterate unpleasant memories, but let’s take a moment to revisit the frenzy that was so prevalent at silver and gold’s all-time high.
Silver Frenzy
For two days in late April, the iShares Silver Trust (NYSE:SLV) was the most heavily traded ETF in the world. Investors were even willing to pay a premium to own SLV over physical silver.
On April 25, the day silver topped, The Wall Street Journal wrote in a front-page article titled “Silver rush spreads to stock market” that “Investors have turned to precious metals amid worries about inflation and the weakness in the U.S dollar. The metals are increasingly considered attractive as a permanent store of value that doesn’t diminish like paper currencies.”
Since then, the “permanent store of value,” silver, is down 43%, while “diminishing paper currency” (the U.S. dollar) is up 9%.
Contrary to the silver rush, the ETF Profit Strategy Newsletter warned on April 10: “Silver seems to be in blow off mode just as oil was in the summer of 2008. Chances are that similar to oil, prices will collapse once up side momentum is exhausted. Picking a top is treacherous but silver is definitely overbought and may collapse at any moment.”
Gold Frenzy
Gold in September followed the same template as the silver top. The SPDR Gold Shares (NYSE:GLD) became the largest ETF in late August with $78 billion in assets, and the gold rush was on.
At the time, gold was viewed as the ultimate safe haven against inflation, deflation, European defaults and whatever other problem you can think of. The Aug. 24 ETF Profit Strategy Newsletter, however, looked at gold prices from a different angle and warned:
“Even though gold is the logical fear trade, price action is also dictated by liquidity. At some point investors will have to sell holdings to pay off debt or answer margin calls. Commonly the most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”
Gold prices are down 18% since their September high.
Silver Outlook
The chart below shows silver prices for 2011 along with some simple but effective trend lines. It’s funny that a digital crayon can prove more powerful than the combined power of Wall Street’s analysts.
Based on a simple resistance line, the Oct. 30 ETF Profit Strategy Newsletter said, “Silver is getting close to resistance at 36 – 36.4. The outlook for silver is bearish as long as prices stay below 36 – 36.4.’
Since then silver has broken through a number of support levels. If current support fails, silver will drop into a technical vacuum with no real support levels for quite a while.
Gold Outlook
Hope for gold was high at the beginning of December. Here are some headlines from Dec. 2:
Investopedia: “5 best bets for buying gold”
Motley Fool: “$7000 gold is closer than you might think”
Reuters: “Gold bull run to extend to 2012 on resilient demand”
The same day, the ETF Profit Strategy Newsletter identified this short opportunity:
“Gold prices are butting up against a trend line that originates from the September high. This is a low-risk opportunity simply because the risk is well defined by the trend line. Traders may go short gold with a stop-loss at 1,760 for gold futures or 171.1 for GLD.”‘
The chart below shows various gold trend lines, including the upper yellow trend line that acted like resistance of a bearish triangle. Of importance to gold is also the 150-day SMA, which has provided support for gold about a dozen times since January 2009. The Aug. 31 ETF Profit Strategy update suggested that a test of the 150-day SMA (a $250/oz. drop) is next.
CNBC aptly summarized goldbugs’ frustration this way: “In just three months, gold has gone from the trade that works in every kind of market to the trade that doesn’t work in any market.”
Gold has found support at the final support line. It is possible that gold will come back to kiss one of those trend lines goodbye, but regardless, the trend is pointing to lower prices.
A Remarkable, Yet Ominous, Trend
If you look at gold, silver and the euro, and compare them with U.S. stocks, you’ll find that U.S. stocks are the best performer.
Considering the backdrop of bad news, this is remarkable and ominous at the same time. In fact, it raises a number of red flags.
1) U.S. stocks are strongly correlated to the euro. The euro (NYSE:FXE) dropped from 1.49 to 1.28 while the U.S. dollar (NYSE:UUP) rallied. January tends to be a seasonally weak period for the euro. A weak euro is bad for commodities (like gold and silver) and U.S. stocks.
2) The U.S. stock indexes are fragmented. On Dec. 28,the Dow rallied to new recovery highs (highest since July 21). The S&P 500 and Russell 2000 did not get past their Oct. 27 high, and the Nasdaq didn’t even make it past its Dec. 5 high.
3) 50.5% of investment advisers and newsletter writers polled by Investors Intelligence are bullish again. This is the highest reading since July. Event though this doesn’t mean stocks can’t go any higher, it suggests that stocks are in a countertrend rally.
In short, the metals and the euro have already turned, while U.S. stocks are holding on by a thin thread. The question is not if but when U.S. stocks will join the rest of the bunch. An interesting side point is that the S&P is stuck in a similar triangle formation as gold was just a few weeks ago.
The ETF Profit Strategy Newsletter outlines the price target for gold and silver and the triangle support/resistance lines for the S&P along with short, mid and long-term forecasts for stocks.
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