A few points on my position:
First, in my estimation, over the next ten years gold will be a sound investment. Second, silver is not the equivalent of a cheaper gold, but should actually be considered an industrial metal, similar to copper, and thus avoided and even sold short. Third, I believe current U.S. economic policy is just staving off the inevitable economic collapse that has been foreshadowed by the downturn in 2008 and 2009.
Long story, short: faith in fiat currency will return, and soon.
The current economic situation feels all too familiar, and it's not for any good reasons. The Euro-zone is on the brink of economic collapse, the U.S. government is days away from being $16 trillion in the hole, and the Bush tax-cuts set to expire. Any semblance of a broad economic confidence in which businesses expand workforces, banks lend money, and consumers spend money is fading. Contrary to all the news-talk of a "recovery," the probability of an already fragile U.S. economy slipping into a new recession is still increasing each day.
Now, based on these reasons, one would think gold and precious metal demand would be on the rise, and thus, resulting higher prices for metals. Although rational, this is probably not going to be the case. For the past three months, gold and silver have been flat with a negative price bias. Only over the past week has gold moved more than a percent intraday in either direction. While the current move does seem to be higher, and I do anticipate this continuing in the very near term, this is more than likely just a head-fake and a prime opportunity to short the metals for a more extended decline.
Recent reports from the governments of China and India have disclosed declining gold purchases. While this usually wouldn't be cause for concern in "normal" economic times, these easily overlooked reports should be considered a warning sign to those who have become accustomed to the "gold price floor" of the last five years.
Next, and possibly the most important according to the market, the Eurozone leaders are showing a united front in keeping the economic union together, capitalizing banks, and protecting the economically lesser member nations. Even going a step further, hints of the Eurozone leaders considering political unionization are on the rise.
So, what does this mean for us? First, it means a false sense of confidence returning, at least for the next six months to two year time frame. What does this mean for trade positioning? Being long the Euro over the next six months, at least until 1.35/USD, and short gold and silver is a prudent strategy.
Keep in mind, we are always trying to be positioned properly for the six month time horizon, and planning our next six month period. Over the next two years, the black swan will emerge in Europe (and possibly here depending on monetary and fiscal policy in the first term of the next U.S. presidency) and the inevitable downward price adjustment will occur. Until 2014, there is much money to be made by playing emotions.
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