The Dramatic Gold and Silver Sell-Off

* Spiral Calendar relationships in Silver: On Tuesday, I spoke of the spiral calendar relationships, which called for a turn in silver in the May 1-2 time zone. Unfortunately, I attached the wrong chart depicting the turn date. So I am including this chart, and the original monthly chart which was originally posted on Tuesday. Here is a summary of the forecasted turn dates for silver according to the spiral calendar method:

May 1-2           (F11, F12 and F13) – weekly chart
June 8-10         (F27 and F17)      – monthly chart
June 12-16        (F10 and F12)      – weekly chart
Sep 1-4           (F10 and F14)      – weekly chart
April 23-26, 2012 (F18-20)           - monthly chart

Before launching into my macro views on market timing strategies, let me offer a cliff notes view of the spiral calendar theories, which has been pioneered by Chris Carolan. I apologize in advance to Chris if I butcher the explanation, but here goes:

The spiral calendar theory is based on the assumption that markets react according to a sequence of events which links to each other by thelunar month, which is approximately 29.5 days, and Fibonacci sequences of the base period, being 1 lunar month. Accordingly, the method involves taking historical market peaks and troughs, which are then put into a computer algorithm, to find coincident dates in the future as a possible date for a turning point. Specifically, the method projects forward by the period of a lunar month times 1.618 (the Fibonacci ratio) raised to a sequence of increasing exponentials. Accordingly, in the above table, where F11 is noted, the forecasted turn date comes from:

Previous turn date + (29.5 days)*1.618^11

When Chris finds a confluence of prior turning points are projecting to a cluster in the future, then those dates become a spiral calendar turning point. Many years ago, when Chris sold these dates as a special service, I profitably traded the Mexican Bolsa (stock market), in and out, according to his turning points. I knew nothing about the Mexican stock market, but the money made in my trading account was real, as is the spiral calendar method. What I have also noted is that when the dates forecasted are right, they can be VERY right. That notwithstanding, no forecasting method is ever 100% correct.

With that background, the above projections call for market turning point last weekend, which actually nailed the gold turn to the day, with the next cluster of dates coming in mid June. Accordingly, my best guess is that silver and gold have turned, which I have been harping on the past 2 weeks via other methods, and there if the next sequence of dates is correct, then gold and silver should make a bottom between June 8 and June 16. This also fits in with my expected timing of a stock market (interim) low in the June 15-July 8 time zone.

For those interested, Chris Carolan has a market timing service which employs other methods for forecasting markets in addition to his spiral calendar analysis, and can be found at www.carolan.org. I recommend his service and his analysis of the markets which he follows. You can email Chris at [email protected] if you want a free trial to his service.

* As I pointed out in Monday’s blog, the list of short term indicators suggested that we were at an interim top, and clearly the price action since then has played itself out in spades. The next graph on the attachment of silver is marked with a dashed violet line, which coincides with Gold’s Sunday evening high at 1577, and silver’s last breath above $48 an ounce. I have also included a graph of gold.

Over the past few days, I have received many comments from readers asking if I would sell my precious metals, and others asking me if they should get back into silver and gold, now that a decent correction is upon us. Let me summarize my answers to both questions:

1> I have been advocating for the past 10 days, to buy put options on silver, and for my part, this has given me a sense of ease while prices have melted down. I stepped up my gold hedging on Monday, which was reported real time to the ‘real time distribution’ (ask to be included on that if you like). While one could have made money with this strategy, for my part, I was only protecting profits on some, but not all of my positions, which were initiated years ago. My focus has been to play defense.

The follow-up question to this answer is:

“I have not done anything to hedge or sell my existing positions with silver now down below $40. Would you sell now?”

To that my comments have 2 to 3 levels of answers:

a> If you can stand watching prices fall to the $30 area, (it is now at $36), then do nothing. My guess is that there will be a chance to sell silver over the next week or two on a rebound into the low to mid 40s, prior to another leg lower.

b> if you cannot stand to watch prices drop any lower, then you need to own what you will feel comfortable with, and if that is the case, then you should not be invested in this trade to begin with.

c> Lastly, selling metals, which I consider to be a core holding, also means that you will need to be equally quick footed to get back in when prices are lower. By the time silver gets to $30 and gold to $1350, there will be many folks talking about how the metals rally is gone forever. In fact, you will hear such chatter at cocktail parties from people who usually have nothing to say about the subject. That will be you cue to get back in. For my two cents, I want to see what the prices have done going into the June 8-16 time period, and conceivably re-load around that time.

2> As for the question as to whether one can buy into the market at current, and reduced prices, my guess is that this sell-off has a few weeks more to run. I say this because players in the market operate in different time frames. The folks who have been wired as I have been, probably sold/hedged/took profits over the last 2 weeks. Some holders of gold or silver might only react once they digest the information over the weekend. And because longer term investors in gold and silver have outsized profits in their positions, there will be a strong incentive on the part of many to monetize some of their gains. This should keep selling pressure on the market for a few weeks in my opinion.

Another comment, which comes from a reader, is that when all risk markets sell-off, traders and investors will sell what has a profit, as they watch other assets they own, go to a loss. To that end, I cite my June 15th to July 8th time period during which I expect stocks to make an interim low, and as that plays out, I expect there to be some companion selling of precious metals as well.

* The long term bullish case for precious metals – despite the current route in the metals, there are many reasons to suggest that the precious metals will continue on their long term bullish trends.

For starters, please go back and re-read the part in Tuesday’s blog about the structure of prices in the silver futures market. In short, there is not enough physical silver around to allow arbitrageurs to take out a nice profit on the mis-pricing of futures prices 1 to 3 years out in the future. Ultimately, that is a very bullish sign.

Then you have to consider the news story on gold, which came out yesterday, reporting that Mexico, Russia and Thailand have added over $6 billion of gold to their holdings since the beginning of the year. Specifically, Mexico bought 93 tons of gold, or about 3 million ounces of gold, which takes them from 6 tons to 100 tons, a 16 fold increase. The same data, courtesy of the IMF, shows that Russia increased its reserves by 18.8 tons to 811.1 tons and Thailand expanded its gold assets by 9.3 tons to 108.9 tons in March. For the record, a metric tonne of gold equals 32,150 ounces. 

This development ties into my long term thesis that gold will likely go above $5,000 an ounce. From 1980 through 2008, the western central banks of the world have been liquidating their gold holdings, but since 2008, this trend has gone in reverse, with China reporting a 600 tonne increase last year (through purchases from domestic mines), and India, Mauritius, Sri Lanka, and Russia have also been prominent buyers of gold. I am sure the sell-off in gold and silver has these central banks licking their chops, in anticipation of more purchases. As the dollar weakens, which has been accompanied by easy Fed policy, persistent trade deficits, and a government which cannot get its deficits under control, central banks are beginning to realize that holding dollars is not a smart strategy. 

It will not take China to come out and say they are selling their dollars for gold to cause the price to sky-rocket. Rather, it will be a collection of all other (smaller) countries which will be buying gold and moving away from the dollar. As a microcosm of the larger universe, Mexico has about $125 billion of reserves, of which only $4.8 billion is in gold (with their recent purchases included), and according to treasury data, $35 billion is in treasuries. There are many countries like Mexico which own way too many dollars, and too little gold. These central banks are not stupid, nor will they react to a sharp drop in prices, except to buy more gold. Central banks are a slow moving herd of elephants in the gold market, and they will only be buying more gold over the next few years. This does not make for a short term trade, but rather a long term trend, which is still decisively bullish.