Schmidt's Gold Thoughts 23 May 2012

CHOPP’N DOWN THE AAPL TREE

A month ago we warned that AAPL($602) had broken down from a parabolic rise. Despite near universal love for this stock, the failure of that pattern was a warning that a much lower price was the destiny for this purveyor of electronic toys. Apparently in disregard for the danger in this formation, 46 of 51 analysts continue to rate the stock a buy. Our view today is the same as in March. AAPL is likely to trade below $400 before the year ends.

Unable to learn from previous mistakes, such as the one pictured above, the massive flop of Facebook was delivered to investors this week. The reality that social networking sites are nothing more than a fad seems beyond the intellectual capacity of most Street analysts. Facebook set historical records for the IPO debut of a fad stock. Who to blame for the failure is now a hot discussion. But, that is not the real question. The more interesting question is which stock, AAPL or FB, will set the record for greatest dollar loss of market value in a single year.

Investors in Gold and Silver are by now quite familiar with the ramifications of the break down of a parabolic formation such as the one in the above chart. A similar pattern and failure developed in both Gold and Silver last year. Both metals continue to suffer from that development. However, just as pleasure does not last indefinitely, neither does pain.

The parabolic pattern, such as that in Silver, Gold, and AAPL, develops out of a widespread, or universal, fantasy about the future price of an asset. Those fantasies tend to become more outlandish as the price rises. Silver was widely forecast to be on the verge of moving to $100. Gold talk was about $2,000, and even $3,000, sometime soon. AAPL has had forecasts of a $1,000 price.

Sometimes these universal fantasies can work to our favor. That may be the case with Gold and Silver. The chart below if of an index for the value of the U.S. dollar. It recently reached a new cycle high as investors fret over Greece and the Euro. The universal fantasy at the present time is that Greece will be thrown out of the Euro zone, and the Euro will subsequently vaporize. So committed to this fantasy are the funds that the CFTC’s COT reports that they are short 1.3 contracts for every contract long. News articles are reporting that bearish bets on the Euro have reached historical records.

Reality is rarely as good or bad as the Street mob believes. Quite frankly, Greece has only two choices. It can agree to the austerity terms as a condition for the financial bailout or it can leave the Euro zone. The latter will result in default on their national debt, and a plunge into poverty unmatched in history. The matter will be decided in the upcoming Greek election.

The problem with the universal fantasy on the Euro is the presumption that Greece exiting the Euro zone means a collapse of the Euro. That view is in error. The Euro zone and the Euro will be stronger after the departure of Greece. When a weak player is discarded by a football team, the team’s performance improves. The Euro will rally dramatically after confirmation of a Greek departure from the Euro zone. A move to perhaps as high as $1.40 would likely develop.

Such a rally for the Euro implies a fairly dramatic drop in the value of the dollar. Dollar priced Gold and Silver would rise dramatically in such an event as traders reverse their positions. $Gold is likely to benefit from another universal fantasy by the funds. We continue to believe that the time of that reversal will be late July or early August. So in short, keep the faith. Should Gold and Silver sell off in the next two months, the time will have arrived to check the oil in the pick up trucks.

GOLD THOUGHTS comes from Ned W. Schmidt,CFA,CEBS as part of a mission to save investors from the regular financial crises created by Keynesianism, and the high priests of that misguided ideology. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com