Gold fell 2% in early trading today and looked like it was headed for its eighth straight trading day decline. Prices reversed around midday.
At market close today, the precious metal ended 2% up from Friday.
Also, gold stocks rallied today... Newmont Mining, one of the largest gold miners, was up around 6%. Junior miner Almaden Minerals jumped over 9%.
Regardless, the afternoon rally did little to change the metal's slide this year. Gold is down a little less than 20% from where it started 2013.
We've covered the gold selloff many times in the Digest. In April, following gold's biggest selloff in 30 years, we discussed several reasons the metal was falling. Following the rout, gold prices climbed for a week... but are retesting the lows.
The biggest reason gold is falling is simple... The precious metal rose steadily for 12 straight years. It needed a breather. Nothing goes up forever.
And naturally, a 12-year bull run will attract a lot of new investment. By last year, lots of people had jumped into gold investments trying to catch the uptrend.
With the stock market ripping to new highs, the new, more equivocal money in the gold market is happy to jump ship. Take a look at this two-year chart showing the S&P 500 versus gold:
Institutional investors are betting prices will fall further.
According to the latest data from the U.S. Commodity Futures Trading Commission, hedge funds and other large institutional investors held 74,432 short positions on gold as of May 14.
Although futures contracts technically represent agreements to exchange gold in the "future" (hence the name)… many of the investors in the market don't have an interest in collecting the gold. They're simply making bets on the direction its price will go.
People with short positions are betting on declining prices. And the current number of open short positions represents the highest level since June 2006... and compares with 67,374 positions a week earlier.
The net-long position dropped 20% to 39,216 futures and options – the lowest since July 2007.
While we continue to recommend gold as a form of savings… we knew the metal was headed for a correction. As Porter wrote in the April 17 Digest Premium:
However, I have [recently] backed off in my purchases because I was reluctant to buy into a commodity at the height of the bull market. So I'm hoping that we see a strong correction in gold (even bigger than we've already seen).
I would not be surprised to see gold fall to less than $1,200 an ounce in this correction. And if it does, I will be looking to purchase some more in significant size.
I recall that during the last big gold bull market from 1974 through 1980 (nearly as long of a bull market as the current one)... gold fell nearly 50% between 1975 and 1976.
The big decline marked about the halfway point of the bull move. So I would expect a similar move... In other words, gold could fall around 50% from its peak. And I believe that would mark roughly the halfway point of this bull cycle.
I think we could see this bear market in gold continue until the end of summer... And if we see bad economic numbers in the fall, the Fed would ramp up the printing presses as they have every year around that time. Then, you'll see gold strongly reverse course.
So why won't the downtrend last longer?
According to Porter, one of the most important indicators of gold's price movement is central bank buying. When central banks, which control nearly unlimited capital, are buying physical gold, it's a bullish indicator. And right now, central banks are loading up...
Central banks added 109.2 tons of gold to reserves in the first quarter of 2013 – the ninth consecutive quarter of net purchases.
And demand in China, the world's second-largest gold buyer, hit a record 294.3 tons in the first quarter.
Over the same period, exchange-traded funds (ETF) that invest in gold saw outflows of 176.9 tons (a decline of roughly 7% of total gold ETF holdings). As people who bought the funds' shares to speculate on the price of gold bailed out, the ETFs had to sell their gold.
One of the ways we've discussed to protect your wealth from our indebted government is to store your gold abroad.
Marc Faber, renowned speculator and editor of the Gloom Boom and Doom Report, agrees. In a recent interview with Yahoo Finance, Faber said he bought gold at $1,400 an ounce, and he has an order to buy more at $1,300... (It's around $1,380 an ounce today.) "I want to keep an allocation towards gold – physical gold – and not stored in the United States at all times," Faber said.
When asked why he'd want to store gold outside the U.S., "a pretty safe country," according to the interviewer, Faber responded:
Well, [is the U.S. a] safe country? I'm not so sure about that under the present government. But in 1933, gold was taken away from Americans. The government paid them $25 and after, they revalued the gold to $35.
So basically what the government can do once again, and that is a possibility. They could artificially depress, manipulate the price down and then say 'Gold is illegal to be held. We have to collect all the gold from the citizens.' Say if they manipulated the price down to $1,000. They could collect it at $1,000 and then revalue to $10,000.
Faber said the likelihood of confiscation is slim, but still a possibility...
Regardless, we'll take the U.S. over France today...
According to French newspaper Les Echos, the tax bill for more than 8,000 French households exceeded 100% of their income for 2012. Yes, more than 8,000 French households paid more in taxes than they earned last year.
Citing data from France's finance ministry, the newspaper also reported nearly 12,000 households paid taxes of more than 75% of their 2011 income.
The huge taxes are due to a one-time levy imposed by French President Francois Hollande on houses with assets worth more than 1.3 million euros.
On a related note, Porter and Aaron Brabham interviewed Faber on their Stansberry Radio podcast in March. In addition to his economic views, he shared where he believes you can find the best nightlife and most beautiful women in the world. To listen, click here...
New 52-week highs (as of 5/17/13): Advent Claymore Convertible Securities and Income Fund (AVK), Constellation Brands (STZ), Coca-Cola (KO), Cisco (CSCO), Blackstone Group (BX), Chart Industries (GTLS), Washington Real Estate Investment Trust (WRE), Integrated Device Technologies (IDTI), Microsoft (MSFT), Qlik Technologies (QLIK).
In today's mailbag, one Stansberry Radio listener describes our "insanely awesome" videos... Send us your comments to feedback@stansberryresearch.com.
"I always like to save the Friday Digest for my early morning reading on weekend mornings while relaxing with my first cup of coffee. While reading the May 17 edition this morning, all I could say was 'Wow!' What a great piece to be reading while pondering life and investing on a leisurely weekend morning. Well worth the price of admission.
"By the way, I have no interest in owning a Ferrari, and it has nothing to do with whether I have the means with which to afford one. I have simply found that the vast majority of potential material possessions are far more entertaining to want than they are to have. However, that does not mean that I do not appreciate the enjoyment of reading about or viewing them; just as I enjoy reading about the exploits of the Atlas Club but don't believe I would really be enthusiastic in regard to joining." – Paid-up subscriber Ken McGaha
"Just wanted to send you guys a quick note... this valuation video is insanely awesome. Been looking for something like this for a long time. I'm about 1/2 done right now, out in my garage on a Saturday with a cigar and glass of Oban (single malt), and by far the best 30 minutes I've spent on investing in my career.
"Absolutely, absolutely fantastic. I already turned it into an mp3 to put on my iphone, and will be watching/listening to this a minimum of 10x over the summer so it really sinks in." Paid-up subscriber Jeremy Reeves
Goldsmith comment: We've received loads of positive feedback about the video Porter recently produced on how to value a security... However this video is only available to Stansberry Radio Premium subscribers. To learn more about the premium version of Porter's weekly podcast, click here...
Regards,
Sean Goldsmith
Miami Beach, Florida
May 20, 2013
Hedge-fund billionaire David Tepper of Appaloosa Management is super-bullish on stocks, as we've discussed in a previous Digest Premium.
Another great sign of this boom... I read that Bill Ackman, a New York hedge-fund manager, is paying $90 million for a Manhattan apartment.
I have no problem believing that you could see securities prices go way up in terms of the multiples. The S&P 500 hit its price-to-earnings multiple peak in 2002 at nearly 47 times trailing 12-month earnings. (This excludes 2009, when the S&P 500 multiple hit triple digits because corporate earnings collapsed.) I would say it's certainly possible we could see a similar multiple again.
I think people are afraid of the consequences of this giant inflation... They ought to be. It's likely the bond market will crash when the Fed stops buying bonds (via quantitative easing). And when that happens, it will probably also hurt the stock market.
But it's hard to say when people will decide they would rather own gold or dollars as opposed to securities. You can't predict exactly when that will occur. I can just tell you that buying stocks around 20 times earnings today… buying a Ferrari after it's doubled in price in a year… or buying an apartment at $90 million probably won't work out very well for you in the long term.