Is The "Book" Really Closed On Gold ?

Here is an interesting quote from this afternoon's Wall Street Journal "Online" Edition: 

"Gold prices slid to three-year lows [today], effectively closing the book on a historic rally that lured investors on both Wall Street and Main Street."

Almost every mainstream financial publication has a negative story this afternoon on Gold. Most point to the latest announcement by the U.S. Federal Reserve yesterday  that it will "taper" its purchases of Treasury securities and mortgage bonds from $85 billion/month to $75 billion/month.Others claim that selling pressure will persist in the Gold market because the global economic recovery is getting stronger and that 2014 will surprise on the upside in terms of global trade and related commercial growth. Still others point to several "masters of the universe" who have exited gold with heavy losses as a contributing factor to this year's slide.

The climate for gold and precious metals investment is so negative now that there is even talk of removing Eric Sprott as manager at Sprott Asset Management. Eric Sprott may be among the greatest portfolio managers of all time in the precious metals mining stocks arena, but some of his funds are down as much as 50% this year so far.

Is the "Book" really closed on Gold? As I write this column (9:30 PM CT), the near-term Gold futures contract is trading about $1193. Will it soon fall to $1100? Is $1000 the next real support in this market? Of course, gold prices could decline further to these key levels, but I just don't see this scenario unfolding anytime soon!

According to the U.S. Commodity Futures Trading Commission, the net-long position in Gold futures and options contracts is now at its lowest level since June 2007. And short positions (bearish bets) have very nearly risen to the levels witnessed in July 2013 when gold prices posted a significant short-term bottom. And global holdings of exchange-traded products backed by Gold have fallen to their lowest levels since March 2010.

And despite the fact that Gold is a "slam dunk" sell here according to analysts at Goldman Sachs, China keeps buying. China is buying gold at a rate of more than 100 metric tonnes every month now. This represents approximately half of the entire planet's annual mined output. Since gold jewelry sales account from more than 1,000 metric tonnes per year, China is effectively buying ALL the world's mined output every month.

In the interest of full disclosure, I now have about a 40% allocation to gold/silver mining shares in the portfolios that I manage. In one of them, I have hedged these long positions with short-sales in the S&P 500 Index. Yes, Long Gold Mining Shares, Short the S&P 500. Interesting position!

Bottom Line: One factor not talked about much with respect to the recent declines in gold, silver, and related precious metals mining shares is "tax loss" liquidations. Most of the shares in this unloved industry are down more than 50% this year so far, and some are down as much as 75%. Today is December 19th. The end of tax loss selling season is nearly done and conditions are ripe for a wicked short-covering rally which will then turn into a massive new bull trend. I strongly believe that Gold/Silver mining shares could easily rally 50% or more over the next 90 days. The upside spring is wound tight for Gold and Silver, and precious metals mining shares will be the star performers over the next several weeks AND for most of 2014.

The Message of Bitcoin Prices

Today, November 29th, is popularly known as Black Friday in the United States. However, people are doing more than shopping for the holiday season today. All over the world, individuals are sending a clear message to sovereign governments and their central bankers. GET YOUR FISCAL HOUSE IN ORDER AND STOP PRINTING MONEY!

This clear message is being translated through Bitcoin prices which have gone "parabolic" and are  actually now as high as the price of gold. Incredibly, the price of one Bitcoin traded at $1,250 this morning, the same market price as one ounce of gold.

While every veteran trader has heard about the Tulip Mania in the 1600's, today's action in Bitcoin prices spurred me to do a little research and pass along a few "bits" of information here. At its peak in 1637, a single tulip bulb was said to be sold for 10 times the annual income of a skilled craftsman. In the classic book titled "Extraordinary Popular Delusions and the Madness of Crowds" as published in 1841, author Charles Mackay claims that at one point in in the madness 12 acres of land in Holland were offered for a single Semper Augustus tulip bulb.

I am almost 60 years old now and I have witnessed dozens of speculative manias, but none even remotely approaching the mania currently unfolding in Bitcoin prices. The great Sir Richard Branson recently "blessed" the whole concept of Bitcoin prices with his heralded announcement that Bitcoins would now be accepted for advance payment on his planned future commercial space flight venture. And the financial media is loving every minute of this madness, as stories circulate of about millions won (and lost) in this fascinating arena.

So what does it all mean, and where do we go from here?

For the Bitcoin, I think it will end very badly for most investors in this market. I sincerely believe that Bitcoins will soon be compared to Tulips as the speculative bubble here collapses. Right now, as far as I know, the Bitcoin is NOT legal tender in any country in the world. Look-a-like virtual currencies are already proliferating and it's just a matter of time before "Regulators" from every major country rein in the excesses in this fringe market by outlawing these products, or regulate them to extinction, or introduce their own virtual currencies.

Of course, my view of the final chapter on Bitcoin prices is "just one man's opinion" and probably worth what you are paying for it (nothing!), but never-the-less I think it may be noteworthy.

So what about Gold? Can we learn anything from the dramatic rise in Bitcoin prices that may help us gain an edge in this oldest of (real) currencies? I think the answer is a resounding YES!

Right now, China appears to be buying the entire world's newly mined production of Gold every month. It's incredible to me that so much Gold is being bought by one single buyer apparently "under the radar" and without significant price distortion. What's the story here? It appears to me that China would like its currency, the Yuan, to be a major global reserve currency, just like the U.S. Dollar is now. The Chinese Government sees the massive global debasement of currencies now underway, and it naturally wants to protect itself from the obviously negative consequences of this debasement. To the Chinese, Gold may be THE answer, or at least their single best answer to this problem. I strongly believe that China will "soon" announce some sort of Gold backing to the Yuan. The timing is unclear, of course, but it's not hard to imagine that an announcement like this could happen anytime over the next two years. Of course, Gold prices would soar and every other major world economic power would have to consider Gold as a reserve to their own currency. Where could Gold prices be in five years under this scenario. I don't think it's a stretch to forecast a Gold price exceeding $10,000/oz, especially after witnessing the current speculative climate for Bitcoin prices. And for Silver, prices could easily jump to more than $200/oz over the same 5-year period.