Don’t Forget Gold…..and Silver

The S&P500 dropped another 1.15% last week, after falling even harder the previous week. This time, volume rose, which adds validity to the price drop. Also, volatility inched higher, suggesting that investor complacency—while still unusually low—is gradually wearing off.  After this latest price drop, the US equity markets look like they’re moving to the bearish side of the tipping point discussed here last week. Even though a short-term bounce is possible, further selling is looking more and more likely.

The US macro data continues to disappoint, implying that the US economy is stalling, if not headed for a double dip recession. Wholesale trade grew at half the rate predicted by economists. International trade results were horrible; these will directly reduce upcoming GDP growth figures. Initial jobless claims were worse than expected. Only consumer sentiment, a number seemingly pulled out of left field, rose more than expected.

Technically, the S&P is somewhat oversold on a short-term basis; this is visible on the daily charts. Longer term, using a weekly charts covering several years, the S&P is turning down and the risk is that the downside is large—there’s a lot of “air” beneath the current price levels and while many intermediate support levels lie below, these support levels are not that strong and could break down quickly until much lower prices are reached.

And if US stocks do continue falling over the next one, two or three months, then remember that other risk assets will very likely fall too (only US Treasuries and the US dollar stand to rise in the face of a major “Risk Off” episode).

Gold, and silver, for example will most likely get whacked. The price of gold could fall to, or even below) $1,500. Silver could fall much more dramatically, in percentage terms, to $25, or even$20 if the selling in risk assets were strong enough.

And just as with equities, a brutal sell-off in precious metals should be embraced, not feared. If gold and silver were to go “on sale” it’s important to be prepared to buy more, not to freeze in panic and just watch, or even worse, to sell at low prices.

The smartest money will be thanking their lucky stars if stocks and metals (and other assets) go on “clearance sale” and will be buying with both hands.

So as difficult as it may be, financially and psychologically, prepare now for this possible opportunity to buy gold and silver.

Why buy more gold and silver?

Precisely because the key reason behind its decade old price appreciation has not ended…..and shows no signs of ending anytime in the near future:  the Fed will keep real interest rates negative.

And if risk assets sell off badly enough, the Fed (through another round of QE) could drive real rates even more deeply into negative territory.

So if you own US Treasuries yielding 1.5% while associated inflation is 2.5%, then you’ll be losing money after inflation and even more so, after taxes are factored in.

In this situation, gold and silver will ultimately preserve real value, perhaps even delivering positive real returns.

And if these metals plunge in price during a general risk sell off, there will be no better time to buy more in preparation for the inevitable rebound in prices.

Remember, be your own central bank—buy gold….and silver.

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