Mike Burnick: Hello again, everyone, and welcome to this special online strategy briefing for Gold and Silver Trader. I am Mike Burnick, and let me introduce Mr. Larry Edelson, the editor of Gold and Silver Trader. Hi, Larry. It is good to speak to you again.
Larry Edelson: Hi, Mike. How are you? Thank you for hosting and setting up this replacement webinar for the SNAFUs we had last week and, members, welcome. Thank you for your loyalty. Thank you for your patience with last week’s SNAFUs in the webinar. I can tell from the audience already we have a larger crowd than last week so that is good; a blessing in disguise. It seems like more people had the opportunity to join this week.
So let’s get started. I am going to take it from the top again with the big picture. I want everybody to really have the big picture in focus. The reason for that is it is really the big picture that counts. We all tend to get myopic at times and look at the short-term wiggles and squiggles in the marketplace and short-term news and short-term economic statistics. But 90% of that is really nothing but background static or noise. You have got to step back and see the forest from the trees and take a look at the big picture.
Having said that let’s go to our first slide, Mike.
Mike: I know in the first slide you are talking about deflation so why don’t you go ahead and give us your big picture overview of that?
Larry: Okay. Deflation is really hitting the global economy very hard right now, more so in Europe and the United States than in Asia or even Latin America for that matter and I want to take a close look at the main causes to make sure that you all understand what they are. They are a little bit nebulous per se but if you step back and take a look at what is happening and how these forces affect the money markets, the financial assets, the tangible assets, and the psyche of both individual investors and big hedge funds and even sovereign wealth funds, you will see what is going on. Put yourselves in the shoes of somebody who is, for example, managing billions of dollars or even hundreds of billions of dollars.
The first cause is Europe’s meltdown. Europe is in very, very deep trouble. There is a hunt for taxes going on. Taxes are going up all over Europe. France at 75% is just the beginning. Belgium is raising taxes. Germany is raising taxes. All countries in Europe are essentially raising taxes and at the same time we are seeing extreme austerity measures led by Germany that is really putting the bond holders of Europe above the people of the different countries and cultures in Europe. That is why Greece is rebelling. That is why there are problems in Spain and Portugal. It is why Greece will eventually have to exit. Bond holders are basically being given priority over the livelihoods, the employment, the lifestyles, the quality of life of the people of the peripheral countries of Europe and that is all being done largely to try and keep the euro together which was an ill-conceived experiment right from the get
go.
The second reason… Okay it is moving on nicely. There is simply too much debt in the world. Now we have heard this over and over again for years. But the piper is finally going to be paid. We have now over $200 trillion in debt globally and the growth of that, even since the financial crisis of 2008, 2009 is now outpacing economic growth, raising debt to GDP ratios almost everywhere, even here in the United States. Debt is growing faster than our 2.2% GDP growth and it is growing much, much more rapidly throughout Europe and including Japan which has 257% debt to GDP.
There is simply no way this debt can be reckoned with without a day of reckoning and that day of reckoning is coming. In fact it is right around the corner. But that mountain of debt by its very nature and existence is deflationary. In theory all the money printing that has been done by central banks all over the world has barely made a dent. I think the total is around $5 trillion out of $200 trillion in debt. It barely dented the problem.
To put it another way, to really turn this deflation around by traditional measures you would have to print well in excess of $200 trillion to pay off the debt and then you would have some inflation. But that is not going to happen. So we are stuck now in a deflationary spiral largely I would say instigated or driven by Europe. Now it is like a cancer that is affecting the entire globe mostly again the weight being on the shoulders of Europe and the United States.
The third cause of the deflation is we are also seeing U.S. class warfare. Now, that started with Obama a few years back. It does not seem to be in the headlines right now but I assure you it is there. I have it from a good source that behind closed doors in Washington they are talking about raising Social Security taxes. They are talking about raising taxes on the wealthy again. We are seeing rising taxation at the state and local levels. We are seeing economic uncertainty. We are seeing lifestyle uncertainty in the sense that healthcare is getting more and more expensive despite Obamacare. We are seeing concerns over IRAs and 401(k)s and corporate pensions being solvent down the road. They are basically not solvent. They were betting on 6% to 8% returns and they are getting, if they are lucky, 2% returns.
So we have a lot of uncertainty and uncertainty combined with the other two forces all leads to a hoarding type of mentality. You are going to delay that purchase of a new car. You are going to hold on to your cash, build your cash. You are going to delay purchases. It becomes a self-fulfilling deflationary cycle just like inflation can become a self-fulfilling cycle. But we are on the other side of that cycle now and we are in deflation which is picking up momentum.
If you look at the evidence apart from prices and we are going to look at some charts next. But if you look at the evidence in terms of volume, liquidity, risk-off mentality, hoarding of cash which is dollar bullish, this is all creating a downward spiral and even more deflation ahead. The volume of activity in the financial markets and the stock market and commodity markets, etc., is roughly 50% lower than it was before it peaked in 2008, 2009. That is a huge contraction in volume and liquidity and I know it is there because the numbers bear it out and I know because in my own trading and in GST, there are times when we can even move the market. This is a sign of lower turnover, lower velocity of investment turnover, lower velocity of turnover of money and credit and it is all part of the deflationary ball of wax that we are confronting.
Now let’s look at some of the major markets and take a look at what is really happening because I know you are reading and you are hearing from others that the latest rally in gold or the latest bounce in oil proves the bottoms are in and it is probably over. Well, nothing could be further from the truth. The good news before I get into the charts is that the lower the commodity prices go, the higher they will ultimately soar once this deflation runs its course later this year.
Why is that? Because markets always swing from one extreme to another extreme. As a matter of fact, what I think the commodities are going to go through is something similar to what we saw in the stock market in March of 2009 after the real estate collapse. We got that spike low into March of 2009, roughly 6400, 6500 on the Dow. That gave the Dow the energy to catapult higher and it has gone higher ever since for six years now. We are going to see the same type of setup occur in commodities. We are going to get another 2008-style meltdown, this time in commodities and that will set the stage to catapult that sector higher just like the Dow has done over the last six years, but this time for commodities once deflation reaches its extreme downward spiral.
But I do want to emphasize because I know there are a lot of people out there still looking for inflation. We are not going to get it for quite some time. Commodities will bottom later this year but deflation will still largely be the prevailing force for up to three more years in different sectors. It will creep from sector to sector. It will shift back and forth between the U.S. and Europe. We will not see anything like normal inflation for some time. So do not bet on inflation driving commodities higher.
What will drive commodities higher will be the deflation that strikes the U.S. government bond market and the European government bond market and the Western socialist governments of those two countries. Because in this phase, while deflation is affecting the private sector right now, it is going to soon hit the public sector and you are going to see governments run for their lives. Their backs are going to be up against the wall.
Let’s take a look now at the big picture. We started to do that last week and we had some SNAFUs. I am going to spend more time on each of these charts with you because I really want them to be emblazoned in your mind. These are the big picture charts.
Here is gold. This is a monthly chart of gold with my long-term median line analysis on it and some other things that I want to point out and you can clearly see from this chart, looking at a monthly chart gives you a much longer term step back picture. Look at how gold has broken that third rising uptrend line there; very, very bearish and there is a gap of white space all the way down to the red line there which is a cyclically-based line, a technique that I use to identify key cyclical points price-wise in the markets. There is no support technically until you get to about 770 in gold, 756 in gold. That is where long-term support comes into play and is rock solid. I do not believe that we will get down that low. I have system support at 920. I think we will get to 920 maybe in a real panicky selloff, dip below 900 but that is about it. Worst case is around the 756 level and I repeat, I do not think we will get
there. But I am very confident that we will see $920 gold.
Now, it is very possible that gold could bounce again up to this blue line to test it, kiss it as I like to say, which would be a rally back up to about 1250 and then fall again. It is not going to be a straight line down. But the trend as you can clearly see from this monthly chart of gold is down. There are no ifs, ands, or buts about it. You could even get a rally, which is not going to happen in my opinion, up to about 1440 in gold and it would mean nothing. The bear trend would still be intact. I doubt very much you are going to get that. We have a chance for one more little pop in gold up to about 1204, 1211 but gold is acting very, very weak. We got up to 1220. We made some nice money on some long ETF shares in the mining shares and that rally fizzled right out in the mining shares and in gold and we are now trading back down around the 1170, 1175 level. There is one more chance for a pop higher and if so, I will
probably be using it to position you for the next move down which will be a doozy and knock the socks off of everyone but put some nice profits into our hands.
Silver is actually in worse shape than gold. You do not need to be an experienced chartist or technical analyst to see that. Just look at this chart. Silver has clearly broken below that third up-trendline there. It rallied up to test it, tested it on the nose, turned on a dime, headed back down, broke below the lower slanted blue and red line which is another cyclical line similar to the one that I just showed you in gold; very, very bearish sign and there is no major, major long-term support until silver gets all the way down to $8.50. Like gold, I do not think we are going to get there. I have system support which is based on a quantitative model that takes time and price into effect that tells me 12.50 should be the bottom in silver. But that is still a 33% plunge from where we are today.
So you can see from these two charts, and this is a monthly chart of silver, nothing has changed. These trends are intact. I do not care what kind of fundamental explanation one might put out there for why gold and silver should go higher or whatever rationale one might use to say the bottom is in. The fact of the matter is these charts are extremely bearish. They show no evidence whatsoever that the bottom is in.
Now, short term, gold and silver are still pretty deeply oversold and a bounce is likely to occur, another bounce, before the next move lower. We could get gold up to about 1204 to 1210 as I just mentioned. Silver may be back up to $17 but if it cannot get above… If neither one of those can get above those two levels, the next big move down is going to be a sharp plunge and I am watching these like a hawk because that is where the big money is going to be made.
What you are going to see and I can predict the fundamentals just from the market action. If we get another bounce higher in gold and silver, every gold and silver bull and their brother is going to come out of the woodwork and say, “See? I told you so. Gold bottomed. Silver bottomed. We pulled back. We are rallying again. That is a sure-fire sign that gold and silver are bottoming.” Don’t you believe it for one second. It is not the case. You are going to have to be a bit of a contrarian here when you hear and see that kind of news or even a fundamental event, let’s say Mario Draghi decides to print more money. Everyone will come out of the woodwork and say, “See? I told you so. Gold and silver are going up.” No.
We are going to use that rally if it comes and it is not certain that it is going to come to position ourselves for the next leg down which is going to be a doozy and I will be looking to aggressively buy those inverse ETFs on gold and silver and mining shares for that next leg down because I think it is going to offer the biggest profit potential, yet even bigger than the profit potential that we might have seen as gold crashed from 1900 to 1700 to 1500 because that took over two years. The move I am expecting down in gold and silver is going to occur in a matter of a few months where gold is going to drop from 1170 or let’s say 1200 to below 1000 in a matter of weeks or even months and we are entering into the June and October cyclical periods that lie ahead. That is the most likely periods for that kind of downdraft to occur.
Let’s now take a look at oil. And oil concerns me perhaps even more so than gold and silver because I have noticed lately that there are a lot of investors trying to buy energy shares. There are a lot of analysts saying the bottom is in in oil and gas and I disagree completely. While I was a little late calling the, and I did think last year that at some point that oil had bottomed up in that 80, 90 area and we would get a rally up to 120, I was at least able to warn you that oil was breaking down and if you look at this chart you can see clearly here the collapse in oil prices has been staggering, absolutely staggering and you have no… We have broken through system support at $67.15, $58.32. The latest rally brought it up to about 52. We could get one more pop up to 54 in oil but that is about it, folks.
The next big move in oil is down to 33, minimum, which would roughly be equivalent to the 2008 low and double bottoms never hold so if we get down to 33, maybe we will bounce back up to 40. But the ultimate low in oil is going to come in the mid to low $20 level and you are going to see some medium and large size energy companies, household name type energy companies face severe financial difficulty. We are nowhere near a bottom in energy prices. I do not care what OPEC does. I do not care what anyone says about the fundamentals, about Yemen, or anything else. Oil has not bottomed.
And as I have told my Real Wealth subscribers, do not buy energy stocks until I give you the all clear. As far as our trading service here, it is very similar to gold and silver. If we get another bounce in oil, we are long oil right now with modest gains. That is because I expect a little bit further bounce in oil. But I am ready and willing and able to quickly turn on a dime and position us for another leg down in oil which, like gold and silver, could be quite a doozy.
Now, let’s look at the commodities sector as a whole through the CRB Index which is a basket of commodities. It clearly confirms the deflation. Look how far the CRB Index has fallen since its peak roughly a little bit later than gold in 2011. It has fallen from close to 700 down to about 400. That is a 40% drop in commodities as a basket. But now take a look at that black arrow that I have there and you can see that it has penetrated a cyclical line, the red downward sloped line. It has penetrated the blue downward sloped line and it is basically in freefall territory. Yes, we can get short term a bounce in commodities, in all commodities. But make no mistake about it. That is all it would be.
Commodities are not going to bottom until the 2000 panic low from the financial crisis, the real estate financial crisis has broken. We will get down to the 2008 low, down around 325. We will bounce a little bit, maybe up to 350. But then the CRB Index representing the entire basket of commodities is likely to fall as far as 212 based on system support that I have. So that is another 50% decline in this index which means just about everything, whether it is coffee, cocoa, sugar, wheat, corn, soybeans, rice prices, you name it, has a long way to go on the downside.
Again, we will try and I will aim to rack up as many profits as we can on the short side but the real big profits are going to come down the road because we are going to be scooping up long positions in these things when there is blood running in the street and nobody wants to touch them. So that will be the long-term strategy.
But short term, like gold and silver, most commodities will continue to bounce a little bit short term and be volatile. You will hear a lot of analysts, experts saying the bottoms are in. Nothing could be further from the truth. I have no evidence whatsoever quantitatively, technical analysis-wise, cyclically that a bottom is in.
I want you to stay alert. I, as I just mentioned, will be looking to aggressively buy inverse ETFs. That could come as soon as tomorrow. I am watching gold very, very closely today. It is trying to lift its head but it is unable to do so. I need a couple more days of information and trading action to see. But it is very possible we could be entering short positions as soon as tomorrow on gold and silver and possibly even oil. I am being patient. I do not want to miss the move but I do not want to get us in prematurely either. I do not think I will be playing the long side other than what we just did over the last couple of weeks. The markets are too weak to try and take a stab at a long position with the exception of the oil long position that we currently have.
So the question then becomes when will deflation end? When will commodities bottom? The most likely timing window remains June of this year. That is not that far off. If we get a panic, it will be music to my ears. It should be music to your ears. There will be a panic to the downside and this entire commodity deflation will end as soon as June. There is another timing window in October. If we do not get a panic selloff in June, we could still get one in October. Those are the two most likely periods when commodities could bottom.
There is a chance and I do have to apprise you of this. There is a chance if we do not get panic selloffs in June or October this year where long-term system support levels are met such as 920 in gold, 12.50 in silver, below $30 in oil during a panic selloff in either June or October, there is the chance that this bear market will extend into a full five-year bear market coming off the 2011 highs into the middle of 2016. Now, I rate that as maybe 10%, 20% chance at best of extending into 2016 but I do want to put it out on the table for you.
It really does not matter because we will be playing it for everything we can going forward. You can see from the recent results over the last few weeks, we have had some good results. We have been fine tuning our timing for trading and I am very optimistic we are going to continue to get better and better results going forward.
What about the stock market and what about interest rates? The stock market is in no man’s land right now with a bias to the downside heading into June.
Let’s take a good look at this chart because again this is a monthly long-term chart of the Dow Industrials. It gives you a very, very nice picture of what is going on here. You can see that it is a very, very strong market yet you can see, and I have mentioned this in my Real Wealth Report several times and I believe in some GST issues as well, the real breakout is around the 18,500 level in the Dow. We have tested that level three times, first at around 18,300, then a higher high at around 18,400, and then most recently another attempt at the 18,400 level just in the last week or so and we sold off again.
That top red line of that pitchfork that you see there, the ascending red line, is major, major, major, major resistance. It is holding that market back and until the Dow Industrials breaks out above that line and comes back to retest it, the odds are we are going to see a sharp decline in the Dow Industrials before the next phase of its bull market unfolds. That is why I am still looking at the bearish side of the stock market. As you can see, there is a lot of white space under there. We could see the Dow drop down to just below 16,000, enough to be a correction. In fact, that is the more likely event over the next few months and I am going to continue to take stabs at the short side because there is a lot of pay dirt to be made on a sudden and sharp pullback.
You will see that in my Money and Markets column coming out tomorrow, I put some statistics in there that the Dow is now… The bullish sentiment in the Dow is at historic extremes measured by various surveys. More analysts, more hedge funds, more mutual funds, and more individual investors and traders are more bullish today than they were at the tops in 2000 and 2007. You know what that means. That means there is nobody left to buy. That is very, very bearish fundamental, if you will. Sentiment is so extreme, everybody thinks the stock market has nowhere to go but straight up and when you get into that kind of sentiment, it is a recipe for disaster.
So please, if you own stocks, stocks that you do not want to get out of or you cannot get out of for whatever reason, consider hedging. In the Gold and Silver Trader we have on one light, short inverse ETF, DXP. It is holding its own. But like gold and silver and oil and it will probably occur simultaneously, similar to the 2008 shakeout, the Dow and the S&P 500 and Nasdaq and all the accompanying European stock averages… I know I sound like a stopped clock. I have been predicting it for a while but in this case I would rather be a stopped clock and be safe as far as buying anything goes and I would rather continue to take stabs at the short side because there is a bundle of money to be made there and I certainly will not go long until one of two things happens: the correction comes and it plays itself out or the Dow moves above that upper red line, retests it, holds it, and begins to move up again. Then we are squarely
into phase two of the Dow’s long-term bull market which will take it to Dow 31,000. But right now you have just got to be patient, got to save your ammo.
I do not believe the Fed is going to raise interest rates until much later this year, not in September, October, but December earliest and quite possibly none until next year and there are three chief reasons for that. I know I stand alone on that, pretty much alone. But do not get me wrong. Janet Yellen and the Federal Reserve would love to raise interest rates for domestic policy reasons but they have learned over the years that the U.S. is not an island and the U.S. has to take into consideration international factors. So I do not believe the Fed is going to be impatient raising rates.
For one thing, the U.S. economy is still too fragile. 2.2% GDP growth is really meager. It is nothing to write home about. Unemployment is still high. Yes, the official number has come down quite a bit but the unofficial number shows unemployment still in the 11% to 13% neighborhood.
The other reason the Fed is not going to raise interest rates is they do not want to signal to the rest of the world, especially Europeans to come here and put your money here because the dollar would go through the roof worsening deflation here in the United States. That would be a real big problem and the Federal Reserve is acutely aware of that and it would put the final nail in the coffin for the euro and the European Union and I do not believe Janet Yellen or anyone else at the Federal Reserve wants to be seen as an outside force that lights the fuse that blows up the euro.
So I think they are going to be very, very patient. They did remove in the last meeting the word patient but they balanced it with a statement saying they would not be impatient. Policy makers always have a way of playing with words and being wordsmiths. But if you look at the facts and the condition of the global economy right now, especially Europe, the Fed would be insane to raise rates right now or any time soon, for that matter.
During the next decline in commodities, which is rapidly approaching, there is even the possibility for U.S. interest rates to fall to new records lows. I want to put that out there because I have been studying the 30-year bond and what has happened in Europe with virtually all of Europe going to negative interest rates to see whether or not negative interest rates are possible in the United States and my answer is yes. Negative interest rates, we could see rates lower before they head higher. We could even see negative interest rates in the United States for a very brief period of time, especially if I am correct and the Fed delays any rate hike until 2016. You will see as the next leg unfolds down in the euro even more capital come to our stock and bond markets and that would push bonds into their final bubble bringing U.S. rates, at least on the 30-year, into negative territory for a very, very short period of time.
I am going to give you a little bit of advice. If that does happen, I know what I am going to do. I am going to borrow as much money as possible. That is what I am going to do because you will never, ever in your lifetime see negative interest rates or even 1% 30-year bond rates again in your lifetime or your grandchildren’s lifetime or your great grandchildren’s lifetime.
So keep that in mind if you are looking at property or any kind of business investment that you want to be able to borrow some money for. You are going to have really, if you think borrowing now is cheap, there is a very high probability it will get a lot cheaper over the next few months. The flip side of that is I would not lend any money to the U.S. government or to Europe by buying their bonds. Let them go higher in the short term, then borrow as much money as you can from them. But do not give any money.
Okay, let’s spend a lot of time on your questions. Those are always very helpful to me to understand where you are coming from and I do know I have seen several emails from several of you that you also enjoy the Q&A. So let’s go right to that.
Mike: Yes, we have got several questions in the queue already, Larry, including some questions from last Tuesday’s webinar attempt, so that we can address them for you today.
Here is one from Clay. “Larry, during your Q&A please discuss all the reasons why you think oil prices will drop significantly from present levels before they bottom.” Kind of touched on that already in your presentation.
Larry: Well, I have touched on the technical reasons and to me, those rule. I can tell you pretty much what the fundamentals are going to be just based on looking at a chart and my interpretation of the fundamentals is that A) you have an over-supply of oil and gas because of our emergence as a major player, a major supplier of oil and gas over the last few years. That is number one.
Number two, you have OPEC who is doing nothing to stem the decline in oil and their strategy is basically to over-supply… It is exactly the opposite. They are trying to over-supply the market to put U.S. producers out of business thereby, down the road, gaining market share after they put U.S. companies out of business. Now, the Saudis and others are supposed to be our friends but they are business people too and from another point of view, even though they are bleeding cash, Venezuela, Saudi Arabia, etc., at these lower oil prices, having some cash flow is better than having no cash flow, especially when you have so much geopolitical problems at home, as we all know, in the Middle East. Some cash flow, even though it may be negative cash flow in the sense that it is killing earnings, is better than no cash flow.
So you are in a deflationary cycle. You are in a deflationary cycle in commodities and you have a deflationary type of mentality by OPEC leaders, by even the U.S. businesses, by energy businesses, keep bumping, keep bumping because of cash flow. We have got to service debt that we took on before. We have got to refill our coffers even if it means we are losing money in terms of earnings in the short term. So you have a host of fundamental reasons why the price of oil and gas can go lower and there is nothing clearer than the charts for me. It says lower prices are coming.
Mike: Here is a question from Brent. “What is your overall level of confidence in the U.S. economy and its capacity to withstand monetary policies that seem to fly in the face of common sense? Always appreciate your perspectives on gold and silver, Larry.”
Larry: Well, thank you. Monetary policy, yes, it does fly in the face of common sense and the reason for that is… The original… Let me go back in history a little bit. The original idea of the Federal Reserve was a good idea. It was not as popularly been told of a bunch of bankers colluding, getting together on Jekyll Island to come up with some way to control the world. The original intent of the Federal Reserve was to smooth out capital flows within the country.
It was instigated because of the San Francisco earthquake of 1907. All the insurance companies were on the East Coast, primarily in New York and Connecticut. When we had the San Francisco earthquake of 1907, the policies got paid out. There was capital, hundreds of billions of capital went to the West Coast to rebuild San Francisco and we had a cash shortage and a credit squeeze and a recession in the East Coast. So the bankers got together and said, “Look, we cannot have this. We need to smooth out capital flows and credit flows between different regions of the country.” It was a great idea and it worked up until World War II when Washington got involved with the Federal Reserve and said you have to keep interest rates artificially low so that we can float debt to build our armies and wage war. Then the Federal Reserve became a political animal and it has been a political animal ever since. That is not going to change until
the system crashes and burns.
That said, there is also a lot of old misunderstandings about how monetary systems work. You have a lot of economists at the Federal Reserve and on Wall Street and in other areas who still believe rightly… well, for whatever reason that we are on some kind of gold standard. We are not on a gold standard. The value, the concept of money has changed. It has changed completely to a medium of exchange. It is not a store of value. It never really was a store of value even when we were on a gold standard because the powers that be can always change the rules of the game.
So the monetary system is always evolving. We went from a gold standard to no gold standard to the Bretton Woods. We need a new monetary system and that is going to be the end result of all this, somewhere on the other side of 2020. Of course, we also have a new global economy with the rise of China and other emerging markets. So everything is changing. Everything is changing right before our very eyes and then throw in technology and all the other changes that are occurring, disruptive technologies, creative destruction as Joseph Schumpeter called it and we are living through some fascinating times to say the least.
Mike: Here is a question from Rainy, Larry. He asks, “Will gold now go up towards 1240 an ounce before going back down to the $1000 level?”
Larry: It is possible. As I said earlier, we will get one more bounce. The last bounce, we got up to 1221. I pegged resistance right at the 1220 level. We got up to 1221 and just fell right back down to 1165 or so and now we are bouncing again. I doubt we can get much higher than 1204 or 1210 and there is a very good possibility we will not even get that high. We might only get up to 1190. So I am watching it very, very closely. The winds of the next leg down are starting to blow so I am watching it like a hawk.
Mike: Okay, here is a question from Raymond. “Larry, I have been a member of the Gold and Silver Trader service for about 21 months now and I have followed all of your alerts at all the recommended amounts and to date have a net loss to show for it. Will you kindly explain what has gone wrong over the last year or so?” Also, he has a followup. “I saw a video presentation recently from Harry Dent predicting the Dow is going to crash over the next few years to 6500 or below. What say you?”
Larry: Okay, as far as the performance in Gold and Silver Trader, there is no question, last year was a tough year. We have had some better results so far this year, much better results. I would say if I had to pick one reason why it has been difficult, I would say it has to do with volume and liquidity. Everyone on this call knows that we have had some trades that we have put on where we have gotten stopped out and then the position goes back in our favor. That is one of the handicaps of trading in a market that has seen volume and liquidity levels fall and I do have a lot of people in the service, a lot of members that follow me, so sometimes the professionals, if you will, see our stops and they pick us off. It is very, very unfortunate and I have made changes to address for that, using wider stops, hiding the stops behind other orders that I see out there in the order books, and depth of market studies
that I do and fine tuning those and we are starting to see some progress as a result.
But the other thing is… That is the number one reason. The second reason is if you look at the markets for the last four or five months they have all been in trading ranges. Trading ranges are always difficult to trade ETFs in. They are easier if you trade futures and you can be very nimble. But with ETFs you get these markets that… The Dow has had a 1400 point range for almost six months that is has swung back and forth three times in. 1400 points is pretty big. But ETFs do not always correlate as well as they should with the underlying security. So there has been some liquidity/volume issues and trading range issues. But we are off to a much better start this year than we have seen for probably all of last year and I am very, very optimistic going forward.
Now, as far as the Dow falling to 6500 again as Mr. Dent seems to think, I just do not understand the logic there. A lot of Mr. Dent’s views are based on the aging of our population and while we are certainly having a problem with that, especially in Social Security, I fail to see how he can exclude all the other factors: international capital flows, what is happening in Europe that is sending money here, what is happening in the Middle East that is driving capital here, what is happening in China and the emerging economies and what is going on there as they become wealthier and diversified. It is like the only thing that he studies is the United States and maybe a few other countries like Japan where there is a gentrification problem as well and he surmises that people are going to save more, they are not going to invest as much; therefore, the Dow is going to collapse to 6500. It is biased and myopic.
Mike: Okay, here is another question on gold. Obviously we have several of them, Larry, kind of combine a couple here. Frances comments that she does not mean to be critical but she did lose a big chunk of her trading account in 2013 and 2014 trying to chase gold and silver. Another question from Dale goes right to the point, “What do you see for gold and silver if it does not bottom in the June to October timeframe?”
Larry: Well, as I said earlier, it could be pushed off into 2016. I do not know yet. If you step back and take a look at the big picture, when gold broke out above the 1980 high at 850 back in, what was it, 2006 and went straight up to 1921, when a market breaks out to the upside it almost always comes back to retest that breakout level. We have not yet seen a test of the 850 level and that is a normal market move. In fact, on a long-term basis, if gold were to fall to 850, it would still be in a long-term bull market. All it has done is shoot up to 1920, come back to test its breakout point, and then it will rally again and the next high will be even higher than 1921. That is normal market behavior.
We pretty much saw the same thing with the Dow. The crash from the real estate crisis into March 2009 tested a breakout level at the 6500 level. We came right back to it. On March 16, seven days after the low, I put out a MaM article that said the low is in. Next move is to 10,000+. These are how markets move. There is a lot of logic in them if you cut through all the noise. That is the most difficult part, cutting through the noise.
Mike: Here is a question on currency, shifting gears a little bit. Rex wants to know, “Do you still believe, Larry, that the euro/U.S. dollar exchange rate is going down to parity or even lower over the next few years?”
Larry: Much lower for the euro.
Mike: How much lower do you think?
Larry: Below $0.90. Below $0.90 down to about $0.80.
Mike: Okay, here is a question from Terry. “Have you heard of the U.S. plan to change to a digital currency later this year? If so, what exactly happens to the cash dollar and how will it affect us in our buying capabilities?”
Larry: Well, Washington does want an electronic currency. So does Europe. So does China, for that matter. So does most of the world. They are planning to go to a cashless, eventually a cashless society. Why? Because everything electronic can be stored, tracked, and taxed. They can monitor you much more closely with an electronic currency than cash. They want to eliminate cash. There is no question about that. That is where we are headed. Later this year? No. No way. I do not know who is saying that but it is not technologically possible, it is not physically possible, and it is not logistically possible. My earliest guess for a digital currency would be somewhere around 2025.
Mike: Here is a question from Wade. He would like to know, “Will you be looking at other metal mining companies such as rare earths or uranium for recommendations in the future?”
Larry: Yes, of course, absolutely.
Mike: Okay, here is a question on trading tactics from Jan. Jan would like to know, actually she starts with a comment. “Many of your recommendations have been stopped out lately and I just want to be sure I am doing this correctly. Should I have my accounts set to sell as soon as the price limit is reached or should it be set to sell when the trade closes at the limit price at the end of the day?”
Larry: Well, the regular stop orders which means as soon as that price is hit as a last quote, a last trade in the marketplace, then you should automatically be stopped out. So they are not limit orders. They are regular good old fashioned stops.
Mike: Okay, here is a question about currencies again. “The Aussie/U.S. dollar exchange rate, where do you see this going by the end of 2015?”
Larry: Well, it is kind of hard to predict the exact level for the Aussie. The Aussie is going to trade lower with commodities and long term it is going to rise with commodities. It is a commodity currency.
Mike: Okay, here is a question from Doug. “Are you going to recommend any oil or natural gas companies and if so, when do you see the bottom on the valuation for these energy companies?”
Larry: Well, the only thing holding up energy companies right now is the rising tide of the stock market. That is it. If it were not for the stock market, energy companies would be trading substantially lower and if we get the correction that I am expecting in the stock market, then your energy shares are going to implode. I am not going anywhere near the long side of energy shares, energy companies, oil or gas, until we get a bottom. I am looking for that longer-term play where we can trade in and out of a bull market once the bottom is in.
Mike: Okay, Donald would like to know, “What is your opinion about the near and longer-term value of the Canadian dollar?”
Larry: Same as the Aussie. They track each other very, very closely.
Mike: Okay, let’s see. Here is a question from Nancy. It is a good one. “What would you suggest a brand new gold investor invest in right now?” asks Nancy.
Larry: Nothing.
Mike: Just wait for your next signal.
Larry: As far as gold goes, keep your ammo safe and build it up for the bottom.
Mike: Okay, here is a question from Donna. “Can the S&P and the Dow maintain this level without a correction in the near future here?”
Larry: Well, yes, of course. Anything is possible. I do not think it is likely. We have been in a largely sideways market. We have tested multiple times that 18,400, 18,500 level which is an indication of how significant that is and the market is running out of steam. So we are probably going to back up before we explode right through that level.
Mike: Okay, here is a question from Jack. “How do you see the effect of deflation on real estate? Is it time to buy or perhaps to sell?”
Larry: I think real estate is fine. You might see some softness as you get a pullback in the stock market going forward but I think the lows are in place in real estate. I am very pro-real estate going forward because when interest rates do finally start to rise, what is going to happen is you are going to see a lot of people, a lot of analysts saying, “Oh, my gosh, interest rates, mortgage rates are going up. There goes the real estate market. It is going to crash.” Well, no, that is not the cycle you are in right now. The cycle you are in right now is historically low interest rates and when interest rates start to rise, what is going to happen is people are going to wake up and say, “Oh, my gosh, I had better borrow money now to buy that property before interest rates and the cost of financing that property goes higher.” So I think you are going to see a mad dash to buy property. I think rising
interest rates are going to be very bullish for real estate.
Mike: Okay, here is an interesting question from Steven. He asks, “Is there any effective way to play the slide that you see coming in the CRB Index?”
Larry: We are going to play it with inverse ETFs on gold, oil, perhaps some put options I am looking at right now on grain ETFs. The CRB Index is too thinly traded. There is a futures contract on the CRB and there are a few ETFs that mimic the commodity indexes but they are very, very illiquid.
Mike: Okay, here is a question on everybody’s mind with what we have seen going on in Yemen. “How will the breakout of warfare and the war cycles you are talking about in the Mid East affect gold and silver? What if Israel attacks Iran?”
Larry: Eventually the war cycles are going to be very bullish for commodities and this is where I erred a couple of years ago, I think it was. I saw them ramping up. I wrote about them. I told everybody about the ramping up of the war cycles. I figured they would immediately be bullish but I underestimated what was happening in Europe and what was happening with deflation and how it was emerging and in this early phase of the war cycles, it turns out it is actually deflationary as well because a lot of people in hot areas like the Middle East are moving to cash, moving to the dollar, and reluctant to invest. That is going to flip. The psychology is going to flip down the road because as the war cycles get worse and domestic and international unrest gets worse, inflation comes to an end, then it is going to become all-out bullish for commodities.
Mike: Okay, here is a question from David again staying on the gold theme. “Larry, do you stand by your predictions that gold will reach $5,000 an ounce by 2016 and that silver will also reach 125?”
Larry: Well, obviously I could see gold late 2016 well above 2000. But yes, the price targets have probably been pushed out a little bit. We are probably now in the… I am glad that came up. Probably looking at 2017 to 2018.
Mike: Okay, let’s see if we have any other questions. A lot coming in about economics.
Here is one again about the stock market. David wants to know, “What would you use to short the Dow, the S&P 500, or the NASDAQ? Would you use a 2x or even a 3x ETF?”
Larry: Yes, absolutely.
Mike: Okay, here is a question about a gold stock. I do not know if you can comment but Nick says he has a buy limit on Royal Gold at $39 and IAMGOLD which you recommended before around $3. “Would it be foolish to continue to hold these limit orders open considering the bear you are expecting will not likely fall lower than those limits prices?” What do you think?
Larry: Yes, those are low enough levels where you are okay. I would not back up the truck at those levels but taking nibbles at those levels is probably okay.
Mike: Regarding stocks, Jerry wants to know, “Larry, when should we go back to SPXS? Is the market ready for a bear market correction?”
Larry: We are getting closer and closer, watching it like a hawk. We have a very light DXP inverse ETF on. SPXS will be my next choice.
Mike: Here is a question from Steven about gold. “Do you think the U.S. has sold any of its gold position over the last several years?”
Larry: No. No.
Mike: And one from Bob, “Could the U.S. monetary system totally collapse as a result of our $18 trillion in debt?”
Larry: Well, the $18 trillion is not the big issue. The big issue is, I think it is $221 trillion of total debt and IOUs that Washington has including Social Security and everything else and when you say the U.S. monetary system, the entire monetary system, the global monetary system is going to crash and burn. We need a new monetary system. It is just in total disarray and it needs to evolve to the next step which is getting rid of the dollar as the world’s reserve currency and implementing a single world currency that is fair to all and acts as a firewall to help prevent contagion moving from one country to another country.
Mike: Okay, here is an interesting question and perhaps as we are a little over time now, we will end on this one. This one is from David. He says, “Do you still expect the opportunity to at one time ‘back up the truck’ so that I can load up my Ford F150 with gold and gold mining stocks? Is there any light at the end of the tunnel for that?”
Larry: Yes, absolutely. Of course there is. Except when we get down to the bottom, I would not use a Ford F150. I would use an 18 wheeler Mac truck.
Mike: Or perhaps an armored car, right?
Larry: Yes.
Mike: Okay, well that is about all the time we have for today. But once again I would like to thank everyone for sending in those terrific questions and if we were not able to get to your questions or if you have any other comments or questions for Larry, please remember, you can always send us these questions at any time by just submitting them to the Gold and Silver Trader editor’s mailbag which you will find right on our website and Larry will either answer those directly or perhaps we will cover them in a future online strategy briefing and with that, thank you, one and all, for joining us again today and, Larry, as always, thank you for your time as well.
Larry: Well thank you, Mike, for hosting and to all my members, thank you very much for your loyalty. Thank you for your patience on this quarter’s webinar and you are going to be seeing a lot of action coming up in GST.
