Happy New Year everyone. I have about 20 minutes to write this out so hopefully my thoughts will be organized. Before I give my bullish prediction for 2012, I think it's good form to present my best bear case. I'd actually prefer a quiet year -- I'm certainly not among those rooting for WWIII and massive riots so metals become more expensive. (Will I lose even more cred in the PM blogosphere by admitting that I also find it hard to root against Bernanke? I dunno, maybe it's because the dude seems like a pretty cool guy to drink a beer with. He would've made a good wing man when he was younger) (though one of us would've had to shave, because that would be kind of weird). In all seriousness, the fiat world is unjust and I want to see it collpase from a sense of justice, but I'm aware it's not going to be beach towels and lollipops when it does and I doubt I'll be "happier."
It's hard to come up with a bear case from fundamentals alone (which of course doesn't mean there won't be big short term declines). All the reasons gold has popped since 1971 have not receded but gotten stronger. Just consider the need for low real interest rates and liquidity via money printing: is it weaker or stronger this year compared to others? On the other hand (and this is something few appreciate) exploding gold prices are more dangerous to current government power than nuclear bombs. In fact, here's a good article on how war and terrorism (in this case "The Many Benefits of 9/11) are actually big boons for the government elite. So, if this is indeed the year gold risks getting out of control, expect "wars on speculators" and 90% windfall taxes and all that crap, combined with all kinds of market bombing, rumors of mine nationalization, and other psy-ops tactics that will cause even the most confident gold bugs to fear God (in the form of our omnipotent Feddle Gummint). The past week was nothing.
Let me also add that the question of whether gold is overvalued relative to other goods right now is a legitimate one. This struck me when I bought a new car recently and realized I could've exchanged this marvel of modern technology for a number of gold coins I could hold in my coat pockets. Consider the thought experiment of being transported with a nice car to some ancient civilization with your pockets stuffed with American Eagles. The natives would've seen the coins and thought "Wow, what a fancy screw press exists in this Visitor's world!", whereas they'd see the car and give me their wives in exchange for clemency. (Strangely, silver seems better in this respect. You can't get a lap dance for $30 these days.)
Alright charts! With silver, to update my prospectus from last week, the 10 year treasury yield to silver ratio appears to have changed direction right on cue, despite silver having a very down week. This bodes well: with yields at 1.89, if we are indeed continuing the pattern by heading down, silver will have to explode, and soon.
Same chart, weekly:
And another bullish update: the 34-week and 55-week MAs are even closer to crossing: note how that has been unequivocally bullish in the past.
After the awful week for silver, I decided to indulge in an optimistic exercise. I tinkered with a chart from last week by trying to make the most bullish chart possible. In other words, let's say silver has bottomed this week (I give it 50% odds, though I see it going back into the thirties by February). Which chart in hindsight would make that appear expected? Here's what I came up with.
With respect to gold, the weekly chart is important. These trend lines are the only ones that fit every closing price since late 2008. I was watching it last week hoping we would finish above $1565, which at least is in line with the closing price from the 2008 bottom. And we did, so hopefully now we can slowly wend our way back into the black trend channel.
If you recall, back in early June, I posted a chart with the 144-day moving average, and seeing that it looked relatively linear, I extrapolated the price forward to Thanksgiving. It actually had overshot by that date, but the exercise was valid: note how the 144-day MA continues to move within +/- $25 of a straight line.
We're pretty much right back to a linear trend. That's what a "correction" means. Because the gold market is manipulated (only the extent is an open question), it's wise to worry only about long term averages and to not get too pessimistic so long as we're not too far from linear trends. (Of course a linear trend on a log chart is actually parabolic.) So let's extrapolate ahead another half year. I don't have time to do the calculations as precisely this time around, but the 144 day MA should be at ~$1900 by the end June, which means the actual price will move up even more.