Disclosure: I am long FCX
Gold was in another correction mode on Friday plummeting below $1430 in early morning trade; a big setback to the bulls, betting that the world will come to an end in 2013. Silver dipped below $23.5.
Gold ETFs like SPDR Gold Shares (GLD) were also sharply lower (down 1.65 percent); silver ETFs like iShares Silver Trust (SLV) followed through in sympathy (down 1.55 percent), and Freeport McMoRan Copper and Gold (FCX) was down 0.55 percent. But after the eighth correction in less than a year, is this correction the last chance to sell or the last chance to buy the precious metals?
Judging from the technical chart of GLD and SLV, the answer is in favor of the former, as the two ETFs trade well below their 200, 100, and 50-day moving averages. And many of the factors that blew air to the bubble are no long on investor radar.
First, inflation, the ultimate tailwind for the metals is nowhere in the offing, as evidenced by today’s meager Producer Price Index (+0.2 percent).
Second, equity markets around the world are on the mend. This means that some money parked in precious metals may be headed to equities.
Third, European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control, at least for the time being.
Fourth, an improving U.S. economy will make it less likely that the Fed will launch another round of Quantitative Easing (QE) — the primary fuel of the recent gold rallies. Besides, Fed’s QE impact on the dollar and the metals has been increasingly neutralized by ECB’s and Japan’s QE.
Fifth, anxiety over Abe’s promise to print yen until it creates 2 percent inflation in the land of the rising sun-the dollar has been falling sharply against the yen.
Compounding the problem of weak fundamentals is the crowding of precious metals trades, which can make the exit from these investments extremely painful.
Bottom line: The best days may be behind for the precious metals, at least until the next crisis, provided that central bankers still have enough ammunition to fuel another rally.