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As Europe Falls, Expect Precious Metals to Rise


So far, flights to safety have benefitted the dollar and US Treasury bonds while precious metals have been considered risk assets.


Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.

This 200-year-old nursery rhyme about a fragile egg seems prophetic when we apply it to the crisis in Europe where the concept of a European Union is Humpty Dumpty. We could also apply it to a fiat currency system where Humpty represents the confidence behind intrinsically worthless pieces of paper. In both scenarios, Humpty seems set up for a great fall.

Policy makers are the kings. Their horses included quantitative easing, bond selling, summits, vows, austerity, partial debt restructuring, liquidity provisions, stress tests, etc.

Looking at previous falls, gold and silver peaked the night the first major US bank, Bear Stearns (JPM), went down in 2008. They were clobbered through the autumn before embarking in 2009, on a run that made them the best performing asset class.

Unfortunately for precious metals bugs like myself, the US dollar and US Treasury bonds have been the dominant flight to safety vehicle while precious metals have been lumped into the risk asset category. They have risen with monetary stimulus, especially here in the US. They have fallen in periods of market duress, such as during the last three months. Over the past few weeks, the metals traded lockstep with the euro for some reason. Obviously the dollar is rising, but if we take a step back, it is not hard to see that all of the news driving the fear over the past months is both real and incredibly bullish for the metals in the longer term.

A few questions:

How could the dissolution of one of the world's three major currencies be anything but uber-bullish for the historical store of value, gold?

With US debt, state and federal, on a trajectory that puts us a few years behind our European counterparts, who is buying 10-year paper at 1.7%?

If a case can be made that our paper is next, as the entire concept of a debt super cycle suggests, what will be left?

In terms of gold and silver tracking the euro almost to the tick, doesn't a Greek exit rally the euro?

The action in gold and silver have been decidedly negative. However, long-term uptrends remain intact, and now do not lurk far beneath market prices. Commitment of trader readings are showing a hedge fund parade on all fronts. Gold shorts, euro shorts have risen dramatically. Dollar longs are rising, and silver futures' ownership is around 40% of what it recorded during 2009.

You get the picture. Obviously all of these deviations from the norm can continue in the short term. Many feel gold has topped for good and sentiment readings are highly negative (bullish).

But I say this view is wrong. A bottom in the metals is close. It could be here at 1628 gold, 26.50-27 silver, a retest of last week's bottom. It could be 1475 gold and 24 silver. It could even be lower than that. It's really a question of when fear-driven selling based on myopic considerations dries up, and concurrently, when opportunistic momentum-driven short selling abates.

I know that wherever we bottom, it will be a major bottom. It will likely be a bottom that will represent the single greatest buying opportunity for the next five years or more. A massive rally is coming, and it will start before the end of this year.

Unfortunately, the metals have been lumped into the "end is near" category. Rationality dictates that if the end is near, then this metal correction is "near the end." Unlike eggs, metals aren't destroyed in a fall.
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