Is Gold's Bull Market Over?

Eric McWhinnie Wall St. Cheat Sheet December 15, 2011

December 14 2011 Tweet Email This

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Early Wednesday, the euro dropped to under $1.30, its lowest level since January. The decline came after Italy paid a euro era record yield of 6.47% to sell five-year notes. Last month, Italy paid an average yield of 6.29%, which shows that despite the EU summit, there has been very little change in the euro debt crisis. With the euro still on the edge, investors are seeking safety in the US dollar. Gold prices dropped below $1,600, while silver broke its $30 support level.

Even though central banks around the world agreed to lower the cost of emergency dollar funding by half a percentage-point two weeks ago, indicators are showing another liquidity crunch taking place. As Zero Hedge points out, the three-month euro basis swap is now almost back to the levels before the central banks took action. Furthermore, the one year euro basis swap is back to December 2008 levels. A euro basis swap is a product that allows the holder the ability to swap euros for US dollars. The value turning more negative represents a greater demand for US dollars.

Investor Insights: Global Factors Hitting Gold and Silver

To add to the gold drama, Dennis Gartman made headlines by saying, "I sold all gold in my personal account." He goes on to explain that we have the beginnings of a bear market, and the death of a bull market. However, many investors see the gold market still intact because fundamentally, nothing has changed. In fact, conditions are getting worse. The world is still drowning in debt as governments overspend, and confidence in financial markets continue to unravel due to cases such as MF Global. James Steel, a metals analyst at HSBC Securities explained, "Gold prices are being influenced by factors that do not necessarily reflect underlying fundamentals." Currently, we believe the liquidity crunch is driving the decline in precious metals and commodities. However, as history has shown, gold and silver bounce back when central banks move to address liquidity concerns.

The technical picture is also giving some precious metal investors reason to worry. On Wednesday, gold fell below its 200-day moving average for the first time since January 2009. Gold is on pace to end its longest streak of consecutive closes above its 200-day moving average since at least 1975. However, the trading channel in gold since 2008 suggests that gold prices can decline to $1,500 and still remain in its historic upward trend. Meanwhile, silver can decline to $25 and still maintain its upward trend.

With the sharp decline in precious metals today, many are wondering when the bleeding will stop. As we have warned in our premium newsletter, gold and silver need a catalyst to challenge the highs made earlier this year. A major catalyst for precious metals just happens to be the tool of choice at central banks, money printing. The question becomes, when will central banks turn to more money printing (besides zero interest rates and cheaper swap lines) to bailout insolvent nations? Kyle Bass, managing partner at Hayman Captial, reiterated his call that the European Central Bank will print after a default and an inevitable global debt restructuring. He goes on to explain that he believes the recent liquidity actions taken by central banks are just "air bags for the fall that's about to happen." Until more clarity is seen from central banks, precious metal investors should buckle up for a bumpy ride.

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