Thursday, January 21, 2010

The Big One Could Finally Be Here.....

This week, we are witnessing something that should become fairly "as usual" over the coming months:  Broad based price declines in virtually every major asset except the USD.

Gold is down about 3% for the week so far, silver is down about 6.5% for the week, and the USD is up (according to our analysis there really isn't much chance of it going anywhere else for the next while).

But here's the interesting thing - finally, after 5 weeks of watching gold top and begin its bear market decline, and the major stock indexes make new highs, we might have just witnessed the turning point in all "risk assets".

And that is really one of the keys, and one thing we have been saying for several months now.   Whenever the precious metals are treated as risk assets for the purposes of capital gains, they are not in a bull market but in a false rally.  The psychology that drives this sort of rally is hope-based, completely mood-driven, and ultimately comes unwound like the thread in a poorly knit sweater.

What we are looking for, here at Investophoria, is despair.  Until we see such a thing in the precious metals we cannot recommend buying them.  If we did without it, we would be advising you to get in line and be "the sucker" who is willing to pay a higher price.  Being dedicated to a philosophy is one thing (i.e. Gold = economic freedom and real possibility for growth), but being blindly glued to an asset of any kind will leave you wondering "how could this happen?" when the psychology unwinds around you.

Our position on metals stays the same - gold is in a shorter-term bear market than silver and should bottom long before the white metal.  We are hoping to have a subscription letter available for when that time comes so that our subscribers will be the first to know when to convert those USDs back into the real money.

The other thing of note (which is far more broad-based in terms of effect) is that it looks like maybe, just maybe, the major indexes have put in their all-time high for this bear market rally.  Perhaps more than a simple "maybe", as the probability of that scenario just increased again this morning.

All things considered, the Dow has followed our forecasts very well thus far and we feel that the safest bet for conservative investors is to close out all long positions and hold cash - for the more experienced traders and investors, a maximum leveraged short position with a stop set about 30 points above where the minor channel line and major trend line cross is an excellent trading opportunity.

I have received several emails from readers this morning who were absolutely shocked at the declines in precious metals over the past several days - as I said in my last silver article, there were several great opportunities to sell your silver stocks and paper positions at >$18.75 over three trading days.  Those who did not take that opportunity will be hard pressed to find another good exit opportunity above $15.00 / oz.

The next leg down in both gold and silver should be very fast and will take many more by surprise who have run to them seeking to make back the losses they sustained in stocks in the last bear-market leg.  If you have been following my recommendations (and actions), you will be able to sit on the sidelines and be at ease, or be in a solid paper short position and earning money while the crowd loses.  A word of warning about short positions - another anticipation we have is that this decline is going to be so broad based and so fast that you may attempt to close it out and receive a message from your brokerage saying they cannot process your transaction due to sheer volume.  Try to find lower-volume (i.e. flat or mild counter-trend) days to exit positions as the probability of having your transaction processed will be highest.  Make sure you are trading with a broker who has the appropriate facilities to accommodate such scenarios.

Again, I will re-iterate our big-picture position.  We are in a deflationary era.  As such anything based on credit or its availability will first and foremost be pommeled.  There is absolutely no safe place to hide except in cash or its nearest equivalents.  All assets in all classes are going to lose value - some more and some less - while cash increases its purchasing power as total money and its velocity shrink and slow to a crawl.  We are in cash, 20% LEAPS, and watching the action with a feeling of peace.

I wish you all the best.

Derek Blain.


  1. Thanks Derek, again, your gutsy calls are immensely useful and can't wait for a newsletter...I remember you are expecting something liske $700 gold...wondering what your thought are on Platinum, more positive than the other two metals or not? This as many seem to think this one has the best prospects...Also, what after the deflation?

  2. Radik,

    I plan to do further research into platinum and palladium to see if there is any reason to believe a similar behavior to silver will occur. As of right now I would certainly not recommend any asset other than a cash or short position on virtually anything.

    Will keep you posted on the newsletter, which should be coming out in conjunction with the new site in the coming months.

    If you read back I have made some mention about post-deflationary era (remember, the piper will eventually have to be paid on this monetary expansion at some point in time), and how one can prepare and ensure they are financially protected during that phase.

    But let's get through this one first!


  3. Derek

    What is your take on Ginnie Maes and other types of Fed backed instruments? Is the yield worth the risk?

  4. If you send me the particulars of what you are investing in I can take a more in-depth look at it.

    Generally I would say absolutely not - if you follow the yield spread on Fed-Backed instruments versus Treasury yields over the past 2 years, we are going to see far higher yield spreads in the coming year or two and as such many of these instruments will be deemed totally worthless.

    You also need to consider the actual liquidity of such instruments - as I've mentioned before the Fed's balance sheet is in horrible shape and they will most likely have to abandon much of their propping activities because they are now at the full mercy of market forces like a regular bank. (typically they would use interventionist devices through an existing bank so they could force that institution to liquidate other assets to cover losses, however they are actually holding well over $1 Trillion of these DIRECTLY on their balance sheet). If the instruments you are buying are highly dependent on the presence of the Fed to maintain liquidity, I would avoid them straight away.

    I would be much more inclined to short any sort of agency debt as the yields on the majority of it are far too low (indicating major complacency) and as such the principal values far too high. There are some excellent shorting opportunities in agency and commercial paper markets these days. Again, just make sure the liquidity is there on the short side as well so you can close out your positions.

    Best of luck!


  5. Hi Derek, thats a really great article and my first one Ive read of yours, thanks!
    I just sold off my futures position in gold after watching a potential 20,000 dollar profit evaporate into a modest 2,500 in a week but at least I got out with some extra spending cash instead of a margin call that I wouldnt have been to excited about going forward with.
    Love your advice as i will sit back and wait for a while, six months? until it may be time to get back in, all the best!

  6. Anywhere near $1000.00 gold will be a "back up the truck" buying opportunity.
    I have always 'stayed the course' over the last nine years and tripled my net worth.
    I fully expect to triple it again over the next three years because gold and/or silver is REAL MONEY while 'Obamabucks' are virtually worthless!

  7. Are these comments for real?

    Didn't investophoria miss the entire POG move from the 950s? Hasn't investophoria been in cash calling for a dollar rally since then?

    It hasn't happened yet people! Not even close. Until it does than maybe all this blog is, is a bunch of useless psychobabble that might somehow have an impact on the small-minded. Maybe not though, maybe this is all brilliance yet to be proven. When I can buy physical gold for less than $1,000 again would be a starting point for any credibility.

    Would anyone rather be wrong holding dollars than be wrong holding gold? If so, then you've come to the right place.

  8. Stuart Cracraft ( 21, 2010 at 9:49 PM

    Hey - based on your comments, I've tightened
    up my stop losses significantly in SPY/GLD/PPLT.

    Thanks for the rational and unbiased thinking.
    It comes through loud and clear.

    You may prove to be a major Cassandra whom people ignore,

  9. Anonymous:

    If you would like to refer back to previous article we were extremely bullish on gold in fall of 2008 and stopped accumulating before 2009 even started. We aren't selling our physical (it's always good to have a hedge) but we sure aren't accumulating at these levels.

    As for the USD - it is exactly where it was when we were calling for a long-term reversal, and has reached this point in a mere 5 weeks.

    $1000 physical gold should be close at hand and further opportunities to accumulate with present themselves at far lower price levels. If readers have followed our actions they not only have been holding gold at $700 per ounce but now have a significant holding of dollars they can use to accumulate gold at depressed prices instead of buying like so many did at $1200 per ounce.

    Thanks for the comment and hope to see you back as things unfold.

  10. Stuart,

    I'm glad I could be of service! Keep your eyes peeled for our new site and upcoming subscription service where subscribers will get immediate notice of the best entry and exit points according to our analysis, as well as much more in-depth insight into specific markets, currencies, commodities, and stocks.

    All the best!


  11. I agree with you on many of your points. The exception is, of course, the deflating dollar. What out there makes you believe that cash is deflating (or are you not talking about USD?) I can't see any scenario where US cash deflates in any meaningful way. Do you not see the current deficit and continued efforts to increase it? Or the five times greater dollar debt in unfunded obligations? Have you interpreted the statements of China and several other countries as positive comments? For anyone with minimal or no debt deflation would be an ideal scenario. Unfortunately there is no economic theory I know of that allows for even the possibility of significant deflation without a substantial, if not complete, default of US debt (including the unfunded obligations.) The metals, commodities, stocks, and other speculative bubbles are inflation driven. I do think gold/silver are in a bit of a bubble, but a good bit of the rise was from the "despair" of realizing just how badly the trusty greenback and its host are positioned for the future.

  12. $700 or $600 gold predictions have been out there longer than $1500 to $3000 predictions. Corporatization is the end of the US dollar. "Corporatization refers to the transformation of state assets or agencies into state-owned corporations in order to introduce corporate management techniques to their administration. Corportaization is sometimes a precursor to partial or full privatization, which almost always refers to a process by which formerly public assets or functions are sold or given to corporate entities by listing the shares of the state-owned corporation on publicly-traded stock exchanges."

  13. hi derek,

    first time visit to your site; or maybe not if i see the lighthouse in your photo; i visited nova scotia for the first time last october and brought back some nice photos of those light houses. Beautiful part of the country.

    On the economic front, not sure why you state we are in a deflationary era ? OK, Japan yes. But what about all the asset bubbles that have reappeared since the credit crunch ? Or, the ongoing growth of the BRIC countries, and consequent unquenchable demand for raw materials ? OK, your analysis indicates that the Dow may be in for a fall; but to extend from that to conclude that the whole shooting match globally is in deflation ? Not yet convinced

  14. Hi Derek, and thanks for the article, its truly an enjoyment to read. I would like to ask your advice about the Yen, where do you see it going against the USD as the index starts going up as you believe it will. Do you forsee a drastic drop in the Yens value versus the dollar? Living over here in Japan and I have all of my cash in Yen, would appreciate any thoughts you have about this currency, all the best!

  15. As to the many questions I have received here and through email about deflation, please refer back over the past several months where we lay out a number of different arguments for why we are entering a period of broad based deflation.


    The Yen is not the currency I have followed the most consistently (I have been focusing a lot of my attention on the Euro because it's sort of been the world's "superstar" over the past 18 months and, funny enough, might not even exist at all in 15 years). However, I would say that, compared to the Pound, Canadian Dollar, Euro, etc., it will probably lose less relatively to the USD. It will still lose value to the USD just not on the same scale.


  16. G'day Derek,

    My 2 cents:

    Given that in 2008 we experienced the worst ever financial crisis, the USD index was only able to peak at 88ish on supposed its 'safehaven' the start of the decade the dollar index was at 120ish...if the USD is so safe then I'm unsure of why it is near historic lows and not challenging it's past highs. Not the characteristic of a 'safe-haven' asset in my opinion.

    Secondly, the Chinese were strongly recommending their citizens buy gold and silver late last year - citizens can can buy direct from their main bank if I remember correctly. That's when the price was around the $1050 mark. I would be suprised if China let gold drop to $700 one year after makng that recommendation. That's not the way Asians conduct business.



  17. the future is uncertain...

    When gold goes up Derek claims he's been accumulating and holding physical gold all along. When gold goes down Derek claims victory for his bearish calls and not buying at the "top".

    He should come out and say it clearly... Either he believes $1220 is the top or just an interim top and if interim top when is most likely point it is hit again? He claims sharp correction in coming so he must think new top is years away....

    Why not just cost average into physical gold if you believe a new top will eventually come? I understand that by trading in and out you can maximize profits but that's a really tough game and Derek's recent record is so pathetic anyway with missing this entire up leg since August.

    bottom line is gold moves up real fast and if you're trading you'll probably sell early into a rally and if you're trading following advice here you'll miss it completely.

  18. Anonymous,

    When you put almost anything into a long enough timeframe you can put a label on it as ambiguous as "interim top". The market top in stocks in 1720 was an "interim top" on a multi-century time frame, however it took over 120 years for stocks to reach that same price again.

    Yes, gold has experienced a multi-year top that it will take some time to get back up to. This is not "the end" for gold or anything silly like that, it is the point in market behavior where the speculative money gets swatted off so a real bull market can happen.

    As per physical metals, we do not "trade" physical gold and silver, we use them as our medium of savings. If you refer back, we were wildly bullish on both silver and gold all through the fall of 2008 when it was very cheap. However we did not sell our physical metals (and have said this numerous times) because those are not things to be traded for capital gains. It is precisely because of that mentality towards gold that it is going to be much lower in price over the coming months.

    So certainly, we may have "missed" the price incline since August, but we already bought 8-10 months before that so there wasn't anything to miss!

    What we were trading then were producers like Coeur d'Alene (in at $.65 sold at $1.60 after reverse split), Keegan Resources (In at $.85, sold at $4.25), Silverstone Resources (In at .40, bought out by SLW at $1.95 - converted to SLW shares at $9.00 and sold them at $11.90).

    Admittedly some of these exits were early - as I've written many times it is impossible to believe how far extended an overoptimistic period can be - however we also had significant principal returns for not only ourselves but our investment clients on short term treasuries while the market was being hammered down from early 2008 to Nov-Dec 2008 when we converted back into cash to start purchasing stocks again.

    Anyway I hope that clarifies a few things for you - if you have any other comments/questions please send them my way.


  19. lance_lager@comcast.netJanuary 23, 2010 at 3:33 PM

    I've enjoyed your posts on Kitco.I'm totally in cash and have been for a while. A couple of questions. Where do you see Silver bottoming and in what approximate time frame and the same for gold. Also,what do you see short term for GDX, HL
    and other major gold and silver stocks.I'm contemplating buying ZSL in the next few days and
    maybe some DZZ. I will appreciate your comments.

  20. Hey Derek,

    What do you think of bear plays (BEARX)?

    Seems like we might have reached a multitude
    of key reversals this past week - volatility jumped
    nearly 20%.


  21. Another one I should add, since BEARX has a hefty 5.x% exit
    fee is SDS (double-inverse S&P500 bear ETF.) Advantage is you
    can put a trailing stop loss on it.