This spike in short-term yields (2-year shown) is what harpooned gold last week and finally got it under control.

More importantly, this spike in the 2-year vs. the 30-year really hurt gold.

These spikes predictably came as the FOMC successfully managed to get the market thinking about an end to the damaging Zero Interest Rate Policy, ZIRP.

Interlude

Yes, it is that time again when the letter writer veers off course into a brain dump. You, dear long time subscriber, have heard this before. But for newer subscribers I feel a point needs to be made so that your expectations of this market report are well in line with its raison d’être.

This is not a ‘go gold!’, ‘got gold?’ style pump house. Simply stated, I would rather live in a world where I do not feel gold is a necessary asset class. I would rather live in a world where bureaucrats were not in control of interest rate functions and hence, to some degree in control of financial markets.

Under this interest rate manipulation, the concept of saving has been utterly torn apart in the United States via the now 5+ year old ZIRP. If you do not speculate, you do not profit. The problem is that the risks in speculation are rising with every lurch higher in the stock market and junk bonds, to name two of the primary beneficiaries.

So it’s everybody into the (risk) pool and everyone foolish enough to depend on savings… screw you. So I [omitted, not for public consumption] because I continue to unwaveringly believe that this big macro operation, going in one form and degree of intensity or another since 2001, is little more a than racket to be unwound.

But if the moment were to come when I feel we really are on the right track – and folks, withdrawing ZIRP [could] theoretically at least be considered one component of ‘on the right track’ – this market report would simply move on from the precious metals sector because frankly, I find it a strange place inhabited by some strange people.

The problem though is partially represented by the distortion built into this chart…

Something is just not right here. Long into an economic recovery and even longer into a bull market in stocks the Fed Funds rate (FFR) is still pinning T Bill yields to the mat. Now, the Fed Chief babbles about a rate hike out in 2015, “that type of thing”. Gold then reverses its ascent (it was ripe, given the Ukraine hype coming out of the gold ‘community’) on the implications of rising short-term yields.

Using the 2003-2007 bull market as a template, the FFR should have begun to rise in 2010. Now it is 4 years later than that and the Fed is talking about a rate hike out in 2015, “that type of thing”. Please. They are playing poker against the market and for now the market is not calling any bluffs.

Back on the Funda’s

So last week we had a group of interest rate manipulators meet for 2 days and then a press conference by the group’s leader. She “you know” intimated that the ideal timing to begin phasing out ZIRP would be approximately “you know” sort of like maybe 6 months after QE3 is entirely tapered. “You know”, if the economy is still strengthening then; that sort of thing.

Okay tell me now, who knows what the economy will be doing then? As things stand now last week was a negative for gold, which was in need of a correction. But the key question going forward will be whether or not these negatives will endure or go back to business as usual as FOMC day fades to background?

So the long-term / short-term interest rate fundamental dropped to its lowest point of the gold bear market last week. What can we conclude from that?

• Gold’s fundamental underpinning took a hit.
• When measuring the length of the sideways channel on the yield spread, we note that gold may have already discounted this drop as its price is much lower than it was in summer of 2012 when the spread first declined to 80.
• The yield spread, driven down by a jawbone and a lot of market emotion and media hype last week is at a potential bounce point.

So fundamentally speaking, gold bugs want to see last week’s hysterics fade pretty quickly and by extension, the spread hold the support area (notwithstanding a day or two of down spiking for good measure).

If the market comes to believe that the Fed means business on the Funds Rate and 2, 3, 5 year yields continue to rise relative to long-term yields, it would be bearish for the price of gold. I make the distinction between “bearish for the price of gold” and ‘bearish for gold’ because price is a reflection of the value assigned to gold at any given time.

For as long as it lasts, a phase where the market perceives itself to be under the sound monetary stewardship of the Fed – regardless of sustainability – would be gold price bearish.

Of course last week may have been a flash in the pan, as the Fed got the respect it always seems to get from the market during the ongoing phase of stock mini mania and economic mini revival. There are other phases you know, when the market gives them the finger. That is out in the future.

Let’s watch the dust settle on the interest rate front and evaluate weekly.

Postscript (current, 3.25.14)

So tell me, what was China doing late last week and early this week as gold got harpooned? Did gold suddenly decline because of the much hyped ‘China demand drop’? Did supposedly massive physical demand suddenly dry up on the spur of a moment? There’s always a seller on the other end of that demand you know.

Ukraine hyperbole unwound and that was expected to take something off the top. But chasing funnymentals like China, physical demand (vs. COMEX shortages) and Ukraine around is what got the gold community in trouble in the first place.

There is no debate, real interest rates jumped last week and gold got clobbered. There are other key fundamentals as well. Unfortunately with the media just pumping out story after story it is no wonder people get so confused.

NFTRH is a serious market management service (including ‘in-week’ technical updates), and is a value at only $29 per month (or 10%+ savings on an annual subscription).

Summary:

• Gold & silver prices are consolidating for a couple of weeks.
• Central Fund of Canada & Central Gold Trust offer a better discount than last month.
• Trying to arbitrage this discount might not be a good idea.

Gold is in correction mode for two weeks, and silver for one month. Seasonality is not supportive any more for precious metals (read here). The fundamental picture remains unclear: inflation stays low, production prices are not a safe way to estimate a bottom, and the concentration of future contracts by a few major players has not changed. Miners are following the move down (GDX, GDXJ). I wrote here in February that it was a bit premature to call for the end of the precious metals bear market. One month later, gold is still above its 200-day simple moving average, but silver fell back below.

My aim here is not to make a prediction, but to show investors where they can find the best value for their money. It might be or not a good time to invest in precious metals, however there is no bad time to buy reasonable amounts as insurance. The next table shows discounts, premiums and real metal allocated for some Canadian funds on 3/24/2014. They are an alternative to ETFs likeGLD, SLV, PPLT, PALL.

*complement is in certificates and cash assets.

CEF and GTU discounts are up since last month, providing an additional safety margin in case metal prices fall lower. Sprott funds are less attractive. An arbitrage, for example buying GTU and shorting GLD, is not a so good idea. Discounts in CEF and GTU have been oscillating between 4% and 8% for two years. At the end, borrowing costs might eat the profit and possibly more.

About Fred Piard

In his first book Quantitative Investing (Harriman House), Fred explains how you can build yourself robust portfolios with simple and powerful strategies. A book on statistical fundamental analysis is planned for Q4 2014 (same editor).

Fred shares his portfolio positions and market outlook in a weekly newsletter (ypafi.com).

He holds a PhD in computer science, an MSc in software engineering, an MSc in civil engineering, and is self-taught in finance. For two decades, Fred has been a consultant for companies and public agencies in various sectors and countries.

A Short Sale on Gold & Silver was recommended on March 18th by this author, depending or if you put a trade on that day, at a point roughly $45 higher in Gold & $1 higher in Silver. Because his recommendation has turned out to be very accurate, it would be a very good idea to follow this man’s work for the point at which he would cover his short sale. At that point of covering the shorts, those wanting to add to their Gold & Sliver would find that a reasonable point to add to their positions or for those wanting in for the first time to take a position/. In the meantime, those with Short Term speculative money, Przemyslaw Radomski continues to lay out the case for making money on a decline , and protecting your capital with stops he lists below – Editor Money Talks

Gold & Silver Trading Alert: Confirmation of a Breakdown

Briefly: In our opinion short speculative positions in silver (half) and mining stocks (full) are justified from the risk/reward perspective.

Friday was generally a calm day in the precious metals market and for the currency indices. The initial moves higher (in the early part of the session) were mostly invalidated later on and overall not much changed at the first sight. On second look, the lack of rally confirmed the breakdown in mining stocks. Let’s take a look (charts courtesy ofhttp://stockcharts.com):

(click on chart for larger view)

Interestingly, we can summarize the above chart in the same way that we did previously, because the daily move that we saw on Friday didn’t change anything overall:

Gold moved  lower once again [on Thursday, but basically it didn’t do anything on Friday]but still not low enough to break below the rising support line. Gold is still outperforming silver and mining stocks (taking this month into account), but now the extent of the outperformance is much smaller. Still, with the situation in Ukraine still being tense, gold might hold up relatively well even if the rest of the precious metals sector declines.

At this time we see that gold’s reaction to the events in Ukraine has been very limited. When markets don’t react to factors that should make them move in a certain direction, they will likely move in the opposite direction relatively soon. In this case, it seems that gold will move lower.

The move below the rising support line (marked in red) could symbolize the start of another big downleg regardless of the geopolitical tensions. For now, the price of gold is already close to this support, but not yet below it.

(click chart for larger view)

Silver declined more than 5% last week. It moved below the rising support lines and closed there on Friday, which is a bearish indication. The situation in silver is oversold, but only on a short-term basis. Consequently, we could still see a corrective upswing here before the decline continues. Miners confirmed their breakdown, but there was no short-term breakdown in gold, so it’s not that clear whether the precious metals sector – including silver – will move lower immediately. It could be the case that miners while decline while metals will pause for a few more days.

The GDX ETF closed below the rising support line and the 50% Fibonacci retracement level for the third consecutive trading day and the breakdown is now complete. If we hadn’t mentioned the extra short position in miners previouly, we would suggest it today. Please note that the small move up that we saw in the past 2 trading days materialized on low volume after a huge-volume decline. This suggests that the real move is down and that miners simply took a breather.

(click chart for larger view)

The HUI Index closed the week without a meaningful move back up, and the sell signal from the Stochastic indicator along with its implications remain in place. We previously commented on it in the following way:

We saw a big downswing also in the HUI Index and it resulted in a major sell signal from the Stochastic indicator. In the past 3 years all cases (and many cases before 2011) when we saw this signal were followed by major downswings.

The USD Index finally rallied last week and it seems that this year’s decline is over. There are no sure bets in any market, but this week’s rally looks very similar to what we saw in October 2013. Back then the currency was also a little below the rising support lines only to come back with a vengenace. We saw this type of action last week and the outlook was bullish.

All in all, we can summarize the current situation in the precious metals market in the same way we have been summarizing it for the last couple of days:

It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold. In fact, gold has been outperforming both silver and mining stocks since Russian troops entered Crimea.

The technical picture for silver and – especially – for mining stocks is bearish, so in our opinion short positions here are justified from the risk/reward perspective. We might add to the short position in silver and open one in gold relatively soon – we will keep you informed.

It seems to us that if it weren’t for the events in Ukraine, the precious metals sector would be already declining and perhaps testing the 2013 lows or moving below them. This could still take place and it’s quite likely to happen once the situation in Ukraine stabilizes.

To summarize:

Trading capital (our opinion): Short positions: silver (half) and (full) mining stocks.

Stop-loss details:

– Silver: $22.60

– GDX ETF: $28.9

Long-term capital (our opinion): Half position in gold, no positions in silver, platinum and mining stocks.

Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Tools for Effective Gold & Silver Investments – SunshineProfits.com

Tools für Effektives Gold- und Silber-Investment – SunshineProfits.DE

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

The simplest explanation for this week’s bearish reversal in gold is that too much hot money has rushed into the space in recent weeks – this week’s Commitments of Traders report clearly illustrates just how overheated gold futures have become recently:

This is the largest “Commercial” net short position in gold futures since last March – which just happened to precede the massive plunge in gold during April.

The large downside reversal also ended up printing a bearish outside reversal candlestick on the weekly chart:

As bearish as all of this may sound, as long as this week’s low holds ($1320) there is ample opportunity for digestion between $1320-$1350 which should set up the charts for the next push higher (targeting the August 2013 highs and possibly much more).

also from CEO – 

The Most Important Chart for the Week Ahead