Gold And Silver Capitulation? A Wash-Out Bottom In The Making?

The end of QE3 is official. What does this mean for markets and metals? The short answer: deflation ahead. The longer answer: almost all asset prices are about to come down (sharply) except the U.S. Dollar.

As we all know, the end of QE1 and QE2 resulted in volatility and unstable stock markets. The end of QE3 will most likely result in a short term extension of the bull run in stocks, after which volatility will start increasing and prices will come down systemetically. We believe that our call of early this year, when we predicted that 2014 Will Be The Year Of The Super Crash, will unfortunately come true. A crash is not an event but a process. Although we do not expect a full crash between now and December 31st of this year; we rather believe that the start of a very severe correction of at least 25% is imminent.

What does this imply for precious metals? First, the ongoing collapse of the gold miners does not bode well. The miners lead the metals in both directions. Unfortunately for gold bulls, the miners are now in the lead, which suggests that metals will follow their decline.

The following chart shows the performance of miners and metals since early June. Note how much lower miners and silver are trading since early September.

gold_silver_miners_June_October_2014

 

The strengthening U.S. Dollar will continue to put enormous pressure on gold and silver. We sense that it will result in a phase of capitulation. If there is one “good” thing about capitulation, it is that all sellers will get exhausted on (much) lower prices, leaving the marketplace with no sellers. Capitulation are rare events but, when they tend to progress very fast.

What would happen in such a scenario? In a matter of two weeks, prices could come down another 30% followed by a spike up. It would fit with the idea that stocks would rise a bit higher and then start coming down, resulting in money starting to flow towards the deeply oversold precious metals miners.

On top, in the physical market, if the Swiss gold referendum on November 30th would result in a “yes” vote, then we would have the first country after more than 4 decades returning to a gold standard. Additionally, in line with the gold rush of 2013 in Asia, (much) lower gold prices could probably make the physical market explode.

How likely is this scenario? Our belief is that it has a probability of 50%.

Longer term, we think that the Fed is underestimating deflation and that they will launch another “money printing” program in 2015 to push back deflation. Chances are high that it will feed inflation expectations which is beneficial for precious metals. The only question, in our view, is “when” not “if.” That should become the driver for precious metals longer term.

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