Lately I have gotten into more trouble trying to catch falling knives than I would care to admit. I don’t know why – all those trades seem like such good ideas. Whatever could go wrong?

The latest debacle is my recent attempt to get cute in the precious metals market. Even though the trend is clearly down, somehow I have visions of being the hero and timing the bottom.

But of course, the pain just continues, and although there have been rallies, they have just been opportunities to sell.

Most people with a problem have devised elaborate coping mechanisms to convince themselves that they don’t have a problem. So without further ado, I am going to lay out my delusions in black and white for you to judge.

Not a gold bug!

I am by no means a Charlton Heston “they are going to pry the gold bars out of my cold dead hands” type. When the hedge funds were stuffed to the gills with the shiny yellow stuff in 2009 and 2010, I was skeptical that the bull story was as easy as they claimed. However, on the way down, I made the huge mistake of getting bullish too early. I will fess up that I never thought that the Fed’s monetary expansion would so conveniently go into only the assets that they wanted to rise. So although I didn’t preclude a rise in stocks, I thought that at the very least it would be accompanied with a rise in gold and other commodities. Well, that sure was wrong. We now know that the Fed’s largesse did in fact flow mainly into financial assets, with hard assets actually heading lower.

For the first few QE programs, the CRB index followed the stock market quite closely. The Fed’s liquidity pushed up both markets equally. But then starting in 2012 something changed. From that point on, the Fed’s QE programs mainly sent stocks higher while commodities languished.

Financial repression

It’s not like I don’t understand the bear arguments for gold. I know all the “Warren Buffett useless commodity” diatribes.

But at the end of the day, I feel that gold is ultimately a way to hedge against financial repression. If I thought that somehow we were going to return to a world of positive real rates of interest, then I would abandon my bullish stance on gold. However, the world is becoming more indebted, not less. The Central Bankers’ ability to raise rates has significantly diminished over the past decade. There is simply way too much debt for this to end in any other way except for a giant inflationary reset.

Now if you somehow think that our global economy is going to grow its way out of this monster indebtedness, then stop reading. If you think that the world is on the right track with its solution of more and more debt to counter every economic slowdown, then go find some rosy G20 communique to read instead.

And don’t think that I somehow suggesting that we should force some sort of Austrian economic debt restructuring. That would simply be way too disruptive. There is no way we could take the pain that would be needed to cleanse the system of all the debts.

No, I am convinced that the high probability response to this debt problem will be for it to be inflated away. It has been done for centuries, and this time will be no different. In my mind, the only question is the timing.

What if they can’t inflate?

I know it is funny for me to talk about the Central Bankers inflating away the debt problem when we are in the midst of a mini-deflation scare. When I put forward my argument the push back that I often receive is what if the Central Banks are unable to create inflation? The Fed has done QE1, QE2, Operation Twist, QE3, yet inflation has only declined. The Bank of Japan has been expanding their balance sheet for a decade and they have barely been able to keep themselves out of deflation.

Here is how I answer that question. Do you really believe that a committed Central Bank cannot create inflation? Seriously? Don’t forget that there is no limit to the supply side of their monetary equation. Yes, there might be political impediments that hinder the Central Bank’s ability to create needed amount of expansion. But if there is a will, there is zero doubt in my mind that the Central Banks can expand enough to create inflation. If every Central Bank in the world said tomorrow that they would double their money supply, do you think we wouldn’t have inflation? And let’s say you were right, and that didn’t cause inflation. Let’s say somehow the velocity of money declined enough to offset the money supply increase. But what if the Central Banks simply said we are going to keep doubling the money supply until we get the desired inflation? Would there be any hope for those saying that we are powerless to create inflation?

Inflation might be difficult to create in an over indebted, poor demographics, declining monetary velocity, global economy, but there is no way that Central Banks are powerless to create inflation. I just don’t buy it for one second. If you increase the supply of something, then the price of it goes down. If you keep increasing the supply of money, eventually its value will decrease.


So then it just becomes a matter of timing. We are going to get inflation, but when?

I don’t know, and as one of my good buddy’s likes to say about his trading – “I am never wrong, my timing just sucks sometimes.” I am wrong all the time, on top of my timing also sucking, but here are the reasons that I am currently trying to catch the falling knife in precious metals.

Let’s start with sentiment. The absolute disgust for everything precious metal related is through the roof. These things are hated. And with good reason – the bear market has been brutal. It just keeps slicing through support after support, with no signs of slowing down.

The only people left recommending gold are the perma-bulls that in my opinion, will never change their position, so there is no point of even counting them as bulls. But what is interesting is the vehemence that they are being attacked on TV. Have a look at this CNBC video in which Peter Schiff is crucified about his bullish call on gold. I am no Peter Schiff fan. I try to avoid listening to anyone whose view never changes as it offers very little insight. However, this sort of bullying does not happen at the start of bear markets. No, this sort of arrogance from the skeptics often marks the end of the move, not the beginning.

Swiss Gold Referendum

Then let’s talk a little about the Swiss Gold Referendum. The Swiss recently forwarded a referendum that if passed would require their Central Bank to hold 20% of their reserves in gold. The vote is on November 30th and obviously if it passes, then that might change the tone of the market.

What I find most interesting about this referendum are the arguments against the proposal. The one that confuses me the most is the argument that it would hamper the Swiss National Bank’s ability to conduct monetary policy.

Right now the SNB has pegged the Swiss Franc to the Euro. In doing so, they had committed to creating unlimited Francs to defend that peg. For a while the market was shooting against the peg assuming that the SNB did not have the stomach to create that many Francs. But the SNB has been printing massive amounts of Francs in exchange for Euros, never wavering in their defence of the peg.

Why would forcing the SNB to also buy gold as their balance sheet expands change anything? Right now they are buying Euros by the truckfull, so why not buy gold as well?

When a Central Bank expands their balance sheet they need to monetize something. Usually it is government bonds. But it can also be another country’s bonds, or even equities, and heaven forbid – even gold!

We are having a problem creating inflation. So why not monetize against the ultimate hard asset?

And if you believe that the end game is for Central Banks to ultimately print their way out of this mess, then being the first Central Bank to start buying gold is probably a great trade.

I just don’t see how the Swiss referendum hampers the SNB. To me, it is simply directing what asset they monetize against. At this point, I think gold would be a much better idea than Greek bonds…

FOMC sets the tone

As I write this silver is pushing through the recent lows. The selling from yesterday’s hawkish FOMC meeting is weighing heavily on the precious metals.

Although I was certain the Fed was going to wind down QE, I am skeptical about the Fed’s tightening policy. Maybe they hike once or twice, but I contend that they are going to be way slower than the market believes. I understand that yesterday’s FOMC release was more hawkish than the market expected, but it is all talk to placate the hawks. Watch what they do – not what they say!

I still think that the market is leaning heavily long US dollars, and although I am wrong so far, I think the risks do not favour US dollar long positions.

I am running out of time this morning, and I am by no means done. I am going to stick to my long precious metals position for now. We are at the point where volatility is going to increase as the bears really push their luck on the short side. It is ugly, but I am hanging tough. I am obviously very far from any sort of recovery for my problem of catching falling knives as I can barely admit that I even have a problem!