Directions 2012

The following is a report from ABC Bullion's Chief Investment Analyst, Brett le Brocque that was sent to clients and newsletter subscribers earlier today. If you wish to have such insightful and timely reports emailed to you please sign up at ABC Bullion's newsletter page here. Whilst there I recommend you also sign up for the Bullion Uni series of weekly emailed course notes, some of which were written by me.

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http://ausbullion.blogspot.com.au/2012/03/directions-2012.html



DIRECTIONS 2012

Welcome to the first Directions report from ABC Bullion.

Whether you’re a gold bug, a new investor in metals or just curious, you’ll almost certainly be wondering what’s in store for precious metals in 2012, and what it means for you.

Today, I’ll outline my thoughts on the likely direction of the markets over this year.

And, over the next few months, I’ll give you regular updates - and even video briefings - so you’ll be able to stay confident as the market twists and turns.

What I really want to do is give you a sense of the coming wealth transfer - and the important role of holding precious metals.

The global economy is like a game of musical chairs.

MUSICAL CHAIRS – THE MUSIC STOPS

Sooner or later the music will have to stop.

The debt-fuelled funding of the economic failures cannot continue. Greece, Portugal, Spain, USA - the list goes on.

If fiat currencies keep being printed at the rate they are, at what point does that music stop?

And, when the music stops, will you be prepared? With real money?

ABOUT THIS REPORT – 2 PARTS

I’m breaking this report into two parts for you.

PART 1 is all about market cycles and where I see gold and silver heading.

Now, you may have seen some of this content from me before. However, I make no apologies, because some of these concepts are so significant they are, frankly, worth repeating.

Then, in PART 2, I want to take you through what is happening in the market for silver at the moment. Now this is a market which hides secret trades and very powerful players with vested interests.

I’m going to focus on silver today – because that’s where the action is happening at the moment. But this also happens in gold, and you need to understand what’s going on so that when it happens throughout this year, you’re able to stay calm and behave like a gladiator (more on that later).

I don’t think any Australian analyst has done this yet, and I want you to be aware of the causes behind silver’s continued surprise moves.

And yes, at the end of this report, I’ll also give you my thoughts on where pricing is heading… But please don’t hurry straight down to see those predictions – I’d like you to take the time to explore these issues with me first.

PART 1: GOLD AND SILVER DIRECTIONS

Before we get going, I want to make an agreement with you. This report represents my views and is strictly intended to be educational in nature; it’s certainly not personal or specific financial advice. In addition, I strongly encourage you to take this opportunity to read my full disclaimer at the bottom of this report.

Ready? Let’s go!

Let’s start with a quick look at the basic, cyclical, principles in play.


CYCLES INVESTING

As you probably know by now, I’m definitely a cycles investor.

What does that mean?

Simply that I want to look ahead to where wealth is moving over 15-25 year cycles.

And by wealth, I don’t mean the illusion of an asset rising in price. I’m talking about something that rises in value – that far outweighs anything priced in dollars.

Just because it now costs 100 billion Zimbabwe dollars to buy 3 eggs, it doesn’t mean the eggs have gone up in value. All they’ve done is risen in price!

Unfortunately, most investors in equities and property only know how to measure something going up in price. Yet value – real wealth – is being eroded from under their noses because they can’t see the elephant in the room: inflation.

For the sake of clarity, when I say inflation, I am not referring to rising prices. A rise in prices is merely a symptom of inflation. Inflation is when governments or central banks expand or increase the money supply. What follows is a rise in prices throughout consumer goods and/or asset classes. So, as more money is printed, the currency is gradually devalued, as we’ve seen in Zimbabwe.

(And by the way, if printing your way to wealth was the answer to solving the world’s economic problems, Zimbabwe should be the wealthiest nation on the planet. But more on money printing a little later…)

If you look at the basic asset classes (shares, property, bonds, cash, metals), there is an opportune time to own something (when it’s undervalued), and an opportune time to sell (when it’s overvalued).

Therefore, wealth transfer in value between asset classes is the name of the game, rather than chasing prices, inflated by currency devaluation.

Unfortunately, if you bought residential property in Australia in the last 5 years, you’ll have had a taste of what I mean, and what’s to come. Property has been falling in real value since 2004. See the following chart and you’ll see what I mean:



Above: Le Brocque Index showing property values in terms of gold.

Now back to precious metals.

If you’re like 99% of Australians, me included, you’re what I call a “lazy, fundamental investor” - meaning that your strategy is “buy, hold and hope”.

If that’s you, then you need to let the trend be your friend.

But, there are 2 BIG questions you must ask yourself first, before you make your investment decisions.
What cycle are we in? (Commodities? Equities? Or Property?)
What’s undervalued now (and going to be overvalued in the future)

Don’t worry. I’ll answer this for you:

We’re in a global commodities cycle.

It started in gold in 2001. And since 2001, gold has not only gone up in value 11 years in a row, but it has also outperformed every asset class on the planet.

But funny... no analyst, stockbroker or financial advisor has told you to buy gold in the last decade. Have they?

Unfortunately, they lack the understanding of monetary history, long-term cycle investing and the role of gold as money. And, I forgot to mention... they get no commissions.


Above: The Gold Bull Run 2001-2012

If you accept the existence of fundamental cycles, it follows that you won’t be expecting all asset classes to rise at the same time. In fact, you’ll be expecting some asset classes to gain in value, and others to fall.

Cycles investors just look to understand where we are in the cycles.

So, let’s go over some signs. If you agree with the following statements, you already know where we are:
Fiat currencies are being devalued all over the world as more and more money is printed by central banks driven by politicians with short-term interests.
Australia is now the country with the most severely unaffordable property on the planet (measured by cost/earnings ratios).

Local and international shares are still at risk from a global double-dip recession because the problems of the last GFC have not only NOT been fixed, but have actually escalated.

If you agree with these points, congratulations – you’re a cycles investor; it should be easy for you to make an inference about the likely direction of gold and silver.

Why? Because over thousands of years, gold and silver have been the benchmark for how you can value other assets.

(If you came to Gold & Silver vs. The World, my recent seminar, you’re bound to remember – I don’t care about PRICE – I care about VALUE).

That means, the price of gold (in dollars) is not really rising – it is the value of currencies falling.

Now, you might be tempted to ask whether gold is getting expensive, or even in a bubble.

I don’t have time to do this issue justice today but… not only is gold dirt cheap compared to every other asset class, but anyone who thinks it’s in a bubble after reading my next report will need to see a doctor!

Before we move on, look at gold relative to shares:


Above: The Dow Jones Index measured in gold



Above: The Australian All Ordinaries Index measured in gold

CAUTION IN 2012 – CURRENCY DEVALUATION AHEAD

For as long as we stay in the precious metals cycle, I expect the continued devaluation of currency, property and shares relative to gold and silver.

However, the world is in for a bumpy ride this year.

The world’s economies are on life support. Depending on the actions of Germany and the UK, the fates of Greece, Portugal, Spain, Italy and Ireland are hanging in the balance. No economy is immune – including Australia.

Not only is there a growing threat of military war (Israel, Iran, the USA), there is also financial warfare playing out as you read this.

China is now doing currency swaps and trade agreements in Yuan (rather than USD) thereby completely bypassing the US dollar as the world’s reserve currency. Not to mention that India is now buying oil from Iran using gold, rather than paper currency, as payment.

Yes, this year will be a bumpy one, and you’ll want to know how to best time your entry into the market, so you don’t fall into the trap of chasing price and losing faith.

Let me introduce you to your new friend, Dollar-Cost Averaging.

WHAT IS DOLLAR-COST AVERAGING?

When it comes to investing in any market, timing when to buy into and sell out of an investment becomes an important decision.

After all, even the best professional traders can’t reliably pick the top or bottom of a market. It’s a well known fact that even the best professional traders on the planet are only 55% correct when it comes to market timing.

I believe the current volatility in gold and silver markets is likely to continue.

That’s why you might want to consider how dollar-cost averaging can help you balance and smooth out the price at which you enter the market.

By sticking to a regular investment plan, you’ll be using the volatility of the market to your advantage. This simple concept is what’s known as 'Dollar-Cost Averaging (DCA).


HOW DOES DCA WORK?

Dollar-cost averaging involves buying gold and silver at different prices by making regular purchases over time.

You purchase more ounces when prices are lower, fewer when prices are higher, and your cost of investing averages out over time.

Here’s how it works:Step 1: Divide

Take the total amount of money you are prepared to invest and divide it by four or five (4-5 intervals being a good entry period). You can use that amount to make your purchases at each interval. For example, if you had $100,000 to invest, you set aside 5 lots of $20,000 buy-ins. Step 2: Invest

Consider making your purchases around the middle of each calendar month, as that is normally when the best buy-in price points for metals occur. In our example, you would invest $20,000 in the middle of each month, for 5 months. Step 3: Stay Calm

If you use DCA, it becomes less important for you to choose the “perfect” time to make your investments. By consistently depositing relatively smaller amounts of money, you reduce your vulnerability to price fluctuations and free yourself from the worry of trying to “time the market.”

That ends part 1. We looked at the macro cycles at work, the importance of value, and the coming bumpy year despite the strong fundamentals. Then we considered dollar-cost averaging as a way of smoothing the ride. Now, if you are not interested in silver, or one of the shadiest and most-intriguing stories in the financial world, you can skip to my price predictions at the end. Part 2 of today’s report is all about crooks, thieves and undercover manipulation.

PART 2: WHAT’S UP (AND DOWN) WITH SILVER

So, you’re sticking with me for part 2?

Good decision. I’ll use a few technical phrases in this section, but even if you’re a new investor, don’t worry - I’m sure you’ll get the gist of the tale of deception to follow...

This is a story of manipulation by some of the most powerful, wealthy and secretive bankers and Wall Street traders.
What just happened?

Despite the fundamentals of silver remaining unchanged, and the technical indications remaining bullish for the white metal, silver took a major hit on Wednesday 29th of February 2012.

Look at this for a price smash on silver:


Above: Silver takes a hit

To look at what happened, let’s start with the technical analysis.

Let’s wind back to 22nd Feb and look at the technical chart of silver.

In the chart below I have highlighted a classic “cup and handle” formation. From a technical analysis standpoint, this is one of the most powerful bullish formations you can track - and it is usually a very bullish “buy” sign if that handle is down-trending.


Above: the cup & handle formation emerges

As you can see in the chart, the formation was clear; the “handle” was down-trending.

Once it reversed on the 22nd Feb at $34.24, that was the breakout price point, and prompt to take a long position (to buy now, because it’s going up).


Above: the cup & handle upside breakout

Silver went straight to $37.50 within 5 days and I actually thought it might have gone a little higher. This was a positive indicator and a bullish signal for silver, from a technical analysis standpoint.



Above: the bull rally begins as expected...

WHAT ABOUT THE FUNDAMENTALS?

From a fundamental standpoint, on Wednesday 29th February, Ben Bernanke (US Federal Reserve Chairman) took to the stage and announced that the US unemployment rate is decreasing and the economic outlook for the US was improving - and that any additional QE (money printing) may not be needed.

Wait a minute...

The US economy is improving, is it?

Then why are over 50 million Americans now on food stamps and why will the US debt to GDP ratio surpass Greece within the decade? Just a coincidence, nothing to worry about! Sure, Ben, of course it’s getting better!

Back to the story...

Everyone was so fixated on Bernanke blowing smoke they didn’t see the real show going on in Europe. You see, on the same day as Bernanke’s announcement, the European Central Bank (ECB) hit the print button, big time on Wednesday 29th Feb, and in not so many words, announced their version of quantitative easing (QE).

Without getting too in depth, they did this through the long term refinancing operation, known as the LTRO. This should have rallied gold and silver higher, as that announcement should have strengthened the fundamentals of both metals.

Why? Because that is nothing but instant monetary inflation.

However, gold fell from $1785 to $1690, a price drop of nearly $100, while silver fell from $37.50 to $34, a $3.50 price drop.

So how much did the ECB print? I hear you ask?

The LTRO, totaling close to $713 billion is the second attempt by the ECB to stabilise bank balance sheets, the first such attempt being December 2011.

Though a highly technical process, LTRO is the equivalent of quantitative easing and, again, is nothing more than stealth inflation!

SILVER SHOCK

So what did happen on Wednesday 29th February for silver to pull back so sharply when the technical indicators were so positive, not to mention, from a fundamental standpoint, there was now additional quantitative easing from Europe?

You guessed it, gold and silver got smashed in what many of the most astute minds in the gold and silver markets call a manipulated takedown.



Above: The take down from $37.50

Now let me make something very clear from the get go...

Buying pressure or selling pressure moves any market.

No pressure, no movement: period! “Do not pass go, do not collect $200.”

You can throw away all your technical indicators and come straight back to hardcore fundamentals as your first lesson in understanding any market.

That is, understanding Buying Pressure and Selling Pressure. If there are more buyers than sellers then the price moves up and if there are more sellers than buyers then the price drops.

ANATOMY OF A TAKEDOWN

A large takedown in the price of the metals last week, had to be a MASSIVE amount of selling at one time; meaning the sale large number of contracts must have taken place.

Just so we are both on the same page here, there are two markets out there in the gold and silver space:
the paper futures market - which I call a fictional paper market (you’ll see why when you read on) and,
the physical spot market (the real market).

Believe it or not, right now, it is actually the fictional PAPER market, which sets the price for the physical market.

On Wednesday 29th Feb, a small number of traders sold 45,000 silver future contracts short, which equated to 225 million ounces of fine silver. (Selling “short” is a bet on the price of the item being “shorted” i.e. falling in price).

But wait, this is where it gets interesting...

There are only approximately 35 million ounces of physical silver in the COMEX warehouses, so there isn’t enough physical silver to cover the 225 million fictional paper ounces that were sold short!

This situation is also referred to as Naked Shorting, as the trader does not own the item he is selling a contract for.

In the normal world, selling something you didn’t own would be called fraud, but on Wall St it is referred to as “adding liquidity” or “making a market” or more honestly as “fleecing the sheep”.

I have gone on record before in the past and I will repeat my message again in this report:

I do firmly believe that this manipulation in the gold and silver markets will be up within the next 2-3 years.

When this happens you’ll see gold and silver trade more freely without the manipulation and price suppression that currently occurs today.

You will also see in the future, two price points for gold and silver, one being the fictional, paper price and the other being the real, physical price.

There is a war going on right now between the traders of fictional paper “silver” and the physical gold and silver investors.

Guess what? The investors in the real physical market are now winning this war. Let me explain further.

About one year ago Eric Sprott - via the Sprott Physical Silver Trust - bought 10 million ounces of physical silver at $30. This moved the physical market price in silver upwards by around $3.

Now just to put things in perspective, last week it took 225 million fictional paper contracts for silver (22 times the amount of Mr. Sprott’s 10 million real physical ounces of silver) to drop silver from $37.50 to $34, about the same price on the downside.

So who is winning…. the real physical market is!

You must remember that long-term trends CANNOT be manipulated! Market forces are far too strong.

However, markets can be manipulated on a daily basis by central bank intervention and the big commercial banks - and that’s what occurred on Wednesday 29th Feb.

Folks don’t forget, although there was a huge amount of selling in the fictional paper market on the 29th, there was nothing but buyers loading up on the discounted price of gold and silver in the physical market!

In fact, in a single 30-minute time span of electronic sell trading on the 29th Feb there were 225 million fictional paper contracts of silver sold and in a market where in 12 months the silver mines only produce approximately 800 million ounces...

Give me a break!

For those of us who look at gold and silver as a safe haven and a store of value, we realize that this type of trading in gold and silver is not based on fundamental, value-based selling - or anything based on the physical market.


BACK TO FUNDAMENTALS

In fact, the fundamentals of gold and silver in the physical market couldn’t be better!

It’s simply computer selling in a fictional market, taking the price down.

Remember that the same thing moving the stock market right now is also the same thing moving the metals market - and that’s nothing but liquidity injection (money printing).

Whenever we get these bouts of liquidation, we know that Eastern central banks have been buyers of physical gold, so now that we are down to these levels in gold and silver again then I’m sure we are going to see a fair amount of central bank buying in the coming months.

Here’s a quick tip… maybe when they buy, you should be buying also!

OK That’s the end of PART II and it’s time to wrap up this report.

A Few Predictions

First, let me prepare you for the mindset you’ll need when it comes to investing in physical precious metals and that is, be mentally ready for more of these takedowns!

My question to you is not about the takedowns on the fictional paper markets, it’s about how you will react in the midst of a price smash in gold and silver.

If gold and silver take a 20-40% price hit (and it’s a possibility), my question to you is this:

Will you sell, lose sleep and worry you’ve made the worst decision of your life?

or

Will you stay happy, knowing gold and silver have been discounted on a “limited time only” buying special?

To me, this is about a choice and that choice is simple: do we keep blind faith in paper currencies, which central banks and governments around the world are debasing by the second, or do we trust something that has maintained its purchasing power for 5000 years?

SILVER GLADIATORS

There’s a war going on between real money (gold and silver) and paper currencies.

In 2012, will you stand calm and centered like a Gladiator in the height of battle who knows every weakness of his opponent or do you allow fear to take hold, and hide?

If you’re a Gladiator then please read on...

Enter this market carefully - without emotion - and accumulate over the next few months by dollar-cost averaging.

Try and do your buy-ins during the middle of each month.

Some of the biggest technical traders are waiting for a price pullback of $21 in silver and below $1500 in gold. Mentally prepare yourself for this, although I don’t believe these will be the pullback price points.

Remember you’re a Gladiator now, armed with golden armour and a silver sword.

Buy on pullbacks - period!

I don’t believe silver and gold will fall back to the price points that the technical traders are waiting for.

However, what I think is that silver could revisit the $26-$30 level again sometime in the next few months and gold could dip below $1600.

A lot of this depends on the Eurozone’s debt crisis and if a Lehman-type event (similar to the one that occurred in the 2008 GFC) is triggered out of the Eurozone.

The reason I see this as a probability is that, in the short term, cash will be king. Investors will flock to a flight for safety and I see them rushing to the US Dollar.

Why? Because, firstly they don’t understand monetary history and why they should go straight to gold and silver and, secondly, because they won’t trust markets and they will exit quickly and sit on the sidelines with cash.

This is only short term as I see it now, but please give me the right to change my opinion. However from September 2012 onwards I see metals starting to move again in a big way.

I’m on record for a price prediction by Christmas 2012 that silver will be at $55 or higher and gold will be above $2100. However, as I’ve said many times in this report, it will be a bumpy ride along the way.

I’m still pretty firm on my price target however, please remember a true Gladiator isn’t worried about price. The real aim of the game is to be the man or woman with the most ounces!

Stay focused on that.

I don’t like giving a price and a time frame as that’s not the way to think about metals. That said, I’m constantly pressured for a price so today I thought I would put it out there and satisfy the price chasers.

IN CONCLUSION

The world economies are on life support.

The problems of the GFC have not been fixed, they have only escalated!

Please don’t fall for media propaganda that everything is fine and start entering equity and property markets without truly understanding what’s going on.

I can show you the same media propaganda before the 2008 GFC saying everything is fine, before the dot com crash of 2000 and before the 1929 Stock Market crash.

Now, more than ever, is the time for financial education because the rules of money have changed.

One final tip… my suggestion is that, if gold does pull back below $1600 or silver at below $30, then take your core positions at those price points and don’t worry about dollar-cost averaging. Gold under $1600 and silver under $30 is a definite core position for a buy-in so take those prices with all the money you have allocated to invest in precious metals.

Until then, keep dollar-cost averaging!

Oh and remember, in the financial battle gold and silver will be the last men standing!



BRETT LE BROCQUE

CHIEF INVESTMENT ANALYST - ABC BULLION

PS - WHAT NEXT?

I’d like to stay in touch with you as the market moves this year. As I mentioned, I’m planning a few things, including:

Regular Directions updates (like this one)
Video briefings
Seminar briefings
Market alerts when things move fast

DISCLAIMER

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of Brett Le Brocque's judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Although Brett Le Brocque is a Licensed Financial Advisor and is qualified to provide personal complex financial advice in relation to the provision of Taxation Planning, Estate Planning and Investment Planning including insurance, superannuation and investment products the statements and opinions expressed herein is solely for educational purposes only and NOT for personal individual investment advice. Investing and speculation are inherently risky and should not be undertaken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Brett Le Brocque and ABC Bullion will not be held liable or responsible for any decisions you make regarding any information discussed herein. All information in this Market Report is provided as general information only. No reader should rely solely on the information contained in this report, as it does not purport to be comprehensive or to render specific advice. As such it is not intended for use as a source of investment advice. All readers are advised to retain competent counsel from legal, accounting and investment advisers to determine their own specific investment needs.