Stathis Discusses the Fate of Gold and the Global Economy

June 2013 Intelligent Investor (Part 1) Opening Statement

Originally Published on June 9, 2013

Last month we boldly called the end of the gold and silver bull market; a bull market that has raged for nearly twelve years. Although there is a small possibility that we could reverse this forecast in the future, we continue to stand firm on this call and we see no reason that we might alter our views.

If we thought there was a reasonable chance that we were wrong or if we needed more time to see if the chart would recover, we would have waited longer. But we identified too many signs pointing to the end of this bull market in precious metals.

Keep in mind that making aggressive forecasts early on is very risky and often filled with error. But much to our strength, we have established a long and prescient track record of making calls well in advance of everyone else, but not TOO far in advance such that these calls become irrelevant or cause investors to miss opportunities.

The trick is to make accurate forecasts soon enough in advance so that your clients are positioned ahead of the curve, but no so far in advance that they miss out on tremendous opportunities while waiting for these forecasts to pan out. It is an extraordinarily difficult task to accomplish, which is why the vast majority of investment professionals simply stick to a sales pitch, knowing that a broken clock is right twice each day. However, that approach only works with retail investors. When you’re dealing with institutional investors, that kind of song-and-dance is usually spotted early on.

As we emphasized last month, the fact that the gold and silver bull market has ended does not necessarily mean that these assets will not rise in price sometime in the future because most likely they will. However, we feel that gold and silver will continue to make lower highs and lower lows, characteristic of a bear market. This winding down process could last several years, causing many gold bugs to view selloffs as buying opportunities. For some investors, such declines will indeed represent buying opportunities, but only if they are making trades.

Unfortunately, most of the retail investment public that owns gold has no exit strategy. With little doubt, this is going to lead to a disaster. We have been warning about the need to trade gold and silver as well as have an exit strategy for several years now. Most people learn the hard way. Some never learn regardless what happens.

As we have been discussing for several months, the global economy continues to weaken. Although the establish economists have been forecasting a stronger second half for 2013, we have been warning our readers and other clients about further weakness. In fact we have discussed that the global economy has largely weakened during the second quarter of this year relative to the first quarter. Recent data from China shows that this is precisely what is happening.

The slowdown in China is clearly the result of worsening economic conditions in Europe, as well as muted demand across much of the globe. As we have continued to insist, the establishment economic organizations such as the IMF, OECD and Wall Street banks will soon be forced to lower growth estimates for China and other economies. This is likely to cause some worry around investment circles.

Regardless of the aftershocks during this revisionary period, it should be clear that the accelerated weakening seen in the global economy is sure to put downward pressure on most commodities. And it could carry over to the stock market.

If the right set of variables strikes during the right time period, we could see a widespread sell off in global equities markets. Such a correction could be as much as 13% or as little as 5%. However, we would view such a correction as a buying opportunity in the U.S. stock market. A global market correction could very well give gold and silver a nice boost, but we feel such a lift would be only temporary.

Finally, as we seek to navigate what could be some market turbulence over the next few years, we must also watch for a trend of declining profit growth, profit margins and rising interest rates.