Post QE2: Where do gold and silver go from here?

Now that QE2 has sailed, gold bugs will need something else to latch onto, at least until inflation really starts denting pocketbooks.

Now the QE2 ship has sailed, investors seem to be scratching their chins as they try to figure out where gold and silver are headed. In fact, the market seems to be doing the opposite of conventional wisdom. The Fed’s printing money, but the dollar’s rising. The currency’s soon to be devalued but bond yields are rising. Inflation is peeking over the horizon, and gold is taking is a breather.

What’s going on? The markets are looking for direction under the threat of major economic changes in the EU and China. No one seems to know what’s going to happen next, and that’s most troubling state an investor can be in.

I stumbled across a quote that seems to sum up the current state of the economy: “Treasurys are getting splattered and 10-year yields are at three-month highs; if rates are going up, it’s not a good thing for equities,” Peter Boockvar, equity strategist at Miller Tabak, tells MarketWatch. “This is the Fed’s worst nightmare.”

Of course, it’s probably not the end of a multi-year bull market in precious metals, but gold investors are nervous.

“With an attempt to quell QE2, a slightly upbeat Dollar bias, fears of Chinese tightening and less inflationary expectations in the marketplace, we have to leave the gold market in a vulnerable posture,” writes Nell Sloane at StockMarketsReview.com. “In fact, if the debate over QE2 gathers credibility politically in the US this week that could prompt December gold to fall back below the $1,350 level on the charts. While the trade thinks that bargain-hunting buying will check up the slide, we think all physical commodity markets are still facing a corrective window directly ahead. If the market thinks the Fed will end up reducing the implementation size of their QE2 effort, that could result in an even bigger corrective washout in gold prices.”

The moral? Tread lightly for now. It may be a case of “buy the rumor, sell the news.” Now that QE2 has sailed, gold bugs will need something else to latch onto – at least until inflation really starts denting pocketbooks.

How to Short Gold, Part II

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar by shorting gold.

Let me be clear up front: I do not think that now’s an appropriate time to short gold. That said, investing always moves in cycles, and we’ve got to be ready to jump ship if it looks like the fat cats are losing interest in the yellow metal. In my last post on shorting gold, I pointed out four simple ways to short gold. What I neglected to mention was one rather roundabout way that are a lot of people don’t think about when it comes to shorting gold: namely, going long the dollar.

Gold and the dollar have long had an inverse relationship as gold is frequently a hedge against inflation. When the dollar goes down, investors move into gold and vice versa. If you’re looking to short gold, then, but you don’t want to deal with the unpredictability inherent in gold mining stocks, you might consider going long the dollar in the form of an ETF such as the PowerShares DB US Dollar Index Bullish (NYSE:UUP).

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar.

Want more? Read my original post: How to Short Gold.

How to short gold

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it from puts and options to ETFs and shorting shares.

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it:

1) Short shares in a gold stock. Find a gold company that seems particularly overbought and start a short position in that company.

2) Short shares in a gold ETF or ETN. The flagship gold ETF is offered by ProShares. Known as the SPDR Gold Trust (NYSE:GLD), the ETF seeks to reflect the spot price of gold. As of Sept. 7, the fund had a market cap of $51 billion.

3) Buy shares in an inverse ETF or ETN. Inverse ETF’s seek to move in the opposite direction of the underlying stock or commodity that the fund is matching. ProShares UltraShort Gold ETF (NYSE:GLL), for example, seeks 2X the inverse of the daily performance of gold bullion in London. A small move in the gold spot price would be compounded 2X in GLL.

4) Buy and sell a put option in gold. A put is a bet that the future price of gold will be lower than the current market price. You can buy and sell puts and options at most online brokerages. Options, however, aren’t as heavily traded as stocks, and may involve substantial risk.

Keep reading: How to Short Gold, Part II

Gold rockets up $14 per ounce on New York NYMEX

Typically, gold moves opposite the dollar, but both climbed in tandem yesterday signaling that the shortened trading week might be more treacherous than most investors might have imagined after the Dow climbed more than 4 percent last week.

Unease in financial markets around the world has pushed investors back into gold and bonds. Indeed, three-year treasury notes for the lowest price on record yesterday, as investors fear another Greece-style banking crisis in Europe.

Precious metals were the beneficiary yesterday with gold adding $14 to its 15 percent gain on the year. Popular gold stocks Hecla Mining Company (NYSE:HL) and Coeur d’Alene Mines Corporation (NYSE:CDE) were both up more than 1 percent on a day when the Dow Jones Industrial Average lost more than 1 percent.

“You saw a little bit of asset allocation shift,” Charles Nedoss, a senior market strategist with Olympus Futures in Chicago, told the Wall Street Journal.

Typically, gold moves opposite the dollar, but both climbed in tandem yesterday signaling that the shortened trading week might be more treacherous than most investors might have imagined after the Dow climbed more than 4 percent last week.

Top 10 gold-producing countries in the world

A list of the Top 10 gold-producing countries in the world by kilograms.

Moneychoices.com has put together a great infograhic on where the world’s gold comes from. Here’s a list of the Top 10 gold-producing countries in the world by kilograms:

South Africa 272,128 kg
China 247,200
Australia 247,000
United States 242,000
Peru 203,268
Russia 159,340
Canada 104,198
Mali 85,411
Uzbekistan 84,000
Ghana 66,205

Who’s Got All The Gold and Who’s Mining It [Infographic]
[Source: Money Hacker]

Silvercorp Metals Inc. (NYSE:SVM): The Most Under-Bought Silver Stock on the Market?

If inflation does hit, expect to see Silvercorp Metals Inc. (NYSE:SVM) around its May peak of just under $9 per share.

All signs appear to be pointing to a bull market in metals as gold finished off a remarkable August, where it surged from $1,180 to $1,245 per ounce. Silver’s ride was less consistent. The metal rose from $18 to just under $19 per ounce, but it did most of it’s moving in the last week of the month.

With inflation fears held at bay by fear of a double-dip recession, you would think that investors would have give up on precious metals all together, but that’s not the case. Gold’s chart (see below) looks like it’s in the heart of a trend that will likely steepen once inflation becomes a reality.

30-Day Gold Chart

That brings us to one of my favorite stocks: Silvercorp Metals Inc. (NYSE:SVM). Trading at a P/E ratio of 26.85, Silvercorp would be appropriately valued if the threat of inflation didn’t appear to be around the corner. Throw that in the mix, and the Chinese metal producer could look like it’s trading at bargain prices a year from now. Indeed, the stock was recently upgraded by BMO Capital Markets, and it looks and heads and shoulders better than its competitors Silver Wheaton Corp. (NYSE:SLW), which is trading at a P/E of 42 and Pan American Silver Corp. (NASDAQ:PAAS), which is trading at a P/E of 28.

Even better than the upgrade? Silvercorp’s gross profit surged to $26.5 million in the quarter ending June 30. That’s better than the company has done in the past four quarters, and the stock maintained its dividend of $0.02 per share. That’s good for a 1 percent yield on top of any appreciation the stock might see. If inflation does hit, expect to see this stock around its May peak of just under $9 per share.

Lackluster day for gold stocks despite powerful market rally

Irrationality in the markets leaves gold stocks in the dust while driving up just about every other sector. The perfect short environment seems like it’s just around the corner.

The dollar dropped an average of roughly 1 percent against the Pound and the Euro. The Dow rallied 208 points (1.99 percent), and the FTSE was up 2.65 percent. What’s going on with gold? Despite an early surge on the New York NYMEX, the yellow metal spot price and corresponding stocks couldn’t keep pace with other equities. Here’s a handful of the most obvious underperformers in gold stocks:

  • Hecla Mining Company (NYSE:HL), +1.01 percent
  • Coeur d’Alene Mines Corporation (NYSE:CDE), +0.46 percent
  • Richmont Mines Inc. (AMEX:RIC), +2.12 percent
  • DRDGOLD Ltd. (NASDAQ:DROOY), +1.21 percent
  • Allied Nevada Gold Corp. (AMEX:ANV), +0.75 percent

The best performers were the international majors who are more tied to basic materials. Among them:

  • Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), +4.56 percent
  • Rio Tinto (NYSE:RTP), +5.26 percent

It appears better-than-expected earnings have created a micro-bubble, that could present some excellent short opportunities – particularly in the technology and basic materials stocks. In two weeks, earnings will taper off, and I expect reality to start setting in.

The ECRI, for instance, is pointing to a recession. Alan Greenspan’s calling for a double dip, and I’m try to free up capital and move into dividend stocks after my shorts blew up in my face today. I want to short at the top, and I think we’ll have that opportunity in the next two weeks – no matter what sector you’re in.

Things looking up for SPDR Gold Trust (NYSE:GLD)?

A mid-day pop in the SPDR Gold Trust (NYSE:GLD) could have been pointing to a good day today.

After the close of the New York NYMEX last night, the price of spot gold started a slow climb that might have been hinted at in yesterday’s mid-day pop in gold prices. The pop is evident in this five-day SPDR Gold Trust (NYSE:GLD) chart:

The jump in pricing occurred around the time the June retail sales numbers came in. The news was bad, of course, with a 0.5% decline. Negative sentiment in Asia seemed to be pushing gold prices higher.

“I’m bullish for gold, with the metal seen attempting to rise as far as $1,240 in the coming week,” Hong Kong’s director of Asia commodities Wallace Ng told Bloomberg Business Week. “Still, a major breakout to another record may be difficult for the present.”

Around 11:30 p.m. last night, the metal was trading at $1,211 up from an intraday NYMEX low below $1,205. A bevy of bad economic news may put further upward pressure on gold prices. The central tendency growth forecast was lowered to a range of 3 percent to 3.5 percent, U.S. industrial production will post a drop and China’s GDP is showing signs of slowing as the government there tries to rein in growth.

All that paints a gloomy picture for stocks and a rosy one for gold. If the stimulus isn’t working, after all, we’ll likely see a bit of deflation before governments are forced to inflate currencies in a malingering economic environment.