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Is the short-term drop over?

Gene Arensberg, in his Sunday Nov. 11 Got Gold Report for, asked: “Why didn’t gold sell off?” If the Got Gold Report had been scheduled one day later, Arensberg wouldn’t have asked the question because gold and silver suffered big setbacks Monday, which was Veterans’ Day, with further drops Tuesday. Today, however, gold and silver rebounded in early trading.

Still, today’s gains are not nearly enough to wipe out the losses of Monday and Tuesday, which begs the question: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Arensberg was looking for gold (and silver in a sympathy move) to drop based on the record large commercials’ (LCs) short position in gold as of Tuesday Nov. 7. (Weekly positions are reported Thursdays as off Tuesdays.) With Monday’s and Tuesday’s drops, did the LCs reduce their short positions significantly?

Further, the LCs could have added to their short positions late last week as gold moved to 27-year highs. The commitment of traders report (COT) is as of Tuesday, but is released Thursdays, so the LCs could have added shorts late last week as the metals climbed, and they could have reduced their positions Monday and Tuesday.

Which puts us back to: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Frankly, I don’t know, and neither does anyone else. Still, analysts and traders (Note that’s traders, not investors.) who follow the market may be looking for a deeper decline because the LCs record position in gold. This week’s COT will shed more light on how the LCs see future action.

Arensberg’s comments on silver were interesting, particularly in that they are in line with my thoughts on silver vs. gold. Read Arensberg’s report for the details, but here are the comments that jumped out at me:

Is silver expensive here? Well, in a word, no. It may be due for a short term pullback technically, but with gold knocking on the door of its all time nominal highs silver has a mountain to climb value wise to achieve the same goal. In fact silver could triple from right here and still be under its all time 1980 nominal peak of $50. And in 1980 dollars were worth a lot more than now.

Adjusted for inflation silver’s 1980 $50 peak would equate to about $125 in today’s weakened U.S. currency, so silver would have to increase eight-fold just to match its peak purchasing power back then. Is that hyperbole? Well, perhaps a little, but even if silver’s 1980 mania-driven spike was a once-in-a-lifetime financial fluke, it traded for weeks over $35 back then, or the equivalent of $87.00 today. Silver could increase 400% and still not have the same purchasing power it garnered for weeks in 1980 in other words.

As for the technical short-term pullback that Arensberg suspects may be in the works, is it over? Frankly, I suspect the decline may not be over, but I am not advising any long-term investor not to buy at current levels. In the long-term, gold and silver remain favorably priced considering all the uncertainties the world faces. In the short-term, however, gold and silver can drive you crazy.

By the way, here are the gold market “drivers” that Arensberg sees:

. . . big honking write downs by the financial sector giants, a pipeline attack in Yemen, civil unrest and martial law in nuclear armed Pakistan, heavy weather in the North Sea and record high oil prices nearing $100, a mining strike in Peru, sub-prime woes expanding into prime time loans, major U.S. housing sector anxiety, lots of talk about slowing U.S. growth or even recession heaped on almost certainly higher inflation talk, a very sick and dangerously low greenback prompting increased fiat currency confidence erosion, significant and sustained short covering in both gold and silver … and the kicker this week: A high Chinese official commenting that China will be diversifying into other-than-U.S. dollars accelerating the already underway mass exodus of enormous global wealth out of the buck and mostly into the other global fiat paper promises.

The prospects of the Chinese diversifying out of dollars alone should drive people to precious metals.

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