The FINANCIAL -- Precious
metals prices dived as the dollar rallied and bond yields soared to a
15-month high as Bernanke said the Fed plans to start weaning the
economy off of stimulus drugs, or quantitative easing, starting in the
fall, with a mid-2014 end to bond buying. But commercial traders are
still bullish on gold, silver and precious metals exchange traded funds,
according to the NASDAQ OMX Group, Inc.
"Gold rallied because of QE so it stands to reason that it would decline on the prospect of less, or no QE," Paul van Eeden, president of private Canadian holding firm Cranberry Capital, says.
Gold is resuming a downtrend after making a short-term bounce from oversold conditions following a massive mid-April sell-off, says David Hunter, chief market strategist at KCCI Ltd. a brokerage firm in Jersey City, N.J. He projects gold will fall to $1,000 an ounce, down 30% from current levels.
"Gold's weakness is a leading indicator that a deflationary contraction is coming," Hunter said in an email. "I know everyone is focused on taper(ing) but regardless of whether the Fed does indeed taper before year end or not, we are approaching a global deflationary contraction...that will send all commodities along with the equity markets to much lower levels," Hunter added.
"The U.S. dollar and Treasuries will be among the very few places to hide," he added.
Bernanke said the Fed's tapering depends entirely on how the economy performs, leaving the door open for QE infinity. The gold bulls believe the economic recovery is still too weak for the Fed to step on the brakes.
"The recovery will stall without the $85 billion per month that the Fed is currently pumping into the economy," Peter Schiff, CEO of brokerage firm Euro Pacific Capital in Westport, Conn. wrote in a statement. "The Fed is likely to keep its foot firmly on the accelerator, regardless of the data," he added.
"Any significant withdrawal of support will cause a steep sell off on Wall Street, a spike in interest rates, and an end to the reflating housing bubble," he added. "They are not prepared to tolerate any of these outcomes," he added.
Gold has been down trending since September 2011 and trades deep below both its 50- and 200-day moving averages, indicative of severe weakness. Technical traders believe gold is oversold and likely to find buying support at $1,300 an ounce, according to the NASDAQ OMX Group, Inc.
"This is a huge support level as it's a 38.2 Fibonacci retracement from the double bottom (chart pattern) in 1999 and 2001, which essentially started this run up we've had until the September 2011 top," Wojtek Zarzycki, chief investing officer at Optimal Investing, a trading advisory, in New York.
Commercial traders, the so-called "smart money" have twice as many long positions as they do short, shows the latest Commitments of Traders ( COT ) report. Meanwhile, the speculators, the so-called "dumb money" have slightly more short positions than short.
Considering that the commercial traders tend to be biased to the short side, this indicates they're making big bets on rising prices, says Tom McClellan, founder of "The McClellan Market Report."
Jeff Sica, president of Sica wealth Management in Morristown, N.J., recommends investors buy physical gold, such as bars and coins, and hedging it with a put option while avoiding the futures markets and ETFs , known as the paper gold market.
"Paper gold is still heavily owned by momentum investors and hedge funds. I anticipate interim heavy selling as the volatility of both the precious metals market and the stock market cause hedge funds to liquidate to cover redemptions," Sica said.