A week ago I wrote about a potential rebound after capitulation and panic selling in precious metals and the miners. It now appears Goldman Sachs (GS) is covering its short on gold as it rebounds above $1,400.
Meanwhile, many banks have helped confuse and misdirect the investment community out of gold (GLD) and silver (SLV). This was a classic shakeout and bear trap, which may start a major short covering rally.
Be ready to see increased short covering combined with record physical demand. These are the two elements to spark a price spike and breakout higher in both gold and silver.
These markets are ready to start moving higher after basing for two years and having a major short attack by the big banks and the media.
Right when gold and silver were about to gain some momentum after bouncing off key support for most of 2012, Goldman Sachs came out with a bearish prognostication on precious metals, FOMC minutes were released and Cyprus said it will sell gold.
This resulted in a shakeout below $1,535 and a massive bear trap for momentum traders who may have been stopped out. The market will do whatever it can to confuse, misdirect and obfuscate the long term trend investor.
In my opinion, gold and silver are still below 1980 inflation adjusted highs and miners (GDX) are trading at record low valuations. Precious metals bubble talk is gibberish.
You should not even discuss irrational exuberance when the miners are in the midst of a hysterical fear, which has dropped junior mining valuations (GDXJ) to all-time lows. Until we witness new price paradigms when the consensus understands the wealth in the earth approach, we should not even discuss bubbles.
The real bubble is in U.S. debt, which has risen more than 17 times 1980 highs, but still many refuse to recognize this real bubble and the possible ramifications of the bond bubble bursting. Bonds have been in a 30-year uptrend and are being manipulated ridiculously higher as investors seek liquidity and yield.
Incidentally, these shakeouts can lead to breakouts as a major rotation occurs near the bottom and long term value investors acquire at a discount. Notice the increase in physical demand and thin inventories for gold and silver worldwide.
Market makers or shorts in precious metals and mining stocks have been squashing every breakout, and in fact, using technical analysis as a contrary signal to shakeout momentum traders over the past two years. I have learned that these players use the charts to go against the market.
When technical signals fail repeatedly in precious metals and fundamentals are ignored by the market many investors leave the arena and fold. This may be a ploy from policy makers to foster an environment with cheap commodity and precious metal prices to make it appear inflation is subdued.
This would support more easy money policies to pay down soaring debts and try to boost a struggling economy.
A few weeks ago, it was discovered that the Fed sent out FOMC minutes early to a small group of recipients that may have included Citigroup, JP Morgan, Goldman Sachs and Barclay's. Investors began to panic that the Fed would exit quantitative easing. Then I observed major banks coming out with bearish analysis saying troubled central banks would sell gold. Could there have been trading based on this information? Does this occur more often giving some Washington insiders an unfair advantage in the marketplace?