In world of bubbles, silver has a special place. Although it is less expensive than gold but the bugs have the same logic for the infinite upward mobility for silver as they have for gold. Many arguments are forwarded in its favour. For e.g. because in the past 5000 years, human being have used silver as well as gold as money, so we must now own them anyhow. Because it seems US Dollar has lost 92% of its purchasing power and it will soon be useless. So on and so forth. My point is not to compare gold and silver against US Dollar or Euro. All I am trying to say is that Gold and Silver do not represent value investing at today’s price. I shall buy gold possibly at $ 1200- $ 1300 range if it is available. May be I shall have to wait till end of 2011 but I am not going to chase gold when it is $ 1600. It does not represent value to me. To me, precious metals are just another asset class and if I see value, I shall invest.

Let us keep in mind, gold increases in value before the crisis. During the crisis, people sell gold. If we are living in USA, we will still need dollars to buy stuff and when everything is gone, we shall have to sell gold if we have it. Same logic applies to the large speculators and funds. In crisis, people will go for liquidity and sell everything. Even their best assets.

 Our memory is short-lived. Almost like a gold fish.  People forget that Silver had a violent correction in last May. So I do not expect the gold and silver bugs to remember what happened in 2008. I am not even going to the era of Hunt brothers. To help freshen up the memory of the momentum chasing precious metal bugs, I have borrowed two charts from my friend Eric Swarts of Market Anthropology.

 The 1^st chart is 2008 SLV daily and the 2^nd chart is 2011 SLV daily. In 2008, SLV retraced 50% of its downward move in the 1^st bounce and in total of 61.8% of the downward move in all its bounces before it tanked to $ 16 and below.

Compared to that , in 2011, so far, SLV has not even covered 50% of the retracement level in all its re-bounce efforts. To quote Eric: “ If the market remains consistent with its proportions – and as indicated in the degree of relative strength exhibited yesterday, the 50% fibonacci level may prove to be a very tough level to overcome. “

 The precious metals got a boost after Ben told congress that some members of Fed thought that there could be more monetary easing if the economy does not improve. Speculators jumped in joy. And the uncertainty with Euro and debt ceiling has helped the speculators to create a dead cat bounce. But  time is now running out.  I am putting my neck on the block and I am calling out the TOP in precious metal by end of August. After that I shall purchase calls on ZSL.

Enough of precious metals for now. Let us look at what happened in the stock markets today.

Today’s market action can be considered as a kind of consolidation. SPX was down by less than 1 point. Although I consider that as positive for the bulls, I would have liked it more to the downside. The oscillators are in sweet spot. MACD is in positive territory and McClellan Oscillator is not showing any danger signal.  However the US $ has broken support on the downside. After the market closed Euro raced up to 1.4265. (In my morning post, I said that Euro will more likely go up) Germany and France are presenting a joint plan for Euro and the market seems to like it so far. But much can change between now and trading in the morning.

 I would like to see a pullback of 10-15 points in SPX in a day or two. Such a pullback would be a buying opportunity in the short term. 

When things go bad, really really bad, Gold is not going to be of much help. And US $ is not going to be extinct anytime soon.

There are Gold Bugs everywhere, screaming their head off for $ 5000 gold. According to their logic, all currencies of the world will collapse soon and will be replaced by Gold. It’s not going to happen mate.

Let me put down my anti-gold points:

• People rave about the bull market in gold for the last 10 years but forget that gold was in bear market for 20 years. They talk of limited production, increased consumption by India and China and last but not the least, collapse of fiat currencies like US $ and Euro.  But Indians have been buying gold for centuries, why gold was in a bear market between 1983 to 2003? Look at the long term chart of gold. People who listened to the end of the world story in 1983 and purchased gold at $ 700 then, had to wait 25 years to get their money back. In fact, on an inflation adjusted basis, gold is still far away from its peak price of  1980.

• The current rise in the price of gold is nothing but liquidity fuelled rally and is an unintended consequence of loose money policy of Alan Greenspan and helicopter Ben. But the whole world is going through a balance sheet contraction. The assets values in the books of the banks and Governments are being destroyed ( like the worthless MBS that are in Feds Books or Greek Bonds that in the books of ECB or overinflated land securities that the Chinese banks are holding)  and however hard ECB or FED or China may try, the debt bust is inevitable. With that the western world is actually faced with deflation. When all assets prices are destroyed, how gold and silver prices will go up is anybody’s guess. Please read “The Age of Deleveraging” by Gary Shilling to get a full understanding of the concept of balance sheet contraction.

• Gold has to reach $50,000/oz to replace the money supply of the world and become the reserve currency by replacing US$. What are the chances of that happening? Zero. Dollar will survive not because it is the best, but because it the worst of the lot. When all the debts are deflated and gone by 2015, there will be fewer dollars in the world, in-spite of the trillions pumped in by Ben. So the theory that people are buying gold because they want to replace dollar, is not very convincing one. People are buying gold because they are chasing momentum. Momentum chasing is not investment.

• The reserve currency status is also linked with the military might of USA. When the Mullahs in Iran finally make the A bomb or even close to it, only USA can be of any use to the world. Without USA, NATO is just a rubber soldier. See what is happening in Libya. After months of bombing, NATO without USA is like a toothless tiger.   So long US has its military might, US$ will continue to be the reserve currency. Most likely Euro will be split into two, a Northern Euro and a Southern Euro. That will make US$ stronger. In the face of stronger US $, gold do not have much of a chance. Apart from US $, there are no alternative in the world. Euro is limping, Yen is a dead man walking, Chinese Yuan is not floated and others in Asia will not accept it as reserve currency apart from being highly manipulated and there is not enough of Swiss Frank. So there you are!

• There are different types of investors for gold. The retail investors who are making much of the noise and institutional investors like Soros  are selling their gold. A parabolic move up always ends with a parabolic move down.  The institutional investors pump the gold market and speculators pile on to chase the momentum. At the end retail investors will be  left holding an overpriced  asset.

• When the Armageddon comes in the stock markets, which may be as soon as this September, the margin calls will force all institutional investors to liquidate all their assets, gold will be the 1^st one to get sold. Gold prices are part of the greater commodity bubble and the commodity bubble is about to burst.

• By next week, when the debt ceiling dust has settled down, gold prices will start their downward journey. Collective memory of the market is so short that it is un-believable. Only few months back, when silver was going up and up, nearing $48, people were talking of silver reaching $100. And then we came down to $ 33. I do not think that the correction in silver is over yet and we shall see $12 before we see $ 100 for silver.

• The 1^st bubble was the dot com bubble by Greenspan. The second bubble was the housing bubble by Greenspan and Ben. The third bubble is the stock market and commodity bubble by Ben alone. That bubble is about to burst and commodities will be the last one to burst. The 30 year commodity cycle is in its last leg and that’s why we are seeing such crazy moves in prices.

• I had written in my Blog on 25th June that Gold will reach a price level of $ 1650 and will reach the top in the next two or three months. I still stand by that and I think we shall see the top by end of August. Time will tell.

By the way, I went long in the stock market today in the face of fear. I am expecting a rally soon which will take SPX near about 1370/1380 before a pullback.