Gold and silver in review

Gold lost 1.9% or $23 last week to close on Friday at $1,184.10. Silver was, believe it or not, almost flat for the week as it closed at $16.51, down only 4c. The gold to silver ratio was 71.7 at the end of the week.

Total GLD gold holdings
Pas Week: Tonnes 885.04 Previous week: Tonnes 915.29 (source)

We will start to report weekly changes in the GLD holdings as it's a great indicator, and we stress the word indicate, as to where the trend for gold is likely heading. This week's loss comes to 30 tonnes, quite the outflow. That fits in well with our own feeling this week, we didn't at all like the performance in gold and had decided already on Monday/Tuesday that we would lower our exposure for the time being.

We cut our overall exposure by immediately getting rid of half our holdings in Endeavour Mining Corp. (EDV:TSX; EVR:ASX), McEwen Mining Inc. (MUX:TSX; MUX:NYSE ), Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE). That's the beauty of holding big and liquid names as well, it's so easy to raise cash in an instant. We did sell a tiny bit of Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCQB). The GRG we sold were just a smaller trading position we had picked up on Nov 11t; our core position is still intact. In fact, if precious metals will see $1,100 or lower, we expect to pick up a lot of shares cheaper in several names, including Golden Arrow. We love the Golden Arrow story and we are just a few months away from finding out what the deal on Chinchillas will look like.

Going back to the subject of not liking what we see in terms of gold's action and performance. The fact is that there has been plenty of damage made in the charts and unfortunately, plenty of damage means plenty of time to repair. It's way too early to say, but there's also a chance that this bull is over. That is not our view, we're simply saying it's a possibility and we have to weigh in all conceivable outcomes.

What we think is more likely to happen is that Fed will hike rates in December which will lead to a stronger US$ and a continued weak gold market. Our first "target" for gold is $1,100 and thereafter $1,075-1,080. We could have a small bounce here up to $1,225 or so but that is no more than an opportunity to raise some cash in our mind.

Although Fed might raise rates further, they can only do so much. There are plenty of signs that inflation expectations are growing, not only in the U.S. but elsewhere as well. With higher inflation, we are likely to remain in a negative real interest rate environment which is where gold thrives. How long gold's "grinding and repairing" will last is anyone's guess, but we would say at least 2-3 months, likely longer. That doesn't mean that the market will be completely dead, the opposite is actually true.

Fortunes are made by contrarian investors and to have the guts and conviction to go against the heard has proved to be a great game-plan in the past. Not only will we now be prepared for adding in our favorite stocks when the opportunity presents itself, we will also be able to introduce new ideas in a better environment. We hate to chase stocks in a strong market, better to buy when no one else dares to.

Gecko Research is composed of a small group of private investors whose aim is to broadly share knowledge and investment ideas. Its research is independent and is based on its view of the company or sector based on publicly available information.

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