What happens when the can-kickers run out of road? -McAvity

Ian McAvity puts forward his technical viewpoint on the state of the U.S. and global economies and his views on where this leaves gold and silver.

In his presentation to the New York Metals & Minerals Investment conference, long term technical analyst, Ian McAvity led off by asking the question “What happens when the can kickers run out of road?  He went on to comment, much as some of the other speakers at the event had, that economic pointers specifically in the U.S. economy, but perhaps even more so in Europe and Japan, are still far from positive if the fudge is taken out of the official statistics.  Indeed he advised the audience to subscribe to John Williams’ Shadow Stats service which does just that and which he reckons gives a far better indicator of what is happening in the economy than the perennially adjusted government figures that are fudged to try and make the general public believe that things are not as bad as they really are.  For example the Shadow Stats figure for true unemployment in the U.S. is 24%.  Compare that with the current official figure of 7.5%.

On the basis of true figures, and illustrated with a plethora of supporting charts, McAvity believes that the S&P 500 carries substantially more risk to the investor than gold – despite gold’s rather lacklustre performance over the past months despite enormous evidence of huge demand for physical precious metals at the currently lower prices prevailing.

He also points to the growing divergence of the key Eurozone economies of France and Germany as creating ever more problems in Europe.  Because these two economies represent such a dominant part of the Euro currency zone, he reckoned the Euro should have been called the Frankenstein some years back – and it is certainly proving to be something of a monster for a number of countries within the Eurozone.

There is something of an antipathy to the Euro developing, even in Germany these days, not only because Germany’s people are seen as supporting the Mediterranean economies at considerable cost to its taxpayers, but also because the Euro has remained relatively strong while competing nations like Japan are beginning to fight a currency war with effective devaluation which is beginning to impact seriously on German exports.  While the German economy had seemed to be immune from the problems affecting most other European nations, it is now also beginning to suffer as a result.

McAvity looks at ‘Dr. Copper’ as a pointer to the state of the global economy.  The copper price has been weakening of late and if it gets below $3/lb (it is currently at around the $3.20 mark and falling again today) McAvity would not see this as an ‘encouraging’ sign for global economic stability.

All these factors he sees as positive for gold – but it is China that he sees as the driver which could, at a single stroke, create a huge turnaround in the gold price and drive it to unforeseen levels.  His view is that China has indeed been hoarding gold, but not recording it as part of its official reserves until it sees an opportune time to report this. 

His surmise – and it is just that – a surmise – is that China will at a point of its choosing, announce that its gold reserves may total 4,000 tonnes – taking it above Germany to the No. 2 position in the global gold reserve table, rather than the 1,024 tonnes it has been recording as its official reserve position since their last upwards revaluation in 2008.  4,000 tonnes is a figure which has been quoted recently by a number of observers, which doesn’t necessarily make it correct, but given the reported gold flows into China over the past several years, coupled with its position as the world’s largest gold producer and its track record of only stating reserve increases built up over a number of years when it suits it to do so, it is hardly surprising that such viewpoints exist.

As to where gold goes from here, McAvity didn’t make specific predictions, but he did comment that if there is a turnaround in the market and gold gets back to $1600 some time this summer, then expect fairly rapid price growth to new highs. 

And as for silver – gold on steroids – McAvity reckons from his charts that when the Gold:Silver ratio moves above 60 (it is at around 61.5 as I write) then silver is cheap and this is a buying signal, and if it falls below 30 then silver is expensive vis-à-vis gold an this would be something of a selling signal.

He also sees the major gold miners as cheap at current price levels, but recognises that it may take some time for investors to regain confidence in them.  He went on to say, rather own those miners that hold the reserves and resources that the majors will need to buy out, than the majors themselves.

Overall McAvity reckons the gold will continue to outperform the Dow in the long term and that the current malaise in the precious metals sector represents a great investment opportunity – and ended by noting that such opportunities do not happen at your convenience, with the implication that one should take such opportunities when they occur.

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