Get Ready for Gold and Silver to Head South

I have never personally liked precious metals like Gold (GLD) and Silver (SLV) - or the related Gold Miners (GDX) as investment vehicles. My basic objection is that they don't have any underlying logic for continued growth - they don't have any economic utility except being the object of speculation.

No doubt Gold and Silver have had an amazing run past few years - GLD has gone from 42 in early 2005 to  180+ in Aug 2011. That's 4x growth in 6 years - impressive - but in my opinion mainly because of the economic uncertainty of past few years. Since touching the high in mid-2011, GLD has been stagnant - and I don't think its going to come close to the high of 180+ anytime soon. If anything, I expect GLD to plunge as risk appetite grows in light of continued improvement in economic climate along with improvement in the stock market. The 2 year GLD chart clearly shows the current stagnant nature of Gold prices:

The downturn is more evident in the SLV charts.

Now, finally, the canary in the coal (gold?) mine - Gold Miners (GDX):

I think the inevitable pullback in precious metals is only a matter of time. I do not have any holdings in Gold or Silver. I am usually averse to shorting stocks - but I might be willing to bet some money on shorting GLD when the downturn becomes apparent.

Role of India

I have a long term bearish view of Gold with my view (wish?) that India will one day wake up from its addiction of Gold. As modern financial services penetrate the rural bits of India and more people become accustomed to letting their money work for them in stock/bond markets - I hope they will then stop blindingly putting their money in Gold. I further hope that the coming pullback in Gold prices will make people realize that Gold is not as safe a storage of value as they had hoped.

It might be really long before India's obsession with Gold will end - but when it does and India starts bringing its hoard of Gold into the world market - watch out. India is sitting on world's largest retail stockpile of Gold in the world - and sooner or later, that mountain of Gold will be taken out and sold - with the attendant collapse in Gold prices. It is going to happen - it will be a good thing for the country when it does - but that will be the last straw for the Gold market.

Some Interesting Data on Gold

All the Gold in world comes to around 165,000 metric tons. Annual production is around 2,500 metric tons - of which India consumes around 750, China around 430 and USA around 130 metric tons. (Source: NumberSleuth)

It is easy to forget that after the last big bull run in Gold prices that ended in early 1980s, Gold went through a more than 20 year bear market (not coincidentally, it was alongside a boom in equities) and lost more than half its value in that period. I believe we are done with the Gold bull run of the 2000s and are now heading towards a similar long term bear market.

After peaking in 2011, Gold imports to India are already declining. Indian households, it seems, currently hold more than 18,000 tons of Gold. In comparison, the entire GLD ETF - the largest Gold investment vehicle in the world - holds just about 1000 tons of Gold!