Is The "Book" Really Closed On Gold ?

Here is an interesting quote from this afternoon's Wall Street Journal "Online" Edition: 

"Gold prices slid to three-year lows [today], effectively closing the book on a historic rally that lured investors on both Wall Street and Main Street."

Almost every mainstream financial publication has a negative story this afternoon on Gold. Most point to the latest announcement by the U.S. Federal Reserve yesterday  that it will "taper" its purchases of Treasury securities and mortgage bonds from $85 billion/month to $75 billion/month.Others claim that selling pressure will persist in the Gold market because the global economic recovery is getting stronger and that 2014 will surprise on the upside in terms of global trade and related commercial growth. Still others point to several "masters of the universe" who have exited gold with heavy losses as a contributing factor to this year's slide.

The climate for gold and precious metals investment is so negative now that there is even talk of removing Eric Sprott as manager at Sprott Asset Management. Eric Sprott may be among the greatest portfolio managers of all time in the precious metals mining stocks arena, but some of his funds are down as much as 50% this year so far.

Is the "Book" really closed on Gold? As I write this column (9:30 PM CT), the near-term Gold futures contract is trading about $1193. Will it soon fall to $1100? Is $1000 the next real support in this market? Of course, gold prices could decline further to these key levels, but I just don't see this scenario unfolding anytime soon!

According to the U.S. Commodity Futures Trading Commission, the net-long position in Gold futures and options contracts is now at its lowest level since June 2007. And short positions (bearish bets) have very nearly risen to the levels witnessed in July 2013 when gold prices posted a significant short-term bottom. And global holdings of exchange-traded products backed by Gold have fallen to their lowest levels since March 2010.

And despite the fact that Gold is a "slam dunk" sell here according to analysts at Goldman Sachs, China keeps buying. China is buying gold at a rate of more than 100 metric tonnes every month now. This represents approximately half of the entire planet's annual mined output. Since gold jewelry sales account from more than 1,000 metric tonnes per year, China is effectively buying ALL the world's mined output every month.

In the interest of full disclosure, I now have about a 40% allocation to gold/silver mining shares in the portfolios that I manage. In one of them, I have hedged these long positions with short-sales in the S&P 500 Index. Yes, Long Gold Mining Shares, Short the S&P 500. Interesting position!

Bottom Line: One factor not talked about much with respect to the recent declines in gold, silver, and related precious metals mining shares is "tax loss" liquidations. Most of the shares in this unloved industry are down more than 50% this year so far, and some are down as much as 75%. Today is December 19th. The end of tax loss selling season is nearly done and conditions are ripe for a wicked short-covering rally which will then turn into a massive new bull trend. I strongly believe that Gold/Silver mining shares could easily rally 50% or more over the next 90 days. The upside spring is wound tight for Gold and Silver, and precious metals mining shares will be the star performers over the next several weeks AND for most of 2014.