Gold and Silver Update: Sentiment is Depressed, Buying Opportunity is at Hand

Gold and silver have been a bear market for quite some time — it was already a year ago that silver traded close to $50/oz and we saw many idiots forecast the price of silver to reach $300 and the not-less idiot and incompetents at Sprott load up on silver at close to all time high, and forecast $150-$200/oz.

Sentiment on both silver and gold has hence became quite pessimistic, to the point where headlines are now very negative, and investors are pulling their money out — and reciprocally, the USD has become over extended, and sentiment over optimistic:

May 16 (Bloomberg) — Investors are reducing gold holdings for a third month, the longest stretch since 2004, and favoring the dollar as a haven from Europe’s debt crisis, even as Goldman Sachs Group Inc. predicts record prices for the metal. 
Bullion erased its gains for 2012 this week as the dollar rose against a basket of currencies for a record 12 straight days. [...] 
Hedge funds are the least bullish on the metal since December 2008
Gold is just another risk asset,” said Michael Aronstein, the president of Marketfield Asset Management in New York, who predicted the 2008 slump that drove commodities down 66 percent in seven months and then the rebound in 2009. “It made you a lot of money if you took the risk eight or 10 years ago. A real safe haven would be a pile of high-denomination Swiss franc or dollar notes, stored in a safety deposit box.
“Usually, gold could be viewed as a safe haven or a contra play to the U.S. dollar,” said Bill Greiner, who helps manage $13 billion of assets as chief investment officer at Mariner Wealth Advisors in Kansas City, Missouri. “It’s really doing neither right now. It’s highly possible that we’ll see gold and commodities in general continue to drift down until the Fed steps in with some sort of quantitative easing package.” 
May 11 (Bloomberg) — Gold traders are the least bullish in five weeks after the metal erased almost all of this year’s gains, as political turmoil in Europe and mounting optimism about the U.S. economy drives investors to favor the dollar. 
Fourteen of 32 analysts surveyed by Bloomberg expect prices to gain next week and six were neutral, the lowest proportion since April 6. Bullion futures slid to a four-month low of $1,578.50 an ounce this week and hedge funds are making their smallest bet on a rally in about three years, Commodity Futures Trading Commission data show. 
[...] “When the market gets very nervous, then they buy dollars and gold finds it difficult to rally,” said Jesper Dannesboe, an analyst at Societe Generale SA in London. “Given what’s going on in the markets at the moment, any rally will probably just be a bounce before another setback.” 
Notice how sentiment is explaining everything? Back when gold was trading around $1,900, you could read "When the market gets very nervous, then they buy gold and the dollar is just another paper currency being debased by the Fed"
May 9 (Bloomberg) — At a time when hedge funds are reducing bullish silver bets by the most in two years, analysts predict a rally as manufacturing expands from China to the U.S., boosting demand for the precious metal most used in industry.
Money managers cut wagers by 68 percent in two months as futures tumbled 22 percent, Commodity Futures Trading Commission data show. Prices will rally to average $35.40 an ounce in the fourth quarter, the third-highest on record, according to the median of 11 analyst estimates compiled by Bloomberg. [...]
The investment purchases will still leave a surplus estimated at 3,415 tons by Barclays for this year. A glut of metal has been no bar to rallies in the past four years, with prices almost tripling since the end of 2008. 
There are signs investment demand is weakening, with sales of U.S. silver coins tumbling 40 percent to the lowest since February last month, data on the U.S. Mint’s website show. Holdings through ETPs declined 1.4 percent since March 7, according to data compiled by Bloomberg.

An economic slowdown may also curb purchases by manufacturers. [...]
For the average individual trader trying to make his way in these markets, trading silver is just a mug’s game,” said Dennis Gartman, the author of the Suffolk, Virginia-based Gartman Letter who has been trading for about 35 years. “The randomness of the movements keeps me on the sidelines.” 
Demand also may be weakening in China, the second-biggest user after the U.S., with March imports 36 percent lower than a year earlier, customs data show. That may be in part because of record domestic production, with mine output increasing 11 percent to 3,232 tons last year, almost twice as much as a decade ago, the Silver Institute estimates.

Stockpiles in warehouses monitored by the Comex in New York, which traded a daily average of $9 billion of silver this year, expanded 21 percent since the start of January, bourse data show. Inventories reached 142.1 million ounces (4,421 tons) on May 1, the highest level since September 1997.

[...] “The long-term bull market is still very strong,” said Charles Morris, who oversees about $2.5 billion at HSBC Global Asset Management in London. “Silver spends more time going nowhere than it does going up, but when it goes up it tends to do it very quickly.”
Finally, here are the charts of GLD and SLV. Ironically, most people bought at the peak, as usual, the day when the SLV volume was higher as the SPY marked basically the very peak of silver...

It's now about time to get back long on those metals, which I have been only shorting for the past year or so.

SLV peaked in April 2011

GLD peaked in August 2011

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