Don't Walk, Run Away From Gold, Silver

NEW YORK ( TheStreet) -- Want to know a guaranteed way to win in a casino? Walk up to a roulette table and bet $10 on red. If you lose, bet $20, and if you lose again bet $40, and then $80, $160, $320, $640, $1280 . . . . This betting strategy is known as a Martingale betting system and unfortunately we see people use variations of a Martingale system all too often when investing.

Adding to losing positions to "average down" almost always comes too close to a Martingale to avoid the eventual loss that will happen sooner or later. The real evil with an averaging down method for most people is it gives a false sense of success from the many "wins" this system normally generates. People buy homeowners insurance for the same reason: It's the big loss that destroys years' of wealth building.

A Martingale system may work well in theory, but it doesn't work well in practice. Averaging down in gold during a bear market is the wrong approach under current conditions.

Successfully investing in gold requires higher inflation than the carrying cost of owning gold. Not all inflation is made the same way. When viewing gold in a U.S. dollar lens, inflation in non-U.S. dollar currencies is a deflationary influence on the price of gold.

Take India for example. Inflation is relatively high, and the price of gold is reaching record highs. The high gold prices in India likely explain (at least in part) why gold demand in India has softened. (Read my article Buying Gold Now Is a Sucker's Bet.)

India matters, too. For Americans, it's a mistake to have an overly egocentric view of the world. When it comes to investing in gold, the greatest attention on the demand side needs an Indian focus.

India, faced with high unemployment and record high gold prices leaves little upside for increasing demand for gold. More problematic than unemployment is the massive trade imbalance India faces causing the parabolic fall in the Rupee to begin with.

The Indian rupee made new lows last week in dollar terms. A dollar will now buy about 57 Indian rupees. At the start of 2011 a dollar would buy less than 46 and before the financial crises at the start of 2008, a dollar would only buy about 40.

India is a large net oil importer, and the biggest help India can receive to shore up the struggling rupee is a fall in the price of energy. Unfortunately for gold bulls, that is the last thing that will help gold. The cost of almost all goods and services are impacted by the price of energy, and lower energy costs equal lower inflationary pressure.

The impact of a stronger dollar is not limited to India. The Euro has fallen in the backdrop of various budgetary and economic implosions. In their attempt to keep the wheels from falling off, the European Central Bank resembles a player in the advanced stages of a "Whack-a-Mole" game. Each time the ECB uses their monetary hammer in response to the latest crisis popping up, another crisis pops up just as quickly.

The problems in Europe may give the false illusion that a flight to safe havens including gold will cause the demand for gold to increase; thereby causing the price to move higher. In a vacuum, monetary crises with multiple sovereign nations may indeed increase some types of gold demand. Where the higher gold demand theory derails are the casuistry or aberration of believing overall gold demand will increase. Those touting a flight to safety are performing a disservice for anyone listening.

Jewelry production is the greatest consumer of gold by far. Failing economies do not lend themselves to greater gold demand. Furthermore, relative to the drop in price gold has experienced in America, gold has not fallen as much in Europe due to the declining value of the Euro. Gold is trading for about 100 Euros off the all-time highs, compared to $300 off the high.

The impact on gold miners appears clear. Barrick Gold ( ABX), Goldcorp ( GG), Anglogold Ashanti ( AU), and Newmont Mining ( NEM) are near 52-week lows. One notable exception is Yamana Gold ( AUY).

Yamana Gold recently opened up their checkbook and bought Extorre Gold Mines ( XG). It remains to be seen if Extorre Gold is a sound investment or not. Extorre Gold is located in Argentina, and Argentinian President Cristina Kirchner has demonstrated an eagerness to place her own political career ahead of a free Argentinian capital market, stressing businesses there.

Yamana Gold also significantly increased their dividend. At 26 cents per share, the yield is now over 1.5 percent. A falling tide lowers all boats, and the headwinds facing the industry should be considered before considering Yamana Gold.

The indices are falling too. Two principal Gold mining indices, Market Vectors Gold Miners ETF ( GDX) and Junior Gold Miners ETF ( GDXJ) have fallen far from their 52-week highs. Both Gold ETFs have bearish trending daily moving averages. Gold is not alone, other metals are falling too.

Maybe the most difficult choice is deciding which is worse, direct gold ETFs like GLD, the miners ETFs, or the miners themselves. Barrick, Goldcorp, and Newmont Mining's daily moving averages are in a free fall. By the close of trading in the week of June 22, Newmont Mining was once again broken below the 60-day moving average and Barrick Gold's price is well below the 60-day moving average. For trend followers, Newmont is the type of stock to short. It's no surprise that Barrick, Goldcorp, and Newmont's short interest, while low, increased in each of the last three reporting periods.

Silver, represented with the silver trust ETF SLV ( SLV) is dropping for the same reasons as gold. All three main moving averages are trending lower, and I can't find a catalyst for silver prices to increase.

Silver is so weak, the price of SLV fell to new year to date and 52-week lows last week. SLV hasn't traded this low since 2010. The daily moving averages for SLV are trending lower, placing Silver squarely in a bear market. Lower highs and lower lows are by definition a bear market. When I wrote my last silver article, SLV was $28.50, and Friday it closed at $26.15. View moves higher as selling opportunities.

Lower demand for silver and gold jewelry, along with a lack of inflation (in dollars) is a perfect formula for lower metal prices. As long as the situation remains, expect gold and silver to continue falling.

Author does not hold a position in any stock mentioned.

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