Monday, November 16, 2009

Animal Spirits in the Gold Market

16 November 2009, updated 17 November 2009

Up until now, gold's price advance has been orderly. The upward moves, the levelling off, and the pullbacks, were all as expected.

Gold (and gold stocks) were supposed to pull back again this week, after topping out last week.


Things have changed.

The animal spirits are back in the gold market.

This is what bull markets do.

Add ImageHere is a chart of today's unexpectedly lively gold action:

I'm busy today. More later.

16 November 2009 (evening):
I added the following comments on Seeking Alpha today....

The observation that gold may remain a superior investment to the gold stocks has certainly held true since March 2008, in fact, from as long ago as November 2003 and May 2006. Bill Fleckenstein recently stated that gold stocks have been trading as if they are radioactive.

However, current developments are likely to boost the margins of the gold miners considerably. Thus, the fact that they have risen dramatically from depressed levels in October 2008 (at that time, they revisited levels last seen as long ago as June 2002) hardly means that they have climbed too far or too fast. We are just now surpassing strata in the HUI (the unhedged gold miners index) that were observed 2 years ago, when gold first challenged the $800 level.

Yes mining costs have gone up - but not all costs, such as energy, which at $100 oil was pricier 2 years ago than now. The HUI:Gold ratio in late 2007 was ranging from .50 to .55. That ratio fell to .205 in October 2008. We have just now surpassed the .41 level in the ratio.

It is true that gold mining companies have reported more than their share of bad news, even recently. But it's hard to argue that good news is not on the way with gold surpassing the $1100 level.

Here's a rule of thumb. Gold has not surpassed its February 2009 levels in most currencies (at which time the US dollar was considerably stronger).

Gold is certainly going to move to new highs in currencies other than the US dollar before the current run is through - and not just because the US dollar may bounce.

So is gold done yet? I don't think so. Here is Clive Maund's view:

Are the miners done their run? No, we have some ways to go in revaluing the gold miners as well. Here is P. Radomski's visual analysis of the HUI gold miners' index:

With animal spirits in charge, gold is simply going to do what it wants to do... and gold mining stocks will be tugged along for the ride.

Enjoy the ride. It might get a little bit wild!

17 November 2009:

With animal spirits breaking out in the gold market, I don't think anyone can say where it is going (apart from $1200 pretty soon). Captain Hook has an idea, based on some of his proprietary charting tools. He thinks we might be headed to $1386 as a "next stop."

Who knows? But Captain Hook might be onto something here.

P. Radomski confirms that we remain a long, long way from a top in the gold price, based on his analysis of the silver to gold ratio. The silver price tends to move parabolically at gold peaks.

Guess what?

We're not even close.

So someplace, such as $1200, or even today's $1140, could be a resting place for the gold price for a while - even constituting a short-term resistance zone. But gold - and silver with it - are going much higher than today's prices.

Over two years ago, I gathered together some arguments that gold is probably headed to $5000 per ounce or higher.

Click here to read more about gold's longer-term targets.

Monday, November 09, 2009

Where the Fed's Bailout Money Is Now Going

9 November 2009

Just in case you wondered where the Federal Reserve's $1.5 trillion in (new) bailout funds are now going, here is the chart to sum it all up for you, courtesy of The Business Insider:

Note that we started 2007 with about $800 billion in traditional security holdings. That figure is now down to about $500 billion. Lending to financial institutions was big in late 2008 and early 2009 (up to $1.5 trillion), but that is now winding down. Providing liquidity (easy money) to credit markets is now also declining.

So what is up? Long term treasury purchases are the well-known "helicopter money." This is the money printed out of thin air to buy US bonds when nobody else in the global market wants them, also referred to euphemistically as "quantitative easing." The Fed has promised to keep a lid on this area of expenditure, as it makes the US look a little more like Zimbabwe, Weimar Germany or Rome in decline, and a little less like the proprietor of the global reserve currency.

But look at the full trillion dollars that is now in mortgage-backed securities. This is the taxpayer-funded bailout of the Wall Street speculators who thought they could keep slicing, dicing and repackaging worthless mortgage portfolios and charging commissions (and awarding themselves bonuses) with each slicing and dicing in a never-ending shell game (which of course ended when the music stopped playing).

American taxpayer dollars are now making those bonuses good while people with long-term disabilities and those reliant on company-funded employee and retiree pension and health plans find that their coverage has disappeared due to bankruptcies.

To wrap it up. The Fed is demonstrating that it is (1) willing to print money out of thin air, though only up to a point (about $200 billion so far, but we're not out of the woods yet), and (2) willing to rescue the reckless by bankrolling Wall Street bonuses while retired, sick and disabled people get left holding the (empty) bag.

Hmmm. Something to think about.

By the way, don't blame this primarily on Wall Street greed (of which there is certainly no shortage). Look first to the policies of the US government and the Federal Reserve, who, according to Ted Forstmann, are actively promoting the risk taking strategies which have culminated in financial disaster. Mr. Forstmann (quoted in the Wall Street Journal) states, "They just throw money at the problem every time Wall Street gets in trouble. It starts out when they have a cold and it builds until the risk-taking leads to cancer."

If you want to know why mortgage-backed securities created so much trouble, Chris Gasparino explains it well (again in the Wall Street Journal):

"Easy money wasn't the only way government induced the bubble. The mortgage-bond market was the mechanism by which policy makers transformed home ownership into something that must be earned into something close to a civil right. The Community Reinvestment Act and projects by the Department of Housing and Urban Development, beginning in the Clinton years, couldn't have been accomplished without the mortgage bond—which allowed banks to offload the increasingly risky mortgages to Wall Street, which in turn securitized them into triple-A rated bonds thanks to compliant ratings agencies.

"The perversity of these efforts wasn't merely that bonds packed with subprime loans received such high ratings. It was also that by inducing home ownership, the government was itself making home ownership less affordable. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels.

"This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware....

"With so much easy money, with the government always ready to ease their pain, Wall Street developed new and even more innovative ways to make money through risk-taking. The old mortgage bonds created by Messrs. Fink and Ranieri as simple securitized pools had morphed into the so-called collateralized debt obligations (CDOs), complex structures that allowed Wall Street banks as well as quasi-governmental agencies Fannie Mae and Freddie Mac to securitize ever riskier mortgages.

"Mr. (Stan) O'Neal (former CEO of Merrill Lynch), the man considered most responsible for Merrill's disastrous foray into risk-taking, told me in an interview last year that in the fall of 2007, when he saw that the firm's problems were insurmountable, he had a deal to sell Merrill to Bank of America for around $90 a share. But Merrill's board rejected it, believing he would be selling out cheaply. The CDOs would eventually recover, they argued, as the Fed pumped life into the markets.

"Likewise, nearly to the minute he was forced to file for bankruptcy, former Lehman CEO Dick Fuld believed the government wouldn't let Lehman die. After all, government largess had always been there in the past.

"All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well?

"There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk."

My insurance advice? Buy gold, and sleep well at night... for decades to come!

P.S. Here's an important story. 10 states face looming budget disasters: Regarding problems in the US economy, everyone has been talking about the overbuilding and weakness in commercial real estate (definitely a problem). But there's now a bigger problem sneaking up on us from behind.

California is not the only state in trouble. It is, or soon may be, just as bad in nine other states - and they are important states.

Why are state financial problems a concern? Well, the US government can print money to its heart's content, and the crazy people around the world keep buying US dollars in the form of (a) payments in trade, and (b) government bonds. Guess what? States don't print money - or if they did, nobody would want it. So when California cuts spending by $20 billion per year and still sees 17% tax revenue shortfalls, that's a big problem.

Now we have 9 additional states in the same boat: "Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin join California as those most at risk of fiscal calamity, according to the report by the Pew Center on the States."

Click here for Judy Lin's (AP) coverage of this very important story - still too far in the background for my taste. I think this is a very big problem.

Sunday, November 01, 2009

Gold Tsunami VII: This Is It

1 November 2009

The gold tsunami is now rolling in.

This is the big wave.

Let me clarify. I am not a short-term market timer, nor a prognosticator. However, I watch a number of indicators. While gold and gold stocks are presently in a period of weakness, here's what I'm noticing....

On Friday, October 30, 2009, there was a solid recovery in the gold price - while much else was falling.

There was also a recovery in the Toronto Gold Stock Index, despite weakness in general equities.

Notice that the S&P 500 didn't recover on Friday, October 30.

I also follow proprietary indicators published by investment advisories. I recommend that you subscribe to the Aden Forecast. Their leading indicator for gold shows that gold's almost $400 climb from its October 2008 low takes us only a little more than "halfway" to where gold is going on its current bull run (be advised that the positive 8-year trend produces both higher highs and higher lows - that is, the leading indicator produces bigger numbers on the up side than on the down side).

I also advise that you subscribe to Adam Hamilton's Zeal Intelligence Service. Mr. Hamilton's relativity analysis (based on comparing current prices to 50 and 200-day moving averages) shows that the current prices of gold and gold mining stocks remain moderate. Note that relative gold can run much higher from here. Why? Gold is outperforming just about every other class of investment in the current market - thus it is not particularly high relative to its 50 and 200-day moving averages.

There is also room for the HUI (Gold Bugs Index of unhedged gold mining stocks) to run another 50% or so from here. That is, the HUI has no technical impediments to moving to the 600 level, and with a stretch, it could move somewhat higher. Interestingly, the recent sharp pullback has bought the HUI much more "relative" upside room. That is the positive function of "corrections of sentiment." Lower levels now give us more room to run in future without taking us to overbought levels. Consider that a tsunami works on the same principle. That is, the advancing wave draws energy from the receding sea before it.

The long-term HUI-to-gold ratio (which recently bottomed at .361 on Friday, October 30, 2009) can also run up another 50% from here without stretching beyond levels attained in 2003-04 and 2006-07. And as you'll read below, there are good fundamental reasons to expect a return to such levels to occur.

Returning to gold, here is an indicator I haven't watched previously, but it is very interesting. This chart indicates that gold's more recent 50-day moving average can run much higher against gold's longer-term 200-day moving average.

I also highly recommend P. Radomski's Sunshine Profits to my readers. This fellow is producing some of the most insightful technical analysis out there. What are Mr. Radomski's charts telling us? In brief, that this is the best gold stock buying opportunity since October 2008....

The Gold Miners Bullish Percent Index reinforces this message.

In sum, what is the picture? Every indicator I follow is presently bullish both for the price of gold and for gold stocks. This is a combination of circumstances that occurs only rarely. Why are we seeing every technical indicator lining up in favour of gold and gold stocks right now?

The gold tsunami is here.

Gold is now exploring new highs with no ceiling in sight.

Gold mining stocks are increasing (and restoring) their leverage to gold. With higher gold prices and lower production costs than in 2006-2008, increments in the gold price strongly boost the profit margins of the gold miners. This equips them with hoards of cash that can be used to develop and expand existing operations, to acquire other miners, and, longer term, to pay increasing dividends to their shareholders.

Have you ever wanted to own a gold mine? If so, now may be just the right time to purchase your share in more than one of them!

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating