Thursday, April 14, 2011

Gold Bulls are Tougher Than Wall Street Bears

13 & 15 April 2011

Just about everybody who follows the markets knows that Goldman Sachs smacked the commodities and precious metals markets Tuesday when they issued a "sell" recommendation on commodities, because the oil price was high enough to slow economic activity.

(As stated in the recommendation: “At prices above $125 per barrel… the risks are becoming more symmetric, which shifts the risk/reward of being long oil.” Note also that Goldman is recommending that clients remain long gold, as gold "looks like a reasonable speculation in the short term," but "gold is overpriced by historical standards and will correct at some point.")

So everything "commodity" got sold, and hard, on Tuesday - including gold (despite Goldman's equivocal quasi-endorsement).

Such power to move markets! It is awe-inspiring. Or is it?

Here's the problem with Goldman telling the gold market what to do.

One, and most importantly, their clients are rarely gold "holders." They might be traders of gold. That is not the same thing.

Two, how can you sell gold if you don't own it? (They can sell it short, but one might wish to take pause first and consider the recent 10-year journey of the gold price - from $259 to $1476 so far - before engaging in risky behaviour of this type.)

Three, the people who own gold are not listening to Wall Street analysts. We have analysts of our own.* We have tuned out of the Wall Street channel many years ago. We do NOT sell when the clever boys at Goldman say to do so. In fact, as a general rule, we do not sell, period. We just hold on with a greater end in sight.

So yes, when Goldman says, "Sell," there are many traders who unload their positions. I'm just saying, that is not "us." We are not traders of gold, silver, and precious metal mining stocks. For the most part, we just buy them and hold them - or if we do sell a gold mining stock, it's to buy another one that we think might have better prospects.

We have discussed the next issue here before. When the traders sell, that tends to exhaust selling at the price levels sold. You can see it on the charts.

Apart from major corrections following steep rises, which occur maybe once or twice a year, once selling at a certain level has been exhausted, the gold price just tends to move on to the next level, as there is no one left who will sell it to you that cheaply!

Why is that? The traders who take their selling advice from Goldman are gone. Prices are not extreme enough to justify the gold bears' taking a short position. And.... most importantly, we - the gold bulls - are still here...

...and we aren't selling. We are just watching and waiting, possibly for a chance to buy a little bit more, if the price is right, perhaps due to selling at irrationally low prices by scheming (or panicked) Wall Street traders....

We have been through a lot. We exist outside the mainstream of the market. What we do doesn't make sense to most investment professionals. While we have been scorned and ridiculed at times, for the most part, we are just forgotten.... We do not exist - or so it seems.

We have watched gold stocks underperform gold year after year.

We shake our heads. Sometimes we sigh. We do get tired, frustrated and discouraged. Things often don't go our way. But... we don't sell when Goldman says, "Sell."

Who are we?

We are the gold bulls, and we are tougher than the Wall Street bears.

Oh, and for my link of the day, Peter Zihlmann sums up our present situation well. Peter went "long" gold stocks (the HUI index) in 2003.

Amex Gold Bugs Index (HUI)
Buy Date Amount Buy Price Total (USD) Price Today
March 12, 2003 1 125.54 1
Total 1 125.54 1 606.28
Profit (in %)

Where is he today? Still long. No change in 8 years. It has been a profitable position. Peter believes it will continue to be. He is a gold bull. He is one of us. Click here for his recent and very inspiring article.

* NOTE: The following are only a few of the analysts followed by gold bulls - this list is far from inclusive: Richard Russell, John Doody, Marc Faber, Jim Rogers, Bill Fleckenstein, Byron King, John Hathaway, Eric Sprott, Pierre Lassonde, Doug Casey, Bill Bonner, Pamela and Mary Ann Aden, Harry Schultz, Jim Dines, Jim Sinclair, Dan Norcini, Clive Maund, David and Eric Coffin, Peter Zihlmann, Goldrunner, Rick Rule, John Embry, James Turk, Adam Hamilton, Przemyslaw Radomski, Jim Grant, Ben Davies, Rob Arnott, Ed Bugos, Jeff Berwick, Jim Rickards, John Mauldin, Steve Saville, Paul Kasriel, Mark Lundeen, Paul Tustain, and even Ron Paul, the US Congressman.

Yep, we're too busy to spend much time listening to the folks on Wall Street! You might say we're on a different road entirely!

15 April 2011:
Goldman are repeating themselves (click here). In my book, that is a sign of weakness. Gold has burst through their $1480 target, so now they think it is too high. My guess, this may be why gold stocks are trading unchanged today, as though the gold price has not broken out (yet again) to record highs. Thanks, Goldman, nice try:

(Kitco News) -- Goldman Sachs says it is recommending an “underweight” allocation to commodities for the next several months. However, Goldman says, “we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year.” Goldman notes commodities have “outperformed” lately largely due to loss of Libyan oil output amid unrest in the Middle East and North Africa.

However, Goldman says, crude may have pushed ahead of where fundamentals suggest, leaving near-term downside risk. “Further, softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011, and
recent gold price strength has pushed us close to our near-term price targets,” Goldman says. “As a result, we now recommend an underweight allocation to commodities on a 3- to 6-month horizon.”

Despite this, Goldman is setting higher 6 and 12-month targets for gold, as follows: "In a research report released Friday, Goldman’s gold forecasts are $1,565 and $1,690 per ounce in six and 12 months." I guess that's too far away to interest traders who follow Goldman's advice, at least for now.

In my view, Goldman may have an inordinate influence on the street. That is, those who sit and watch today because Goldman's near-term targets have been surpassed will just end up paying higher prices later. Certainly the gold bulls will be buying today on strength.

And if John Hathaway is right, a few too many may have arrived late at the station, and will have to buy later if they want to ride the gold train.

Mr. Hathaway is describing "decisive action" in gold, leaving "a lot of people still mystified and basically out of the game." He added "We could have a very quick move of a couple hundred points, and maybe see $1600 before anybody realizes what is going on." He notes that gold stocks are lagging, and therefore, "People (will) have to revise their earnings expectations in the gold stocks!"

Mr. Hathaway allows that gold stocks could possibly gain an additional 40% in market value this year, simply to begin to catch up to historic valuation levels on much higher profits due to the rising gold price.

Oh yeah, as if that weren't enough, Jim Grant (who predicted the 2008 financial crisis well in advance) is now suggesting that the United States will resolve its debt problems "necessarily by undertaking the step of restoring the dollar to convertibility into gold.”

Mr. Grant, a specialist in interest rates who is one of the world's most sober and conservative investors, continues, “To me, the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n,’ I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller the ‘n,’ the bigger the price. One divided by a receding number is the definition of a bull market.

He concludes, "You’ll notice that this has nothing to do with security analysis (a method favoured by many professional investment analysts). This is conceptualizing, brainstorming, nothing to do with price/earnings ratios, other valuation methods like cash flows. It is a proposition or a hypothesis on what is driving the gold market. So the gold market is necessarily a speculative piece of business.... Anyway, I happen to be bullish on it, but not for reasons that I can readily defend before a member of the fraternity of chartered financial analysts."

ADDENDUM: OK. I couldn't resist this bit of hijinks. My faithful adviser Bill Fleckenstein was on holidays this week. It seems the markets often go wild while he is away. So I chose to reassure him as follows:


I hope you had a great holiday. And your timing was good. It turns out we didn't need your analysis this week after all. It was easy to understand everything that happened all week long. Goldman told people what to do, and they did it.

Oh, one thing though. Goldman thought gold was high enough at $1480, but gold got a little feisty and decided to go higher without permission. But, yeah, apart from that, everything was as scripted.... Even the gold stocks obeyed. It was just gold that got out of line there. Yep. That was the only part I didn't quite understand!

LATE DAY NOTE (15 April 2011): OK, let's do a run-through of what happened today in the gold market.

(1) Gold set a new record high. Ho-hum. What's new?

(2) As we have often noted, record high gold prices tend to be BAD NEWS for gold stocks. Why? Just to reiterate this point and drive it home, gold stock investors (at least the traders out there), believe that new high prices in gold signal a trend reversal, and that means gold has to go back down soon, because how can it sustain such excessive price levels? As gold "obviously" has to exhaust itself, new highs are interpreted as a sell signal.

And how did gold stocks respond today? You guessed it - back down again. Despite the surging gold price, it was thus a bad week overall for the HUI gold stock index, as illustrated below, though it is not far off its highs.

All right, that was predictable. How about the SPTGD Toronto Global Gold Index?

Oh! This one is almost 10% off its December 2010 highs, when US dollar gold was at least $40 cheaper. Note that the Canadian dollar gold price was briefly slightly higher in December 2010 than it is today (during parts of 3 days only), and that there is certainly no 8-10% differential to justify the marked decline in Canadian gold mining share prices that has been observed since:

(3) As we have been discussing all week, our friends at Goldman Sachs issued a sell recommendation on commodities, and a "high enough" call on gold. Well, didn't that reinforce the above point? You got it. All week, gold stocks have traded down, particularly relative to the gold price. Check out the HUI Gold Bugs (Basket of Unhedged Gold Stocks) Index, divided by the gold price:

Yes - you can really see the persistent downward pressure on that one. And here is the SPTGD TSX Global Gold index, relative to the US dollar gold price.

Pretty similar, don't you think? May I therefore just refer to this week's action as "the Goldman cap?" Yes, you just have to marvel at Goldman's ability to influence the market.

Is that all there is to it? Are there any leaks in the dike?

Well, actually, yes. There is one. Basically, world markets obeyed Goldman on every call this week, except for one market. The gold price was supposed to top out at $1480.

But the gold price didn't cooperate fully with Goldman's target price. In fact, it didn't really slow down at $1480. It actually barrelled on through to $1487.90, and closed at $1486.40.

That was "unexpected."

So we have something to watch next week. Does gold get back down under the $1480 level, like it's supposed to? Or does it continue to be uncooperative, and keep on rising to "unpermitted" levels?

Let me say this. So long as the market obeys Goldman's rules, Goldman calls the shots. When some part of the market gets unruly, then perhaps investors will begin to think for themselves, and take the obvious action - before time has passed them by.

People actually sold gold stocks at lower prices today as the gold price continued to rise. While selling gold mining shares on strength has proven a clever strategy for most of this year, at some point, it may begin to appear perhaps... unwise.

My guess, that day of reckoning may be coming sooner than expected....


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