Friday, September 23, 2011

The $100 Day in Gold I've Been Waiting For... Almost!

9 August & 23 September 2011

This essay was originally posted August 9, 2011. As we've just had a $100 down day in gold (these go hand in hand with $100 up days), I thought I would repost it, with an addendum (see below)....

I've been saying for years that we were going to start seeing $100 days in the gold market.

I'm old enough to remember when this started occurring in the Dow. It is routine now, but it was a big deal at the time.

Well, here's what's happened so far: On Sunday night, we started the week with gold just over $1660 per ounce. As you've heard me say before, "That's a high price." Well, so is $1500, $1400, $1300, etc.

Except that in only slightly over 24 hours, gold had run as high as $1772.30. Granted, it took 31 hours to achieve this gain of approximately $110. However, gold appreciated at the rate of $3.55 per hour during this 31-hour period.

Jim Sinclair had been telling us to look for a $1764 gold price ($100 up from Sunday evening's start). So, hey, where we are now is pretty close. He'd been writing about $1650 gold for years. But $1764 - we had only five days to digest the transition.

The times they are a changing.

Will we see volatility from here?

For sure. We're going to need more than 5 days to adjust to this surge. Movements of this kind are always associated with increased volatility.

Will Mr. Bernanke announce QE3 today?

I'd be surprised - among other things, each infusion of newly-printed money produces less effect - and we've already witnessed diminishing returns with QE1 and QE2. The bankers get the money, but they're fearful of loaning it, so they increase their reserves, and deposit it with the Fed for a hefty 0.25% annual return - better than loaning it in this dangerous environment!

So Mr. Bernanke may announce an end to the 0.25% rate - to discourage the banks from socking away their Monopoly money....

But watch Jackson Hole later this month!

Will we have more $100 days in gold this decade?

My guess is - several per year - for the next decade. And a few years down the road - get ready for $100, $200 and $300 leaps. It's a process. But that is where we are headed.

This is the gold tsunami.

23 September 2011: Another $100 day in gold. No secret - this time down, from $1747.40 to $1629.50. And let's not forget that we were at $1923.70 on September 6, 2011, a lucky 13 trading days ago (and an almost $300 move - down - in less than 3 weeks)....

LinkIs there any fundamental reason for the pullback? Not that I can tell. Banks are collapsing, currencies are imploding, and senior economic prognosticators are warning of recession. It is certainly in times such as these that gold does best.

The following headline may be significant, however:

CME Group Raises Comex Gold Margins By 21.5%, Silver Margins By 15.6%

Obviously some folks pull out when the cost of entering a particular trade rises. There's no conspiracy, margins have to rise as the price of gold rises. Certainly, if the CME thought that gold were headed back to lower levels, there would have been no need to up their margin requirements in the first place. So at least some of the players who had a hand in gold's fall today are anticipating higher prices in future (as am I).

Let me emphasize that while the "paper trade" in gold and silver is down (no physical delivery is involved in most global trading of the metals), it has again become difficult to obtain physical gold and silver for sale, due to the fact that physical demand for the precious metals explodes with every significant pullback in price. (As precious metals are sentiment indicators, their market prices are very volatile.)

While I pay attention to short-term moves, my primary investment strategy is to discern very long-term (secular) trends. At this point, there is nothing on my multi-decade radar that substantially threatens the rising price of gold. As the years pass, the price of gold will continue to rise. That is how it goes when the fundamentals are "at your back."

In fact, these fierce pullbacks actually create the conditions necessary to gold's rise. The "weak hands" sell. The "strong hands" hold. Those who have been sitting out start wondering if our favourite archaic relic might soon (or now) be trading at a bargain price.

Given our recent 15% pullback, expect gold to trade now (or soon) like a coiled spring.

Let me summarize it like this. If you are a gold investor, any price in this range is "high," whether near $1400 or $1900. You don't have to go far back in time at all to see when gold was priced much lower. And if you're a buyer? Gold at $1658.20 will certainly look economical when it ploughs through the $2000 and $3000 levels (and so on).

In fact, it is starting to seem somewhat absurd to value gold in moribund US dollars (yet another failing currency). Wouldn't it be more reasonable to ask how many ounces of gold a US dollar will buy?

Look at the CDNX index (Canadian small capitalization companies, mostly miners) valued in gold terms - it's flatlining - building a base! And... up a bit today from yesterday, relative to the only currency that wlil still be in existence at the turn of the next century....

May I coin a phrase here?

What comes down must go up!

See you soon, closer to $2000 than to $1500. Then at $3000. Etc. Sooner than you think.

Anything is possible.

This is the gold tsunami.

It comes in waves...

As it did on August 9, 2011 ($100 up) and today ($100 down).

And, as it will again - and again - and again....

Be ready.

Has Gold Broken Down?

23 September 2011

I enjoy the financial news and analysis site "Seeking Alpha" because the site administrators have no axe to grind. Every view is expressed, and a broad range of contributors are permitted to post articles.

It is easy to locate others with a view similar to my own at Seeking Alpha, so the kinship of like minds can be found there. However, it is no secret that "too much" like mindedness makes us narrow and cloistered thinkers.

So... I often read articles by (usually intelligent) contributors whose view is entirely different than my own.

Such was the case recently, when I read Eric Steiman's article, "Gold Has Broken Technically and the Selling Will Be Scary."

Mr. Steiman's main thesis is as follows: "Gold (the author is referring here to the "GLD" exchange traded fund - a tradeable proxy for physical gold) has broken the 50-day moving average and may go all the way to the 200-day (moving average) at 148. I see potential downside of nearly 20%. Making matters worse is that the overall market is taking a major hit. Many investors that have been in the GLD trade will look to sell positions that are in the money or out of the money. You can expect major volatility in the GLD over the coming days, but I think overall it will be much lower in time. The move up was too dramatic, and the fall will be just as bad."

I found Mr. Steiman's arguments parsimonious and reasonable. However, I also disagreed with him.

My reply is presented below, and I will permit my own words to speak for themselves. For more context, please click here for the original article:


I think your analysis is smart - you have covered the bases. My critique is that you are using a rear-view mirror. We are not replaying 2008-09 in gold, though we could do so in stocks (the bad news is pointing to recession).

Operation Twist is not inflationary, in that it does not expand the money supply. However, it moves money into the MBS (mortgage-backed security) market, and will presumably stimulate the mortgage refi (refinance) trade. That of course does free up a modest amount of spending money, which will work its way into the consumer markets (at the expense of the banks, who will be collecting lower levels of interest on the refis).

However, look at the fundamentals, Eric. Is the collapse of the monetary system as we know it not gold bullish?

Of course, anything can happen short-term, and I understand why pinched investors sell their winners. But then you've gotta think, in a recession, where are your next winners going to come from? Then I'm with most of the crowd that has amassed here.

If I were to start picking my expected winners for 2012, I'd have to nix general equities, the banking sector, the USD, etc. What is left? Real interest rates will stay low in a recession. And when and where does gold thrive? Right in that sweet spot.

What then is the argument for gold stocks? Try running the CDNX ratio chart over GOLD.

We have already hit the bottom in the small cap miners in gold terms. That implies that the way from here is up. Add to that the new mutual fund buying in the large miners. And where are they going to go in a recession?

Who is it that has been saying gold stocks will be the next utilities - Jim Sinclair? Yes:

Jim Sinclair "This will result in producing gold mining shares becoming the utilities of 2016 onward."

I think he has got it. With the big miners now paying dividends, and doing fine in terms of revenue and profit growth, and with the Yen, Euro and USD in their death throes... Hey Goldcorp, Yamana and Newmont are now utility stocks!

Last but not least, what technical guy is not going to look for those gaps to be filled in the above charts? October is weak seasonally for gold. A few weeks' of underperformance and base building is reasonable to expect.

But the technical analysis has to be informed by fundamentals.

My fundamental analysis tells me that currency collapses and bank failures are gold bullish - to a very high degree!

Wednesday, September 21, 2011

Take Your Pick, Stocks or Gold....

21 September 2011

Where would you rather be for the next decade, general equities (stocks) or gold?

Here's the 105-year chart.

Make your choice for the next decade.

Posted by Joe Weisenthal, at Business Insider, and the chart is from Citi's Tobias Levkovitch.