Monday, April 25, 2011

Gold Mining Investors Hate Record Highs in the Gold Price - Huh?

25, 26 & 27 April 2011

Gold mining investors absolutely hate new record highs in the gold price. Every time gold moves to a new high, the gold mining shares plummet.

I understand why. It's because the investors who accumulate gold stocks think gold is too high and has to go back down again.


If that's the explanation, though, what (the heck...) are they doing investing in this sector???

Case in point. Gold soared to a new record high in the $1518 range overnight. As is so often the case, it was sold off in New York (that is a recurring pattern too).

But as I write, the gold price is doing just fine, acting quite comfortable in the $1500 range. And last week, people seemed to think $1500 was a pretty high price for gold. (In 2008 and 2009, they though $1000 was pretty high, and so on and so on, back to $300 in 2002, which seemed like quite a lot at the time also!)

So what did gold stocks do today, as indicated by the HUI Gold Bugs Index?

They sold off hard. Every time this happens, a text box pops up above my head with one word in it:

How, then, are gold stocks looking relative to the gold price? Here is the ratio chart, using the GLD ETF to create an intraday chart.

Hmm. This looks really bad - trending sideways, and actually falling when the gold price climbs!

Well, perhaps it's not as bad as it appears. It does seem that investors are willing to dip their toes back into the market when gold holds at new prices for a few days. It's just a very skittish crowd, for reasons I don't totally understand.

Of course, this broad behavioural pattern has actually caused gold mining shares to underperform the gold price since 2006.

So, yes, you can still buy gold shares very cheaply, relative to the cost of gold, which, surprisingly enough, is what they happen to produce and sell - the better ones in increasing quantities and with rapidly rising profit margins... making gold mining more or less the most profitable business on the planet at this particular juncture in history.

However, at some point this pattern will change, and cheap gold stocks will no longer be readily available.

For the holdouts in the crowd, I'm warning you now.

You are getting gold stocks at a steal. Enjoy it while it lasts, because, hey, it's not gonna last forever!

And think about this: When the gold price sets new record highs - for example - for the last ten years in a row, that might be a reason to hold gold miners, not sell them!

So, why not buy and hold gold mining stocks now? It's just a thought on my part....

Looks like it's been a good idea for the past ten years.

Have you ever noticed how, when a trend sets in motion, it just tends to keep going that way?

Seems to me we might have some kind of trend going on here! So... why not stick with it?

26 April 2011:

Here's an update for you.

Gold, in my opinion, had an uneventful though somewhat lower day (after all, it's a bit hard to trade higher every time an all-time record high has been achieved...):

Gold stocks of course, were smacked down for the second day:

And HUI:GOLD, the ratio chart, is back to valuing gold miners - relative to the gold price - about where they were in late January, when gold was trading $200 lower, in the low $1300s.


Let me do the math for you. When the gold price is $200 higher, gold miners make more or less $200 more in profits per ounce of gold sold.

That is, if math is tough for you - as it obviously is for most gold mining investors, then at this level, the miners' margins might be up by, say, 25%.

Let me explain.... Suppose their production costs are $500 per ounce - it can vary considerably, from $0 to $800 or so. Then from late January to late April this year, the miners' profit per ounce of gold sold has increased from something like $800 per ounce to something like $1000 per ounce.

So, independently of the gold price, the miners should trade on the order of 25% higher now than they did in January. In this case, that would constitute a rise in the HUI index from the bottom-feeding 492 in January 2011 to a still undervalued 615 today (the HUI actually closed today at an absurdly low 574).

Let me tell you now - this logical increase in the market value of the gold miners is systematically not happening! The gold miners have lost traction as the gold price has risen for the past 5 years, just as has occurred over the past 3 months, with an additional 33% underperformance from already undervalued levels!

So long as mining company investors go running for cover - like cockroaches under an upturned rock - every time the gold price drops from a new high, that pattern is not going to change!

I guess a smart speculator could play this game for profit, just by going short the miners every time gold sets a record high.

In fact, I'm going to guess that some do, as many commentators on Eric King's program have been maintaining (Dan Norcini and others, for example)!

Shorting the investment sector I believe in more than any other is contrary to my ethics, but what an easy way to make money for the past 5 years!

27 April 2011:

OK. Anywhere around $1500 is a perfectly fine gold price for now. Watch out, as we're setting yet another new record high in gold.

It would be nice to see gold stocks respond positively to a record high in the gold price for once. They are still below last week's levels.....

If that occurred, it would be a watershed event!

Oh, Ben Bernanke is speaking now. The first news conference ever for a Fed Chairman. I disagree with every Fed policy and every statement he makes. However, I admire his courage in attempting to make the Federal Reserve and its policies more open and understandable to the public. That single decision on his part is entirely admirable, and increases my underlying sense of hope for the future.

That is, I believe Mr. Bernanke is wrong about literally everything, but I have total respect for his openness and directness.

You can't help but notice Mr. Bernanke's voice shaking from time to time. He is a courageous and well-intentioned man who is really trying to do a good job! Oh, by the way, his job is probably impossible. He can't fix everything by himself. For example, you'd need a few committed politicians. And how can they do it if the citizens themselves are not willing to take the road less travelled?

You need an entire people working together to respond to a crisis of the present proportions. I hope that will happen one day. But, unfortunately, today is not that day. Almost everyone still wants the easy but short-term solution with higher long-term costs!

Post-News Conference comment:

Hmmm. Mr. Bernanke and I agree on one important point. He stated that the US Federal budget deficit is "unsustainable," and that US Federal debt is "our most serious problem." Wow! That is exactly correct.

Obviously we have different ideas about how to respond to that problem, but yes, we are all looking at the same problem.

Mr. Bernanke was somewhat happy about the S&P downgrade of US debt (S&P warned that its rating of US debt may fall below an "AAA" credit rating, which would drive interest rates powerfully upward!). Obviously Mr. Bernanke hopes that something will get the politicians (and public) moving, so he won't have to do the whole job by himself - which, as we have discussed - he can't possibly do in any case!

As to the gold price, it is soaring on an intraday basis, higher still post-news conference. Somebody somewhere believes that inflation is going to continue....

Are you surprised?

Jim Sinclair's $1521 gold price target was met (and surpassed) today. It hovered at that level following the Fed announcement (due to a promise of continued dovishness in a situation where something entirely different is obviously needed), and the gold price moved over the $1521 level following the conference with Mr. Bernanke. Note that $1600 seems to be the next stop....

Mr. Bernanke still believes that he can act effectively when long-term inflation expectations get out of hand.

Just a small caveat on that one.... We are long past that point, and Mr. Bernanke has obviously missed this critical historic juncture! Pandora's box was actually opened back in 1987, when Alan Greenspan took over the chairmanship of the Fed. That is an event that has been unacknowledged for the past 24 years!

Oh, the question I would have asked... "Mr. Chairman, given that you have announced your intention to cease purchasing US Treasuries in June of this year, what will be the result if no one steps in to take your place?"

Not sure why no one asked that question. It would have been my first!

And... are gold stocks still underperforming the gold price?

Radically so. It is a shocking disconnect! However, the long tail and the trend reversal in today's chart looks optimistic for gold mining shares in the short-term....

If we had a new high in gold and gold stocks climbed... that would be a BIG DEAL! Let's wait and watch for that one....

That would change everything.

Wednesday, April 20, 2011

Goldcorp: Cup and Handle Base Pattern

19 & 25 April 2011

I'm not an expert in technical analysis, but I know from experience that the "cup and handle" is about the nicest chart pattern you will ever see.

Wanta see one?

Then look at the current chart of Goldcorp.

It's a beauty.

And this one is somewhat aggressive. Notice how it is already angled upwards....

What do cup and handle formations do?

They go up (other things being equal, such as the stock market not crashing this week, etc.).

Oh yeah, here are a couple of examples (from the textbook).

McDonalds 1998-99:

And the Euro in Australian dollars (2008):


(UPDATE: McDonalds is still looking great in 2011. The Euro - not so hot, for now, especially in Australian dollars. My call for Goldcorp? Looking very good for a very long time to come - about as far as the eye can see!)


25 April 2011:

Oh yeah, some other gold miners and royalty companies are showing similar cup and handle patterns. Here are some.

Franco Nevada (one of my favourites:

Royal Gold (this one's a little skewed, but it's aggressive):

Yamana Gold (getting ready to move, a bit of a slow starter....):

Alexco Resources (creeping steadily upwards to double digits):

New Gold (give it time, it just swallowed a big bite of Richfield Ventures....):

And Minefinders is just an old-fashioned bottle rocket, with its "cup" having formed back in 2010 (the formation still works, obviously!):

Look like a pattern?

Saturday, April 16, 2011

Atlas Shrugged: The Movie Is Worth Seeing Despite Its Obvious Failures

15 April 2011

OK. Just caught the premiere of Atlas Shrugged: Part I this evening. I read the book in high school (at which time it was still fairly new - it was published in 1957). The movie is only on 200 screens.

In my view, Ayn Rand, the controversial and celebrated author, was not a great novelist. She used the form of the novel to express ideas about her personal philosophy ("objectivism") that had been formed by her personal survival of Russian collectivism and a genocide twice the scale of Hitler's. This woman definitely has something to say. As to the film, I was most struck by the conflicting and deeply compromised premises at its core.

Rather than seeing the film set in historical context, we find that it opens in the year 2016. Gas is $36 a gallon, everybody is unemployed, and evil politicians scheme to loot the last few of the country's wealthy and successful people.

Sound like Russia? You've got it. And we are also taken back to the original story of railroading, iron, steel and coal – and ballroom cocktail receptions. That is quite a disconnect, and at least for me, I couldn't set the railroad story in our present decade.

There are other problems. I was bugged by the characters' inability to construct grammatical sentences (“we/us,” “is/are,” basic stuff). The dialogue itself was probably taken from the book, but honestly, that is not an inspired source. Rand's characters can speak for 50 pages without taking a breath. So a lot of the pieces of the story didn't work together.

I also have the impression that the screenwriters (John Aglialoro and Brian Patrick O'Toole) don't know much about modern business. For example, and most tellingly, they stayed with Rand's notion that individuals would be outlawed from owning more than one company.

Hey, individuals don't own any major companies anymore – and don't want to! Everything has been floated on the market to exploit shareholders! Why do it yourself, when you can suck the shareholders dry?

This problem is in fact one of the contemporary manifestations of exactly the problem that Ms. Rand was trying to illustrate from the middle of another century.

That is, the evils of our age are different than those of the mid-20th century. So if we're going to set this story in 2016, then let's see the collective thinkers mired in political correctness and tortured compromises, trying to rescue the economy by destroying the currency. Hey! That is actually happening – and it would make the same point in a contemporary setting, as I think the screenwriters intended.

So, at least for me, this WAS still worth watching. I guess the producers didn't have much money or time. I understand. This is not a big budget film, and that's OK. Give them a break.

I think what everyone involved in this shoestring effort was trying to get across is that individual initiative is the only thing that can save us (as opposed, say, to organizing various factions into groups and going at each others' throats – as seems to occur on Fox News nightly!).

So yes, this film is trying to be about courageous people believing in something and doing it, not unlike trying to produce this film with no money! Good for them. It's probably still the right answer.... I commend them for trying!

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....