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:

Eric,

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!
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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.
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Time for a New Direction in Gold Mining Stocks!

22 August 2011

This seems so obvious it doesn't require saying. However, I'm saying it.

Gold is doing well because the folks who manage our economy are not doing their jobs well. I have commented on why that is the case in many previous posts and won't repeat it here.

Look at gold - doing fine:

Now, take a look at Canadian gold mining stocks compared to gold on this ratio chart.

Does anything strike you as unusual?

Hey, these companies mine and sell gold. Gold is going up. The stocks should go up too, and faster than the increase in the price of gold.

Why? Because production costs are rising more slowly than the price of gold, and gold miners' profit margins are therefore rising faster than the market price of the product they sell.

This trend has continued for ten years, but has not been reflected in the share prices of the gold miners.

Therefore, in my opinion...

It's time for a new direction in gold mining stocks!

We've come to a fork in the road....

If I'm right, gold stocks can double from here like falling off a log.

In fact, as this relative downtrend in the gold miners has progressed, I've actually been raising my targets.

Why?

I think we are seeing tension analogous to a spring under pressure. With release of the downward force (the broad markets have not believed in the 10-year gold trend), the prices of the miners should spring upward with ever more force.

Watch out above....
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Gold, the Obvious Investment

8 August 2011

It is now early morning, the first trading day after the S&P downgrade of US debt from AAA to AA+.

Gold has spiked higher, most recently, from prices in the $1660 range to prices in the $1710 range.

I wrote last week about the correlation of the gold price and the national debt.

Many now feel that gold has become an "obvious" investment.

I see it differently.

I think that gold was already the evident (not yet obvious) way to go in 2001, following the crash of the internet bubble - which even at that time was fuelled by Federal Reserve money printing and US government debt (Remember? It seemed like a big bubble at the time....).

If gold was the evident go-to investment in 2001, then by 2003, it had reached the stage of obviousness that the metal of kings would preserve its value better than any currency that was backed by a central bank whose members (and later chairmen) used helicopter analogies when talking about how to stimulate a slowing economy!

It just took some folks a little longer to catch on (for example, by buying at $1710 today, rather than at $330 in 2003!)....

I'm still waiting for gold stocks to trade at "bubble valuations," as the NASDAQ did in the 1990s - oh yes, and still does!

In fact, the better gold miners are trading at roughly a 60% discount (or more) to the value of their gold in the ground (after production costs). John Doody has calculated that his top ten gold stocks can easily double as a group, just to reach their inherent value at $1500 gold (Wait, isn't gold now $1700? Oh yes, he was writing last month!).

Gold has been "obvious" for the past 8 years and for the past $1400 in appreciation.

My advice?

Stick with the obvious.

This is the gold tsunami.
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Debt Ceiling Up... Gold Price Up... What's Next?

2 August 2011

I think this chart, posted on Zero Hedge, requires no explanation.

Now that the debt ceiling has been lifted $2.5 trillion, what do you think will happen to the gold price?

(Hint: simple correlational analysis suggests $1950 gold.)

Of course, the two charts could decouple at some point.

However, if this occurs, it presently seems that gold may break higher before the debt ceiling because:

(1) investors are catching on that we are past the point of no return,

(2) the gold universe is much smaller than the debt universe, and

(3) Asians understand the gold market better than Western investors, due to the long-term view that characterizes Asian culture.

This is the gold tsunami.
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China Will Not Unload Its US Government Bonds Because of the Debt Ceiling Crisis

31 July 2011

I thought I should write this while the debt ceiling debate is still raging. I want to make these statements before the matter is settled.

To begin, the debate over the ceiling is for real - it's not a charade. The Tea Party folks were elected to reign in US government spending. They aren't faking.

Further, let's say a deal is not reached by August 2. This would not necessarily mean that US government bonds would collapse in value. Continuing revenues could still be channelled to meet interest payments on US debt (which are presently only about 10% of US government expenditures - though solely because interest rates remain low).

Since the US prints its own money, it is well-known that the country cannot run out of cash (it can only run out of cash that has lasting value). This is unlike Greece, which shares the Euro as a currency along with the other members of the European Monetary Union. Greece cannot “print money,” but the US can.

However, there has been talk that the Chinese, who now hold something like $1.2 trillion in US debt instruments, could “foreclose” on the US, basically tanking the US currency and with it the US economy.

This argument misapprehends why the Chinese have accumulated $1.2 trillion US dollars in the first place.

If you want to understand this better, I recommend that you read an excellent article by a professor at Tsinghua University's School of Economics and Management in Beijing. In a very concise piece, Professor Patrick Chovanec makes clear why the current Chinese economic strategy not only requires China to keep its existing US government bonds, but in fact to continue buying more (though they are certainly diversifying).

Professor Chovanec states, "China’s growth model for the past 30 years relies, in large part, on running a trade surplus (selling more than it buys from abroad) in order to maximize capital accumulation and therefore investment at home. At the same it, it encourages inflows of foreign investment into China in order to speed up that process even further, while restricting Chinese money from flowing abroad, in all but a few controlled circumstances.

"The result is that foreign currency flows into China and piles up, with no outlet to flow back out again. Normally, all those excess dollars that were piling up in China would fall in value relative to the RMB, until the imbalances corrected themselves. However, in order to keep those imbalances in place, the Chinese government intervenes to buy up all those excess dollars (and euros, and yen) itself, to keep its currency from appreciating, and accumulates them as official reserves. It has to invest those reserves somewhere until it decides to use them to buy U.S. goods or make more direct investments with them abroad.

"Since the U.S. is China’s largest customer, and since many smaller customers also settle their international trade in U.S. dollars, roughly 70% of China’s $3 trillion reserves are in dollars. In theory, it could sell some of those dollars for other currencies or for commodities, like gold or oil, but in practice, given the huge sums they are already holding, its hard for China to sell off even some of its dollars without undermining the value of what it has left. Even if it could do that, there just aren’t any markets that are as large or liquid as the market for U.S. Treasuries, to accommodate the amounts of money we’re talking about. The fact is, as long as China wants to sell goods for dollars, and decides to accumulate those dollars as reserves rather than spending them on imports or investments, it has little choice not only to hold the Treasuries it already owns, but keep buying more and more."

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I'm not saying the US is not headed down the road to disaster. It is. Things have already gone too far. But the Chinese are not going to upset the applecart next week, whether the debt ceiling is raised, eliminated by presidential decree or maintained.

Click here for Prof. Chovanec’s article.

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Oh, just in case you thought that the Tea Party folks are really here to fix the problem, have a look at which party ran up the biggest tally of new Federal expenditures in US history:

I'm not calling Mr. Obama innocent. He has certainly been a big spender - but he has been no match for the George W. Bush Republicans! As they say, politics makes for strange bedfellows.

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Linguistic and Numeric Literacy in Leadership

23 June 2011

I am not convinced that US President Obama has a handle on either domestic or global economic troubles, nor am I quite sure what he did to earn the Nobel Peace Prize.

However, he is able to pronounce almost all the words he says correctly.

I noticed on the news last night that he used the term "Taliban" correctly, emphasizing the "ee" sound (Ta-lee-BAN).

After hearing GWB say "nukulur" a few too many times, it is refreshing to have a literate and articulate president.

If Mr. Obama doesn't win re-election, I hope we don't see another president who is "absent a brain" elected (Sarah Palin being the most obvious present example).

Ron Paul keeps standing up and nailing the truth about the economy. I have no idea if he is fit for the presidency, but he is certainly economically literate, and in this case, much more so than Mr. Obama.

In Canada, the literate, engaging and articulate Michael Ignatieff was trounced by the broadly unpopular Harper Conservatives, perhaps due to overlooking coalition opportunities with Jack Layton's far less astute populist hordes.

Though Mr. Harper is literate, he is uncommunicative, thus undoing the entire point of literacy.

As to economic literacy in Canada, Paul Martin had it nailed. He did EVERYTHING right economically, as far as I can tell, aided by his background in business.

By way of contrast, Harper, abetted by the evil Jim Flaherty and Mark Carney, overlooks no opportunity to pillory small investors and savers in the interest of minority factionalism.

So, in the US, let's keep Mr. Obama in the presidency due to his ability to speak without mangling the language, and just put Ron Paul in charge of finances.

In Canada, let's bring back Michael Ignatieff as leader based on his brilliance as a communicator (he is already re-ensconced in academia, unfortunately), and we'll return Paul Martin to the post of finance minister to save the day for our country!

Let's not let Mr. Harper throw us another curve ball!

That would fix everything important, as far as I can tell!
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This Is a High Gold Price

5 May & 25 June 2011

Gold is now down almost $100 from its recent peak of $1575.10 (which occurred earlier this week).

This is still a VERY HIGH gold price.

Gold is doing fine. The miners will do exceedingly well anywhere within a couple hundred dollars of here - either way - and make no assumptions about which way!

Take Goldcorp, for example, who just released first quarter earnings - what a quarter!

Anything is possible.

Half hour before market close. Still falling. Down about $115 from the recent top.

This is OK too. There is nothing wrong with the gold price.

In a year or two, brief $100 moves will not be unusual, as gold will be much higher than it is today. I guess we'd better get used to it now!

25 June 2011: Just checking in to remind readers that the gold price is still high. $1558... $1500... $1400... $1600... does it matter? It's just high - and going higher!

The gold miners are doing wonderfully. Their stocks are selling at incongruously low prices. Though anything can go lower on a short-term basis, long-term, they can only go MUCH higher.

Nothing has changed.

Gold mining is the best business on the planet.

23 September 2011: Hmmm. Gold has fallen off sharply this week, recently trading in the $1720 range, and down $200 from its early September (2011) high of $1923.70.

As time has passed, I hope my point has become evident.

$1920 is a high gold price. $1720 is a high gold price. $1520 is a high gold price.

The fundamentals are entirely in gold's favour, and it will continue to be worth a lot for at least the next decade (by then we'll know if our leaders have been able to do anything mature and responsible in managing the economy - for example, by encouraging saving and reducing debt.

I will paraphrase Jeff Berwick at The Dollar Vigilante. If gold retraces to $1500, go out and collect cans by the roadside and borrow money from all of your relatives to buy gold and gold stocks.

The major trend is up, not down. The volatility is just noise - plain and simple.

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Want To Buy Gold Miners? Take Advantage of the Insanity Now!

3 May 2011

The word "duh" no longer describes what is happening to the market prices of gold miners. This is insanity, plain and simple.

The gold price is doing fine today, presently in the $1530 range.

In fact, this is an awesome, really wonderful gold price for gold investors!

Among other metrics, gold is now trading $50 higher than Goldman Sachs' $1480 intermediate target price for 2011, and much higher than all but the most optimistic analysts thought it would trade this year - thanks, of course, to demand in China and India, whose citizens and governments now consume - between them - over 70% of the world's gold.

However, gold stocks are falling out of bed... again! (It's getting tedious, and perhaps a little too predictable....)

Have a look at Goldcorp, the fastest growing - and best - major gold and silver miner. It is being pummelled, and is (again) back below early 2008 levels, where it is revisiting its peak levels even of May 2006. I had to draw up a 6-year chart to illustrate this numbingly obvious point!

Why is Goldcorp pulling back to these levels? In fact, there is no fundamental reason for the stock to trade anywhere near its current range....

If the gold price were to fall back to say, the $1000 level, it might begin to justify the current pricing of the miners. Anywhere in the current broad range that is well over $1000 allows gold miners to rake in profits. Their business is not just "fine," it's unbelievable! Gold mining companies are generating unprecedented profits, probably the best in any industry (as gold mining shares receive a premium over base metal mining shares, because gold trades as both a currency and a commodity).

Let's look at Goldcorp again, in relative terms.

Contrasted to the gold price, apart from its similarly bizarre dip in January of this year, the share price of Goldcorp is at its lowest level since November 2008, at which time gold was priced at $700 - that's right - less than half today's prices! The following relativity chart divides Goldcorp's share price by the price of the GLD ETF - a gold price proxy which allows me to show today's intra-day action:

So, are you worried that gold may pull back to $1400? $1300? $1000?

Forget about it! It doesn't matter. Today's gold mining stock prices would still be justified - even a bargain - at such levels - particularly as no one could suppress the price at such levels for long!

So if, like me, you're not gravely concerned if gold falls back a bit - even quite a bit - from its recent record highs in the upper $1500s, then you are looking at screaming buys across the entire gold mining sector. Keep in mind that no investment product can set a record high day after day. There have to be intermediate peaks and valleys - it's no big deal... and it's certainly not a sign of a topping long-term market price (gold has thousands of dollars to go from here)!

My suggestion, load up on the premium quality gold miners, the Doody Top Ten if you will: Goldcorp, Franco Nevada, New Gold, Yamana, Gold Resource, Royal Gold, Minefinders, and more. In the area of silver, Silver Wheaton is a giveaway, as is Alexco - which in my opinion is the best Canadian-based silver miner.

Stock up now, and offer special thanks to the momentum traders who will sell you the best companies in the world today - in any sector - at one-half to two-thirds their inherent value!
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