Gold, Silver and Other PMs
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» Normxxx - Another View of GOLD
Another View of GOLD
<img Width="560" src="http://www.321gold.com/editorials/morgan...">
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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Blowoff Top in Gold
Blowoff Top in Gold an Historic Event
By Tom McClellan | 16 December 2005
McClellan Financial Publications, Inc
In a couple of years, people are going to be looking back and asking each other, "Do you remember that big gold blowoff back in '05?" Then they'll co-opt the line uttered by thousands of Texas oil men, and say, "Lord, just give me one more of those gold bubbles and I promise not to screw it up this time."
Our mission at this point, as analysts and investors, is not to decide whether this is a blowoff top or not. The market has made that pretty clear in the past few days. Instead, our mission is to figure out what this means for the future, and not to get misled by contrary signs which might pop up to confuse us in the near future.
The chart above shows the cash price of gold compared to its 50-day high-low range. A couple of things are worth noting as we start out. First, gold tends to make more rounded bottoms, and more spiked tops. This is the opposite of the stock market, for example, which tends to have quiet, rounded topping action and panicked, violent and volatile conditions at bottoms. Second, seeing a big range over a 50-day period like we have right now is a condition that reflects that spiky top nature of gold prices. Such high readings tend to only appear at important price highs.
That chart also allows us to see that the recent run up from the congestion earlier this year at around the $420 level dwarfs any of the other price structures in this 15-year chart history. Clearly, something unusual has just taken place, and now we get to see the after effects.
The point to understand about blowoff tops is that once the blowoff is completed, then what follows is a thorough dismantling of most or all progress that had been made on the way up. Each of the different blowoff tops varies somewhat from one to the next, but the common thread among them is that the slope of the decline after the top is very much symmetrical to the slope of the advance on the way up.
Chart #2 compares the current gold price top to the blowoff top of Aug. 2, 1993. Chart #3 shows a comparison to the Feb. 5, 1996 top. These comparisons allow us to see that the chart structures leading up to the blowoff top were similar to the current structure in both cases. It is reminiscent of the way that a pole vaulter traces out his steps beforehand on the runway, so that each time he approaches the vault the steps are nearly the same.
Most notable is the hesitation structure which formed during October and early November 2005. It closely matches a similar choppy sideways structure that formed in May and June 1993, leading up to that final Aug. 2, 1993 top. It also resembles another choppy structure which formed December 1995 ahead of the final run up to the February 1996 top in chart #3.
In each of these cases, the selloff which followed was very severe. 1993's example saw a quick downside hit, perhaps too quick because it exhausted all of the selling pressure in just a couple of months. That selloff still erased nearly all of the gains that the gold bulls had needed 5 months to build, and did so in only a two month decline.
The 1996 blowoff top also saw its rapid drop immediately after the price high, losing about 2/3 of the magnitude of the rally in just 6 weeks, but then proceeding to give away the rest of it and more over the months that followed. In that 1996 case, the more gradual selling kept the selling pressure from washing out all at once, which kept the downtrend going for longer.
If the 2005-06 instance is like either of those prior examples, then we can count on a huge decline between now and mid to late January. We have already seen a big price drop in just the last two days, but that is just a down payment. To erase the entire run up to the blowoff top would mean a return to the $420/oz area. That's not a prediction or an objective, just a statement of how much more downward movement is yet to be done to completely erase the run up to the blowoff. Erasing the run up to the blowoff is the mission of the post blowoff decline.
Now, if you don't care at all about gold prices, or gold as an investment, then you have probably already quit reading this by now. But just in case you are still hanging on, waiting for the "so what" moment of insight, then this final chart (#4 below) is what ought to make you care. It compares the monthly cash price of gold to the 3-month T-Bill yield. The difference is that we have slid the gold price pattern forward in this chart by 15 months, in order to show how gold acts as a leading indication for short term interest rates. Gold actually serves as a leading indication for inflation, but short term rates respond to inflation which is what makes this relationship work.
The rise in gold prices that we have just seen has not yet been fully reflected in short term interest rates. Certain members of the FOMC might think that they are almost done raising the Fed Funds Rate target, but they are going to realize in 2006 that inflation pressures compel them to continue raising short term rates further than they thought.
We may not see the equivalent magnitude of blowoff in short term rates that we have just seen in gold prices, but the upward pressure on interest rates should continue for about the next 15 months. Blowoff tops in 1984 and 1993 saw corresponding rises in short term rates, even though the gold uptrend was relatively short-lived. The 1996 blowoff top which we show for comparison above was actually fairly small in terms of gold price movements, so its effect on interest rates was much more muted.
The Fed erred in early 2000 by thinking it was smarter than the market, and trying to fight inflation which was not yet evident but which was thought to lie "over the horizon". Once they realized their mistake, they had to overcompensate by drastically cutting rates all the way down to 1%. Those low rates, and the ponderous rate at which the Fed has been "removing policy accommodation" have had the result of creating the tremendous amount of excess money that has been driving gold prices upward. That excess money will gradually get converted into price inflation over the next 14 months, to which the short term rates will be rising in response.
Bottom Line: The blowoff top we have just seen in gold should mark the end of the up move, and now the expectation is for most of those gains to be erased over the coming weeks and months. Inflation and rising interest rates will still be with us for another 15 months, in response to this gold spike. Resist the temptation to buy gold as a hedge against that coming inflation, as that opportunity has already passed.
[Normxxx Here: Now you see why I said to hang on but buy put options; you can never tell whether Gold will just crash again, or turn around and go back up at something consideraly short of $420. ]
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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» gadget767 - Re: Blowoff Top in Gold
In response to Blowoff Top in Gold posted by Normxxx:Norm, this view of the outlook for gold seems quite opposite to what I recall of your thoughts...what do you think of this view? It seems reasonable except for the fact that, as you and others have noticed, there seems to be something quite different about this particular move in gold prices.
-- posted by gadget767
» Normxxx - Re: Re: Blowoff Top in Gold
In response to Re: Blowoff Top in Gold posted by gadget767:Unfortunately, it's not necessarily all that different! Gold can move in enormous swings; it's a reason you can't just B&H gold, unless you have a strong stomach and/or have managed to pick up Gold at or below its average mining price (somewhere north of $300, today; about $250 before the present move began).
For a variety of reason, I do think it's different this time, and that LT is up (but first we have to get past ST and IT). If we go into a deflationary crash (very possible, given our enormous debt load) first, we could easily get to $420 or thereabouts on the next swing down. Maybe even without an actual crash. (And, I am expecting such a crash, probably sometime around 2009/10.)
The best strategy is to just accumulate LEAPS— calls on the way down; puts on the way up. Probably a good pivot point is around $510; puts above $510 and calls below it. But don't rush; otherwise you could run out of money well before the move down completes. And, don't bet the farm; remember, Gold can languish at the bottom for years— at which point you will have to be able to cash in your puts for a profit (including covering the cost of your worthless puts and calls). Again, use several mining companies and try to factor in their individual potential (e.g., I think NEM is undervalued at this point, so calls would be preferred).
Otherwise, you can wait until you think gold has bottomed; remember, gold makes a shallow bottom (could be that 'handle on the cup'), so there is usually not the rush to buy gold at the bottom as stocks. but buy judiciously; don't be greedy, if you buy on the way up early on of an enormous move, why worry about squeezing out the last possible cent? Always sell "too early" and buy "too late." On the way down, no asset is so cheap it can't get cheaper— all the way to zero! Of course, gold will always finally bottom in the region of its mining price.
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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» permabear - Re: Re: Re: Blowoff Top in Gold
In response to Re: Re: Blowoff Top in Gold posted by Normxxx:I took some profits for the first time in my gold position today. I feel like gold is at an inflection point right now hovering just above $500. The spike to $540 was beyond a doubt an overbought condition. Whether the correction to below $500 and now holding just above it is a sign of a blowoff top for an intermediate or longer term, who can say. My sense is that it's just a correction in the longer term secular bull market in gold. Thus I'm still holding the majority of my gold position for the longer term. I still believe that the dollar is going to crack at some point. I still believe the economy is going to crack at some point. But even if both are true, if the American and world economy slow or go into recession, is that bullish or bearish for gold??? It could go either way. Asset prices all around may tumble, including stocks, real estate and commodities. Or investors, central banks and hedge funds may go to gold as the safe haven. I just don't have enough confidence in any position to ride out all of the possibilities without grabbing a little profits at this point in time. I always said I would learn a lesson from the NASDAQ meltdown and take some profits when I've got them. Taking some profits in gold now is a good way to apply those lessons... even if gold shoots to the moon tomorrow.
-- posted by permabear
» Normxxx - Re: Re: Re: Re: Blowoff Top in Gold
In response to Re: Re: Re: Blowoff Top in Gold posted by permabear:All very well; and very astute. But exactly what permanent store of value do you plan to keep your "profits" in!?!
-- posted by Normxxx
» permabear - Re: Re: Re: Re: Re: Blowoff Top in Gold
In response to Re: Re: Re: Re: Blowoff Top in Gold posted by Normxxx:All very well; and very astute. But exactly what permanent store of value do you plan to keep your "profits" in!?!
I sold some of my gold mutual funds in my 401k account and temporarily parked the funds in a safe short-term bond fund. I'll take 4% while I wait to figure out if and when I want to be more aggressive in something else. My favorite investments right now outside of gold are foreign bond funds, Pimco funds and floating rate funds, but I'm already well diversified in these already. Not confident enough in energy to go there right now, so a short term bond fund seems about the most practical place to put new money right now.
-- posted by permabear
» Kirk - Gold & Silver Charts
.Gold & Silver Charts
Gold Chart
<img src=http://stockcharts.com/def/servlet/Sharp...>
Silver Chart
<img src=http://stockcharts.com/def/servlet/Sharp...>
Will the blue lines give support?
As of 12/18/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 194% while the S&P500 only up 14%!!! & NASDAQ only up 3%!!! (my portfolio beta is roughly equal to that of QQQQ.)
For 2005, Kirk’s Newsletter Portfolio is Up 13.2% YTD vs. QQQQ up 4.2% YTD vs. DJIA Up 0.9% YTD vs. S&P500 Up 6.2% YTD
-- posted by Kirk
» Normxxx - Re: Gold & Silver Charts
In response to Gold & Silver Charts posted by Kirk:Will the blue lines give support?
Hard to say; but probably not. Gold is a very international commodity, and its "support lines" differ substantially in the different currencies, especially when those currencies are all moving fairly widely against each other. Also, especially true when international interest in gold has materially picked up, as now.
It's safer not to rely at all on "support" and "resistance" in gold. Sometimes they work; more often, not.
______________
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
______________
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» SteveT - Golden Opportunity?
By ROBIN GOLDWYN BLUMENTHAL
CAN ANYTHING BE as mesmerizing as gold? the yellow metal has been squarely in the spotlight for the last couple of months, thanks to a dizzying run-up and an equally swift reversal.
Swings like that -- the price zoomed from $459 an ounce in early November to $528 on Dec. 12, then plunged to $492 in just a week -- aren't uncommon in the wild world of gold. But for investors who take the long view (and perhaps some Dramamine), gold could pay off handsomely over the next few years, and possibly into subsequent decades. In other words, we may be in the early stages of a powerful bull market in bullion.
With the economy awash in liquidity following several years of low interest rates, gold holds clear appeal as a place to stash cash, safe from the ups and downs of currency markets. Its allure will only grow if inflation, now quite tame, begins to stir again, as the Federal Reserve evidently fears.
Meanwhile, both institutional and individual investors are able to enter the market much more easily than in the past, thanks to the rise of exchange-traded funds specializing in gold. The largest such fund, StreetTracks Gold Trust, has attracted nearly $4 billion in just its first year. Such instruments are adding still more support to gold prices.
It's true that gold already has doubled since 2001, to about $500 an ounce. But "commodities are an asset class for the first time in history" -- something hedge funds and other investors can no longer ignore, says Barron's Roundtable member Marc Faber, an early bull on gold. "I don't think this is a late-cycle movement," he adds, noting that commodity cycles are typically long -- from 45 to 60 years from peak to peak. The last peak was in 1980, meaning the next one could still be at least 20 years away.
Faber, a Hong Kong-based money manager, points out that in comparison with oil or to the Dow Jones Industrial Average, the price of gold is still relatively low, with about 20 ounces of gold needed to match the level of the index. Typically, gold is considered expensive only when the ratio drops below five. That suggests there's plenty of room for gold to rise, in either a bull or bear market for stocks.
There have been myriad theories for the surge in the misunderstood metal, which is variously described as a currency, a commodity, an inflation hedge and an asset class. Each theory -- from increased buying by smaller central banks, to foreign petrodollars diversifying away from dollar-denominated investments, to hedge funds chasing a hot chart, to jewelry demand from developing countries -- has its appeal. And depending on the investor's perspective, each makes some sense.
But pinning down the real explanations is anything but easy.
"Most people on Wall Street have a very strong opinion on gold, but very few people know what they're talking about," says Trey Reik, who runs Clapboard Hill Partners, a long/short equity fund that focuses on mining shares. "The fact is, you don't know [the reasons for the spike] until after the peak and you see how it unwinds."
Certainly, eager speculators have played a role in the big run-up. "Investors have been scrambling to find anything they can bid up in price," says Peter Perkins, a global investment strategist at BCA Research.
The level of speculation has led some, including Reik, to predict a price pullback, perhaps to $480 an ounce, before the longer-term bull market plays out. But James Turk, founder of GoldMoney.com1, a well-regarded Internet site for buying and selling gold, expects prices to top $850 an ounce next year. He's worth listening to: In the fall of 2004, Turk correctly forecast that gold would break $500 in 2005.
Turk sees the move above $500 as "an international buy signal" that confirms for investors that "this move is for real." He notes that gold has been rising against all of the major currencies, something that hasn't occurred since the 1970s, the start of the last major bull market in gold. He points out that in current dollars, gold's all-time high of $850 an ounce, reached in 1980, would be $2,200.
George Milling-Stanley, manager of investment and market intelligence at the World Gold Council, a group of leading mining companies, cites some other factors boding well for gold, including persistent geopolitical tensions and the return of at least a fear of inflation. Gold is a sensible guard against inflation because it's the only form of money accepted worldwide that's not tied to the fate of any country's economy.
For the long term, there's also anxiety over the federal government's burgeoning debt load. U.S. government debt ballooned 27% in the past five years, to $4.62 trillion. At some point, Faber and others suggest, the unthinkable could happen: America could default on its debt, causing a stampede to gold. Faber thinks the price will eventually exceed $3,000. Yes, $3,000.
Of course, the economic winds could shift. If the U.S. were to get its financial house in order and dramatically reduce its debt, or if there were unforeseen strength in the dollar, gold would almost certainly reverse course. But gold bugs are hardly counting on that.
FOR INVESTORS WHO want to join the party, there are several ways to proceed. Faber recommends buying physical gold and holding it in a safe-deposit box in a gold-friendly country such as Dubai, Switzerland or India. "You buy gold to some extent as insurance for the worst case in the world -- hyperinflation or financial collapse," says Faber. "I don't want to have any problems of being right on gold and wrong on having done some speculative transactions that can't be settled in the end."
For those who don't want to actually own the commodity, the alternatives include trading futures contracts or buying an exchange-traded fund -- vehicles that are underpinned by gold and move in line with gold prices but trade like stocks. In addition to StreetTracks (ticker: GLD), there's the iShares Comex Gold Trust (IAU).
Reik figures that once gold prices blow off some steam, the StreetTracks ETF will be the best way for most individuals, as well as institutions prohibited from owning futures, to participate in the longer-term bull market.
The StreetTracks ETF, which was trading recently at $50.14 a share (each share is backed by one-tenth of an ounce of gold, which the sponsor buys and stores in a vault), would probably double if gold were to go to $1,000, while the stock of Newmont Mining (NEM), a gold-mining company, could triple or quadruple, says Reik. But an ETF doesn't contain the same exploration or depletion risks.
"Gold mining is an inherently very difficult business, and there are very, very few companies that ever do it successfully or profitably," says Reik. "For the average guy, there's no question it's much less fraught with peril to own gold itself."
Another way to invest in a stock based on precious metals is Central Fund of Canada (CEF), which holds gold and silver but has no operations and no management fee. It's up 16% in the past year.
NEXT ON THE RUNG of risk would be buying shares in a gold mutual fund; such funds hold shares in mining companies. "We don't think it's the best asset class to invest in, because of the volatility" and high expenses in some funds, says Morningstar gold-fund analyst Karen Wallace. The funds often charge 1.67%, versus 0.25% for an ETF.
Wallace points out that in the past five years, the average gold fund has risen about 30%, while the Standard & Poor's 500 has fallen 0.57%. But she thinks shares in the funds are now fully valued, and that the funds are too volatile. Instead, she recommends other hedges like inflation-indexed bonds or real-estate-investment trusts.
For those hardy souls who still insist on gold funds, Wallace has identified two with relatively low expenses and good performance records: the American Century Global Gold fund (BGEIX) and the Vanguard Precious Metals and Mining Group (VGPMX).
Dennis Gartman, editor and publisher of the daily Gartman Letter, also likes ETFs, but suggests that investors with greater appetites for risk at least consider some stocks. He's partial to big companies like Newmont or Barrick (ABX), which just reached a friendly takeover deal for Placer Dome (PDG).
"We know their managements, we are comfortable with their decisions and we savor liquidity above all else," Gartman says.
But gold stocks are unquestionably controversial. Gold-mining companies "are all overvalued at this time" based on discounted cash flow, says Parvathy Krishnan, an equity analyst at Morningstar. On a 30% or so pullback, however,she would favor Barrick, Royal Gold (RGLD) and Freeport McMoRan (FCX), whose primary business is copper, and Goldcorp (GG).
"A lot of [gold-mining] companies are having difficulty," says Frank Holmes, CEO of U.S. Global Investors, which runs mutual funds. He notes that production costs have risen and it's been difficult to find reserves. "The mathematical odds are so much against you, you have to be very selective." Moreover, investors need to be aware of the political risks of owning shares in gold-mining companies; the mines are often in developing countries unfriendly to capitalism.
Holmes advises investors to evaluate gold-mining shares on three metrics: growth in reserves, growth in production and growth in cash flow. "The more massive the reserve growth, the faster the stock takes off." He's partial to Goldcorp, which has been on a tear, and he holds more than 10% of Northern Orion (NTO), a copper and gold company that trades at five times cash flow, compared with a peer-group multiple of 12.
Clearly, if investors can stomach the risks, the rewards can be substantial.
"During the 1930s, investors made over 500% in Homestake Mining, during one of the worst depressions in history," wrote Larry Jeddeloh in the Market Intelligence Report early this month. "What happens in this decade if the economic outcome of years of overleveraging, fiscal irresponsibility, reliance on foreign capital and a debt-strapped consumer is that the authorities decide to inflate the whole problem (which is what I think they must do)? Where does gold go then?"
Gold bugs certainly think they know the answer. It may be time for others to join their ranks.
The Bottom Line:
Gold could exceed $800 next year, say some savvy pros. The easiest way to participate is through StreetTracks Gold Trust, an ETF that's pulled in $3.9 billion in just a year.
E-mail comments to editors@barrons.com
URL for this article:
http://online.barrons.com/article/SB1135...
Hyperlinks in this this Article:
http://www.GoldMoney.com
-- posted by SteveT
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