Wednesday, June 24, 2009
I Think Gold has Bottomed
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I think the bottom for Gold is already in at around $913-$914/ounce in overnight trading yesterday (6/23). I think it's time to go back to $1000/ounce and shoot for new nominal highs in the Gold price. The plunge in the stock markets that is about to occur should help fuel the rise in the Gold price as people flee for safety.
A new phase in the credit contraction cycle has begun and Gold likes credit contractions. So does Gold royalty company Royal Gold (ticker: RGLD). An economic depression has already begun, but such events are processes, not "wake up one day and everyone's in a soup line" concerts. Government insistence on piling public debt on top of bad private debt makes sure that we are headed for a replay of the Japanese lost two decades experience (one decade down, one to go...).
In such an environment there will be trading opportunities, but buy and hold for stocks is dead for another decade (at least!). The only buy and hold sector is Gold (or fiat cash if you insist on hoping for the best) and the Gold mining sector. Do not put new money into senior Gold stocks yet, as lower prices will occur later this summer.
We will certainly have a cyclical bull market (or two) during the remainder of this secular bear market, but the current cyclical bear market ain't even close to being done in time or price. We are at a P:E ratio of greater than 100 right now when you strip away all the modern "tweaks" introduced by Wall Street shills during a 20 year stock market bubble that has finally popped for good as a generational, not cyclical, event. Let me repeat that: we are now at the highest PE ratio for stocks seen in any of our lifetimes at a time when the economy has entered a full blown economic depression. Tell CNBC and Cramer to put that in their green shoots pipes and smoke it!
If you don't like going short, there is nothing wrong with a cash position - a 0% return on your money is good compared to a loss. The US Dollar is not about to collapse in the next month, but a few banks will. Deflation first, then inflation.
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10 comments:
concur
i say gold bottomed
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From:
Duncan Robertson
Isle of Skye
tel 01471 833 313
Adam,
Do you think the $USD will drop or increase. The current price is around 80. Though it looks like it has topped, I've a feeling that the USD would make a double bottom and then take off, bringing down the gold sector. I've seen this correlation before and I'm seeing it now...
So far, dollar running higher with gold as you said they would in a previous post. Gold shares, so far, also following in the same direction. So far. Good call, Adam.
Adam,
Very insightful posts!
I you mention that in this downturn credit contraction will lead to higher gold prices. I think you also believe that gold stocks will rally, but most likely will not confirm new highs in gold and we will have another correction in gold stocks (and gold?) later this summer which will present a good buying opportunity.
Here are my questions:
1. I guess you believe that the direct correlation between gold and the stock market that we have seen over the last year will be over. Do you believe that people will no longer sell gold when there is margin calls and liquidity crisis?
2. If gold is going to 1000, even if gold stocks do not rise as much, we are likely to see them rise until they break. So why not use this as a short term trade?
Thanks
Adam: I've seen you mention RGLD many times, a gold royalty comapany (I'm not even sure what that is). You seem to separate it from the rest of the gold stocks. Can you explain the differenc(s)? I infer from your posts that you believe that RGLD would not take quite the hit as the rest of the gold stocks during a severe downturn in the market. Why is that and is there any reason why you are not suggesting buying that stock (RGLD) now as gold seems to be in the early throws of an assult on 1000 and a correction in the markets imminent?
Frank Barbera has a good article on the possible market movements based on the 1938 model (much like Bob Hoye):
http://financialsense.com/Market/barbera/2009/0623.html
"In all of the prior stock market history going back the last 100 years, the ‘best-fit’ analog to a ‘non-new bull market scenario’ was the market rally of 1938 which followed the dire 1937 collapse. While the table above shows some of the recent bear market rallies from 2000-2002, and even 2007/2008, none of these compared well in amplitude to the recent market experience. Instead back in 1938, the DJIA bottomed on March 3, 1938 at a reading of 97.46, and then rallied for 16 weeks up to a high of 144.91 on July 25, 1938. This was an advance of 48.69% in 16 weeks. That compares quite closely to the recent S&P gain of 43.40% in the 14 weeks spanning the March 6th low at 666.79 to the recent June 12th peak at 956.23. Using the 1938 price action as a guide, the high of July 1938 produced a 9-week correction that saw the DJIA decline by 10.76% to a low value of 129.31 the week ended September 26, 1938. This downside correction was then followed by a second sharp advance which recorded a peak at 158.41 on November 14, 1938 (seven weeks duration), and a near double top peak on December 31, 1938 (14 weeks duration) at 154.76.
Using the same figures to today's situation, a 10.76% decline off the recent S&P peak at 956.23 would yield a retracement down to 853.33 with a low due in by the week ended Friday, August 14th. This could then be followed by a rally to a peak near 1040.46 lasting approximately 10 weeks for a peak in late October (10/23/09) 2009. Of course, no historical analogy is ever exact, but at least in the case of 1938 some of the background technical and fundamental factors seem quite similar in both time and amplitude."
If inflation follows deflation, then a possible timeframe would be in June 2011 (based on Martin Armstrong's 8.9months market cycle and expected peak in US dollar strength).
http://www.scribd.com/doc/15475184/Understanding-the-Real-Economy-51509
http://www.scribd.com/kzuur58
Btw, when do you expecte the next cyclical bull market to start?
If based on the 1929 to 1932 model, the current bear market will bottom in 30 months or by April 2010.
Chandu-
Expect rise in USD and Gold together.
Sdanesh-
We are getting later into the liquidation phase and this will still put pressure on Gold but Gold is cash and thus it will stay nears its all time highs like any strong currency.
You could trade Gold stocks, but if you're a trader, why not go short other things? Nothing wrong with a quick bull trade here on Gold stocks with tight stops.
Gallo-
Good point on RGLD - I was pounding the table for people to buy before you got here. It's still a good buy actually, just not as good as 1-2 months ago.
Vorlon-
I just can't see stocks going far above their 200 day moving average, which is required for the 1937-1938 scenario you describe. I think the top for the general stock market is in for the year. We'll see...
Yes, I am thinking spring 2010 might not be a bad time to bottom for general stocks.
Thank you again, Adam. I'm sure I'll have more!
Thanks Adam,
I think I speak for all of us saying that we really appreciate you taking the time to answer our questions.
I have been in the gold market since 2003. I have read many people before, have listened to many webcasts and subscribed to most contrary newsletters at one time in the past. I have to say you are of of the best. Please keep writing.
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