Monday, December 7, 2009
Gaming the Gold Correction
Since, unlike many commentators, I don't believe Gold has shown evidence that it is definitely in its bubble stage or that Gold has topped for this cycle, I am still playing this as a routine Gold and Gold stock price correction. I am rabidly bullish on Gold just like the non-Anglo central banks of the world.
Two things I watch on a correction like this - price and time. I think 1 week is a minimum, so I won't be rushing in to buy before Thursday of this week. I would also like to see us get within spitting distance of the 50 day moving average for the Gold price. Keeping it simple is the best strategy when trying to time a strong bull market. Pullbacks are for buying and being too early is not a problem in a strong bull market that will bail you out of any timing mistakes.
I am interested in getting back in precisely because I sold some junior miners that had gotten ahead of themselves and because I sold some covered December calls on my 2011 Royal Gold (ticker: RGLD) LEAP call options (these covered calls have already been closed for a quick profit). So, now I have some cash to invest and I am patiently waiting to put it back to work. My core physical Gold (with a little physical silver) position is never traded and won't be until the Dow to Gold ratio is 2 or less.
Anyhoo, everything is progressing as expected and there has been nothing unusual or out of the ordinary so far. A few more days and a few more percent and we're there. Now, it is true that this correction could last 4-8 weeks instead of 1 or 2. In fact, watching how Gold versus Gold stocks correct may be rather instructive if the correction lasts this long. If the Gold price correction is steeper/deeper than the Gold stock correction, then Gold stocks will likely outperform on the next leg up (and vice versa if the Gold price correction is shallower). I think the Gold stocks are set to outperform on the next leg up, so I am looking for them to have a shallower correction if a longer duration consolidation occurs here, but only Mr. Market knows for sure.
What would make me nervous? A Gold price below $1050/oz. would make me nervous over the intermediate term, as would an immediate rise higher in the Gold price from here (Gold needs a rest to make this move sustainable). Otherwise, I am wildly bullish on Gold and think this is a necessary correction before an assault on the all-time highs and a bum rush towards $1500/oz. I am watching several individual juniors and seniors as well as the GDXJ and GDX ETFs. I haven't fully decided how I am going to buy into this bottom, but I am thinking I will use options to get a little bit leveraged with some of my speculative funds while continuing to hold a basket of individual small cap Gold miners and long term call options on RGLD.
The U.S. Dollar could certainly rally a little further and I wouldn't mind at all as someone who gets paid in Dollars. All fiat currencies are sinking as confidence in the global monetary system deteriorates. A Dollar rally won't stop this Gold bull, although a strong rally will make it pause when one considers the Gold price in U.S. Dollar terms. The paper currency fluctuations against one another haven't stopped Gold from making NEW HIGHS IN EVERY MAJOR GLOBAL CURRENCY AT SOME POINT DURING 2009 and I don't think 2010 will be any different.
I will also be very interested to see what silver does after this correction. If silver breaks out to new highs over the next few months, the entire commodity secular bull market remains intact in my opinion, even though I previously thought it was over. Remember that silver often lags Gold on an intermediate-term bull run until the last few weeks and then silver tends to do a mini-parabolic move to make new highs. If that's what we're heading for, I think silver makes it to $30/ounce and Gold to $1500-$1750/ounce.