Gold Miners Making More Money?

Mining is a tough business and profits are rarely easy to come by. I learned the concept of the "real" price of Gold from Bob Hoye at Institutional Advisors. This concept ignores the nominal price of Gold (i.e. ignores the currency effect, which is difficult for paperbugs but easy for long term Gold bulls) and focuses on the price of Gold relative to the price of other commodities as a ratio. Mr. Hoye has his own proprietary index, but as we all stand on the shoulders of giants before us, I use my own proxy of this ratio by dividing the Gold price by other commodities indices (I typically use the Continuous Commodities Index [$CCI]).

When the ratio of the Gold price divided by a basket of commodities is rising, the "real" price is rising. This is irrespective of the nominal price. In other words, the price of Gold in U.S. Dollars could be falling while the "real" price is rising. The concept is a valid and important concept for two reasons.

First, wealth is relative. If Gold goes to $2000/oz but oil goes to $10,000 per barrel, then Gold investors are poorer if they need to use energy/in energy terms. Deflation in Gold terms has been here for a decade - it is only when paper currency is introduced into the equation that things get confusing. Let's say Gold starts today at around $1175/oz and a house in your neighborhood costs $200,000 today. In a year, if Gold falls to $800/oz (not saying it will) and the house in your neighborhood costs $100,000 at that time are you richer or poorer? Well, both! In nominal terms, you are poorer. In other words, if your main goal in life is to accumulate as many pieces of paper issued by the unconstitutional, non-federal, for-profit federal reserve corporation, you are poorer. However, if your main goal is to buy a house some day, you are wealthier in this scenario.

As a strong believer in Gold during the Kondratieff Winter cycle that we have entered (it ain't over yet, trust me), I believe paper currencies will also deflate relative to Gold rather than gain value relative to Gold as people like Bob Prechter think. It's a subtle but important investing concept when one looks over the longer term horizon and tries to protect wealth. Because I believe the deflationary forces in the economy are strong, I believe it is possible that U.S. Dollars can be significantly devalued and yet gain in value relative to real estate and general stocks. But holders of any of these asset classes I believe will lose wealth in Gold terms.

In other words, I believe Gold will buy more paper federal reserve notes (i.e. nominal price of Gold will rise), more real estate and more general stocks in the future. This is not a mainstream concept, as it gets to the core of what true money is likely to be this cycle during the continued economic and debt storms the global economy is facing. Confidence in the U.S. system and its central bankstaz will decrease further as this secular economic crisis proceeds. This is why creditor central banks of the world are now net buyers of Gold - they want to take their excess paper reserves and convert them into a reliable store of wealth.

Such a trend change by central bankstaz in buying Gold is not a brief blip. This is not a "get rich quick" trading scheme happening here. This is a secular shift that will continue for some time to come in my opinion. China is not telling their population to buy silver and Gold and making it easy for them to do so because they want their people to lose their hard earned money. Accumulation of U.S. Dollars over the longer term is now seen as relatively unwise. You may buy this concept or not, and it is not they key point of this discussion.

The second reason the concept of the "real" price of Gold is important relates to the Gold miners. Producing Gold miners can make more money when expenses are decreasing relative to the price of Gold, regardless of what the price of Gold is doing in nominal terms. Like the Wal Mart model, you can cut prices and make higher profits as long as your costs are falling even faster than prices are. The most obvious component of the cost equation is energy, as mining is an energy intensive business. If Gold drops 30% but oil drops 70% (like last fall, for example), Gold miners can make higher profit margins (again, all things being equal, which they are not for individual firms). Higher profit margins can translate into higher profits, which can (not does, but can) translate into higher dividends and/or higher stock prices.

Now, this concept can be attacked and is not fool proof but it gets to the heart of how Gold miners make money. This is why a deflationary environment is more consistently bullish for Gold miners than an inflationary one. Think of the 2007 to early 2008 period when oil was going ballistic - even though the Gold price was rising beautifully towards $1000/oz, oil was rising even faster and further and many Gold miners were unable to increase profits during this time. During a secular credit contraction (again think in Gold terms, not in terms of paper currency units), commodity prices fall relative to the Gold price over long periods of time.

Recent short term action has been bullish for the Gold miners in this regard. Here's a 2 year weekly candlestick chart of the Gold price divided by the CCI commodity index ($CCI):



If this is an early stage rise in this ratio (I think it is, but only Mr. Market knows for sure), it is bullish for the fundamental underpinnings of a significant continuation of the new cyclical Gold stock bull market that began in late 2008. Again, this is fundamental data, not a trading signal. In fact, the lag between a rising Gold:$CCI ratio and rising Gold stock prices can be significant and ironically, a ratio of Gold to oil or a basket of commodities is often rising at a time when the stock market is not doing very well. Gold stock charts should be evaluated and traded based on their own technicals, not based on the chart of the Gold to commodities ratio. However, a rise in this key Gold ratio indicates that the fundamentals for Gold stocks are improving. Because investors are forward looking, it also suggests that fundamentally, Gold in the ground for Gold explorers and developers may be valued higher based on its higher profit potential.

When looking over the longer term, one can see that the secular turn in the Gold:$CCI ratio occurred in the 2001 time frame and appreciate just how big a move happened in the Gold to $CCI ratio in 2008 (20 year monthly log scale candlestick chart of $GOLD:$CCI follows):



The massive spike that occurred in this ratio during the Great Fall Panic of 2008 (which the feds and government were unable to prevent despite all their market intervention leading up to this point) has not yet been fully priced into the Gold miners. If it was, major Gold mining indices would be at significant new all-time highs. If this ratio can maintain at current lofty levels (let alone go higher, which I think it will) for the next few months, I believe the Gold mining sector is going to have a volcanic explosion to the upside in 2010 regardless of what the general stock market does.

Martin Armstrong May Need Your Help

See this link from Nathan's Economic Edge (a great site) for info and details:

http://economicedge.blogspot.com/2009/11/martin-armstong-forced-to-move-to-high.html

Please help if you can spare a few minutes. If you don't know who Martin Armstrong is, he is basically a financial and market whiz and market and economic historian into cycles and cycle theory. You can read some of his many articles here.

The bottom line is that he is a victim of the system and his voice is an important one for those seeking to learn more about markets, regardless of what you think of him personally.

Thanks in advance!

Dueling Parabolas?

David Nichols does some interesting work on fractals as they relate to Gold. Here's a link to his website if you're interested in learning more. I am not a subscriber and have no relationship with him but have read some of his free articles on the web and at his website over the past few years.

Mr. Nichols sees Gold as having entered a parabolic run that may end as soon as early 2010. I have no idea if he's right or not, but the work is interesting and in my opinion is along the same lines as Elliott Wave theory. The rational market hypothesis is obviously worthless, so it is helpful in my opinion to seek out other explanations for market movements.

I was noticing an interesting parallel on the current monthly Gold chart and the NASDAQ chart leading up to its 2000 climax and that the similarities were a little uncanny (the NASDAQ is one of Mr. Nichols' classic examples of a parabolic run). Here's the two charts I created to show the similarities if these two runs end up being similar. First a 10 year monthly non-log scale candlestick chart of the Gold price ($GOLD):



Next, a similar chart of the NASDAQ ($COMPQ) thru the end of 1998:



Kind of similar, no? Here's what happened next in the NASDAQ:



The main problem with this pattern, if this is what's going to happen to the Gold price (I don't claim to know), is that it is awful hard to pick the top in real-time in such a pattern. And if you hold on too long, you're not going to like what happens on the back side (think NASDAQ 2000-2003 or oil last year after the top was in). Those who are married to Gold and who are die hard into the politics (I like the politics, too, but I'm in this to make money) don't like to hear of such talk, but Gold did a similar thing in 1979 and then collapsed after the early 1980 peak.

If this pattern is what's going to happen, that would put the top for Gold in the $2400-2500/oz. range in the first half of 2010. I certainly wouldn't be disappointed in such an outcome. Let's just say that if the Gold price chart keeps tracking the NASDAQ in the same uncanny manner, Gold investors will have to be prepared for a similar resolution. Such a pattern would also create a significant opportunity for shorting Gold on the backside of its price collapse (I know, I know, it's heresy to say such a thing at a Gold site).

Also, keep in mind that Gold stocks will likely peak after the Gold price (and after the Dow to Gold ratio bottoms) and may actually have one of their strongest bull moves after the Gold price peaks if 1980 is a decent guide. As an example of what was typical in the senior Gold patch back then, here's a chart of Homestake Mining versus Gold back then (I believe I stole this chart from a piece by Frank Barbera a while back but I can't remember for sure):



And here are some examples that include junior mining shares (the following table was posted by a CIGA over at jsmineset.com not too long ago) - get ready to smile if you haven't seen this before:



Anyways, the "dueling parabolas" concept is certainly food for thought in my opinion. It's going to be hard to know when to sell Gold for sure. I know we're not close yet at $1200/oz, but once we get over $2000/oz, an exit strategy will be an important part of my investment plan as a long term physical Gold holder. The Dow to Gold ratio is my most trusted guide for this cycle, but once we get to 2, I don't know exactly how much lower this ratio is going to go (Ian Gordon at Long Wave Group has said before that he thinks we're going to reach 0.25 in this ratio!). I figure if I sell my physical Gold too early, I'll just be using the proceeds to buy Gold miners anyways, so I don't think I'll miss too much of the party if history is a reliable guide.

Bearish Visions

There are, in my opinion, some extremely strong warning signals being sent out by the markets right now. Every time we delay the inevitable by artificially supporting and bailing out markets, we create the set up for the next round of volatility. Governments cannot change the primary trend of the economy, they can only destroy the currency and destroy confidence through their irrational and dangerous acts designed to protect the few and screw the majority.

I think the bear market is resuming right here and right now. I think the next leg down will take us to scary new lows in the Dow to Gold ratio and likely in nominal terms as well. There are several signals telegraphing this imminent move for those inclined to pay attention in my opinion. Some of these are repeats from previous posts, so excuse the redundancy. This is my attempt at a unified discussion of the risks in the equity markets right now.

First, and very importantly, are the yields on U.S. government debt, particularly at the short end of the curve. The one year U.S. Treasury note exemplifies this scary trend well (below is a 30 month daily chart thru 11-25-09 close):



Even the 5 year U.S. Treasury bond broke down today (18 month daily chart thru 11-27-09 follows):



I have seen some stupid explanations for the moves in bonds. This is a classic flight to safety, so where's the fire? The big money that moves markets apparently sees what's coming next in the equity markets and they don't like it. Just like last year, the bond market is telegraphing the next wave down in stocks. Big money sells/distributes their equities to the public, escapes to the "safety" of government bonds, then magically the market starts to crumble on any bearish news and "buy the dips" doesn't seem to work any more.

Any other explanation for the move in short-term government bonds is designed to part you from your money. Inflation, deflation or both (I side with deflation when Gold is the measuring stick but have no idea exactly how the paper currency system implosion will play out), the stock bear market is NOT OVER.

Next are the warning signs from Japan, Greece, and some of the non-confirming U.S. sectors and indices. First, Japan, the basket case of the world (following is an 18 month daily candlestick chart of the Nikkei average [$NIKK]):



Japan is in much worse shape than the U.S. when it comes to public debt. However, the Japanese private sector may be nearly finished deleveraging and this is a positive to keep in mind for down the road. Why? Because a currency crisis/devaluation due to the chronic Japanese government incompetence and persistent quantitative easing may occur once the Nikkei bottoms. This could spur a massive rise in the Nikkei as the private sector takes its saved paper currency units out of the banks and government bonds and gets back into "risk" assets. Such a scenario is not for now - we're talking at least a year from now, maybe several years...

Greece, a weak link in the Eurozone economy, is also breaking down in not-so-subtle fashion. Following is an 18 month daily candlestick chart of the Greek stock market ($ATG) thru 11-26-09:



In the U.S., The Russell 2000 small cap index looks like it's starting to crack while everyone watches the S&P 500. Here's an 18 month weekly candlestick chart of this index ($RUT):



I also get an eerie sense of deja vu when I look at a long-term weekly chart of the Dow Jones Utility Average (10 year linear scale weekly candlestick chart thru 11-27-09 follows):



Other sectors that have not made recent new highs along with the Dow Jones Industrial Average include banks, financial services, insurance, commercial real estate, and the homebuilders. In other words, the FIRE (i.e. acronym for finance, insurance, and real estate) economy that defines the essence of the entire U.S. economy is not making new highs with the Dow right now. A narrowing of breadth in the market often occurs under the surface before a major top and I don't think this time is an exception.

Sentiment is back at an irrationally bullish extreme at a time when economic fundamentals have deteriorated further despite what you hear on CNBC (e.g., unemployment, banking system and federal/state/local government insolvency, real estate collapse, etc.). Courtesy of Market Harmonics, here's a chart of the Investors Intelligence percentage bears:



It may seem like everyone is bearish if you spend too much time on the internet reading kooky blogs like this one, but it ain't so. This is also evident when reviewing the equity put to call ratio ($CPCE). Following is a chart of the 20 day moving average (used to smooth out the noise in a daily plot) of the $CPCE over the past 3 years (remember that the lower this number, the lower the ratio of bearish bets [puts] to bullish bets [calls]):



The "dumb money" crowd (of which I sometimes am a card-carrying member despite my best intentions) has a very short memory. People think helicopter Ben can just guarantee everything and the stock market will keep rising as the dollar keeps falling. The dollar may keep falling, but that doesn't mean the stock market won't have another bear leg down! "Dollar down, stocks up" works until it doesn't. If you're a hard core inflationist and subscribe to this horribly misguided oversimplification of the relationship between currency fluctuations and risk assets, explain why stocks didn't go up all through the 1970s. The 1973-1975 bear market was the worst of the last 40 years until the 2007-2009 bear came along! You'll also have to explain why all the money/debt printing, bailouts and government guarantees didn't prevent the Great Panic of 2008 (does anyone remember the massive government interventions related to Bear Stearns, Fannie Mae, etc. that "saved" the market from collapse before it ended up collapsing anyway?).

And, finally, that brings us to Gold. Gold won't collapse. It had a vicious correction of 30% in the 2008 fall panic and then it was back up to $1000 a few months later during February. A quick sell-off is possible, of course, but Gold will weather this storm VERY WELL. How can I be so sure? Simple. Central banks are now net buyers in the Gold market at over $1000/ounce. When the hedgies puke, India, China, Russia and others will step up and keep a bid under the market. Central bank buying of Gold is a multi-year buying strategy, not a "make a quick buck by trading" strategy. The writing is now on the wall for the current global currency system and people know that Gold can be relied upon as a currency regardless of what happens to the Dollar, Yen, Yuan, Euro or any other paper debt ticket.

For those projecting shocking drops in the Gold price and a complete deflationary wipeout (a la the 1930s scenario), I would counter that this is highly unlikely for one reason: people don't trust the Dollar any more (as much as Americans would like to believe they do). The Dollar can rise some relative to other counterfeited fiat paper tickets, sure, but Gold will re-emerge as the premier global currency, not the Dollar. The Dollar has had its day in the sun and that time is past. A heavily indebted nation rarely experiences a shocking rise in their currency's value when the poop hits the fan (ask Iceland). I am not saying we can't have another "short squeeze" in the Dollar for a few months - we can and we very well may. But if cash is king during deflation and you're a deflationist, look to real money (i.e. Gold), not the IOUs of an out of control debtor.

In the 1930s, we were on the Gold standard while others left it (e.g., England, Switzerland). We were also a creditor nation rather than a reckless debtor nation. When other countries defaulted on their debts and Gold obligations/standards, money poured into the United States to hold our "good as Gold" Dollar and/or exchange their paper tickets for our Dollar so that they could then redeem those Dollars for Gold! When we defaulted on our Gold obligation in 1971, we sewed the seeds of our currency's destruction. Gold is the asset class at major new highs - not stocks, not commodities, not the Dollar, not real estate, not corporate bonds. You can look at this and call Gold a bubble, or you can recognize massive relative strength and a major secular shift when you see it. The secular Gold bull is just now starting to reach critical mass in my opinion, and I believe it will keep right on going regardless of what the stock market does until the Dow to Gold ratio reaches 2 (and it may well go below 1 this cycle).

Hey Gold Bug - Are You Feeling Panicky?

Because the paperbugs are going to have a field day over the next several days. The Gold correction has started with a vengeance. Look for paperbugs to provide Bloomberg with quotes on how the Gold bubble has popped, commodities are toast (as if that's relevant to the oldest global currency known as Gold), the Dollar is king again, blah, blah, blah.

This is a normal and healthy correction that has begun in Gold. If you haven't been here before, Gold corrections are not for the faint of heart. This one's starting out sharp and nasty. I think the stock bear has awoken from his/her slumber. Gold is different than the stock market. Gold is not just an anti-dollar play. Gold is a safe currency that yields the exact same as U.S. T-Bills (i.e. zero) but without the built-in depreciation risk.

Here are some "scary" corrections in Gold. First, from late 2005:



Here's one from late 2007:



Let me go out on a limb and predict the late 2009 correction. I'll say it will be about 9% or so over about 1-2 weeks or so (call me crazy!):



Now, let's put things in perspective with a 10 year log scale daily candlestick chart for Gold:



Corrections are necessary. The bull doesn't want you on its back. The paperbugs are going to be out in force trying to scare people out of their Gold positions, mocking Gold and speaking of bubble collapses from a simple multi-week correction that is a necessary part of any bull move. Corrections are buying opportunities. The Gold break-out past $1000 was not a joke in my opinion and not a head fake. Gold stocks are going to get whacked here transiently. This is an opportunity to buy lower if you're a Gold stock bull so that you can sell higher later. Don't be afraid, be patient and be ready to pounce on the Gold (or Gold stock) that others throw away in fear.

Special Thanks to Paul

For doing the work I don't have the energy to do right now. Mr. Paul has been updating the junior Gold mining spreadsheet I posted a while back (I have placed a permanent link on the right side of the site under the "links" section per his excellent suggestion). He has been doing more work on this than I have lately. There are still plenty of holes in this spreadsheet but this is starting to become a valuable "quick" way for me to evaluate a junior relative to others in the sector.

No promises on when (or if) it will ever be completed and how often it will be updated. No guarantees on any of the info in this spreadsheet, as it is all subject to change at any time. Blah, blah, blah...

Anyhoo, thank you, Paul!

Dubai's Turkey Day Surprise and the Panic of 1907

These two things are not related except in my own mind. Dubai has rattled the global markets with an admission that Dubai World may need a little more time to pay back some of its debt. This may be the spark to get the next leg down in the stock bear market going. What does this have to do with the Panic of 1907? Nothing, really.

However, I like the chart of this old Dow bear market as a crude road map or fractal-type pattern for the current ongoing bear market in U.S. stocks. The exact dimensions and timing are not as interesting to me as the pattern. I don't know why I like this pattern so much, but my hunch is that it's going to play out in a similar manner.

Here's a sliver of the chart of interest from that time (Dow Jones Industrial Average chart, credit given below):



And here's a 4 year weekly linear candlestick chart of the NASDAQ ($COMPQ) thru yesterday's close:



I think the NASDAQ (and other general U.S. stock market indices) is at a similar point in time compared with the 1907 chart pattern shown above. If I'm right, here's what happens next (following and initial Dow chart from thechartstore.com, a great site for historical data):



The stock bear market is not over. An event like Dubai World essentially defaulting on billions of dollars of debt would be just the type of thing to get markets into fear mode again. It seems like a fairly random and scary event, and such events are always used as an "excuse" for why the market went down again. The only people who could have seen something like this coming are those who have remained bearish all along. Bears are no fun to hang around with and they've been wrong for the last several months, but that doesn't mean they're wrong on the longer term "big picture." I am not currently positioned to profit significantly from a downdraft in the stock market, but I remain interested in shorting the stock market if a decent opportunity presents itself (I believe it will soon).

Gold's initial reaction to the Turkey Day chaos was good. I think people will increasingly flock to Gold once this bear market fires up again. Gold needs a brief rest, but it is the strongest asset class in the world right now and all surprises in Gold should remain to the upside. Happy Thanksgiving!

Gold Versus the State

It really is a war of this proportion. It really is the Gold holder versus "The State" when there is a paper fiat currency system in place. The U.S. Mint has suspended American Gold Eagle coin production AGAIN, citing rising demand (link here).

My comment from the last piece I did when the U.S. Mint pulled this crap (see the link here for a decent rant from a year ago) remains appropriate in my opinion:

Gold is an alternate currency. It competes with the paper promises of panicked politicians, which throughout history have yielded less than a junk bond and harbored three times the risk. Which investment do you think will hold up better going forward?

Since that prior rant over a year ago, Gold is up about 35% or so and our currency is down around 9% - and I don't even have a PhD in paper economics like Paul Krugman! I am an adult with an education, not a vapid 6 year old child. If demand is too high for American Gold coins, BUY SOME MORE FREAKIN' GOLD TO KEEP UP WITH DEMAND! This, of course, is the mandate of the U.S. Mint, but anyhoo...

Of course, anyone with the appropriate intellectual and analytical skills knows the high demand is not the problem for the U.S. Mint. The problem is that Gold ownership is anathema to a paper fiat regime, particularly in its later stages (i.e. towards the end of the road, as all fiat currencies go away and are replaced). If everyone starts clamoring for Gold and it's easy to get, then gosh darnit, fewer people will need to rely on the government for everything in their lives! This is bad for Big Government, Inc. - a menacing corporation that has shown a wonderful propensity for aggressive growth in any economic environment and regardless of whether democratic or republican "candidates" are in control.

Why does the U.S. government not want to make it easy for you to own Gold? Because Gold is the enemy of the fiat state. Don't believe me? How about Sir Alan Greenspan (see here for more info on this classic piece before Greenspan "sold out"):

...The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against [G]old. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the [G]old standard.

OK, so now we know what the past chairman of the federal reserve thinks about Gold and why it is the enemy of the state. Expect more artificial shortages to be announced by the U.S. Mint as this Gold secular bull market rages onward and upward. And make no mistake, the shortages are unequivocally artificial and intentional. Against the War on Terror? Then you're a terrorist. Against the War on Drugs? Then you're a drug pusher and/or user. Hold physical Gold over U.S. Dollars? You have (knowingly or not) become an Enemy of the State as it currently exists. Funding the bankstaz physical metal short position by buying the paper GLD or SLV ETF? Good boy/girl!

Gold is the money of choice in the "free" world. This process was intentionally subverted to benefit a select few. Gold is not always a good investment (there are times to be in cash [Gold] and times to invest in productive enterprises). Gold sucked as an investment from 1980 to 2000. But it is Gold's time now and you are advised to buy some physical Gold on the next correction to be held outside the realm of prying government eyes if you haven't already. It is not too late. Things will get worse before they get better and all global fiat currencies will be debased further before this secular stock and economy bear cycle is over.

The only safe cash is that which cannot be debased, which eliminates every national currency in the world right now. Once the Dow to Gold ratio gets to 2 (it may well go below 1 this cycle), it will be time to start looking around for other opportunities. Until then, join the dark side of the investment world and put on a tinfoil hat (they're quite stylish really...).

And Now, Back to Our Sponsor

Mr. Goldie. Mr. Gold, sir, can you show us what a short-term correction in the midst of a powerful bull market uptrend looks like?

Oh, that's right, you're doing it right now for all still watching to see:



And please remember the U.S. Dollar is only part of the story. How can I say that? Easy, take a look at this chart of the U.S. Dollar Index ($USD, the black and red candlestick plot) and the price of Gold ($GOLD, the thin black line plot) over the past 2 years:



The vertical lines with black dots on them delineate specific points in time for the US Dollar Index and price of Gold. Here are those data points in table format (rounding used to make a point):

March 2008: US Dollar Index 71, Gold $1000
February 2009: US Dollar Index 87, Gold $1000
September 2009: US Dollar Index 76.5, Gold $1000
November 2009: US Dollar Index 75, Gold $1165

So, in the last 20 months, the US Dollar has rallied roughly 5.5%. So, the Gold price should be lower, right? Well, it's up roughly 16% over that same period of time. All currencies are sinking and the sponsor of this sight, Mr. Gold himself, would like to remind you that he cannot be debased by apparatchiks or czars looking to seize more power (oops, I mean fix what's wrong with our economy by "stimulating it with other people's money"). The Gold bull is healthy and strong. It's way too early for people to be calling bubble on this Gold bull market - way too early. Central bank buying of Gold does not constitute a top in the market or a bubble, rather it is a marker of the pre-mania phase or middle of the secular bull market. India is not and never has been "dumb money" when it comes to buying physical Gold.

Once GDX and GDXJ are trading comfortably in the triple digit range and the Dow to Gold ratio hits 2, then we can talk about a bubble starting to form. Until then, the so called "contrarians" are just missing out on the strongest bull market in the world right now. Want proof? Here's the Gold price in a few different currencies over the past few years (following table stolen from goldprice.org):



Sure looks like it's a little more than U.S. Dollar weakness to me - call me a crazy Gold bug for using actual data and all...

;]

Perspective in a World Gone Economically Mad

Since up is down and left is right in an anchorless fiat currency world, one must keep a perspective on things. As a Gold investor, I am not exactly bullish on the U.S. Dollar. However, I also am not bullish on other international paper currencies, either. I wouldn't place faith in the Euro, the British Pound, the Swiss Franc, the Japanese Yen or the Chinese Yuan over the next few years. When the chips are down and the global economy falters, every country now seems to have an endless ability to create more debt and start the party up again - it's like watching synchronized swimming for the damned.

Assets are deflating relative to Gold. This is the missing link of the deflation/inflation game. Prechter is focused on the wrong currency. His theory has already been proven when Gold is used as the measuring currency. I know, I know, only freaky, crazy, tin foil hat-wearing, irrational, hunker down in the bunker Gold bugs could possibly think of Gold as money. I get it, paperbugs, I get it.

The promises of powerful men much smarter than I are obviously more reliable than a timeless piece of metal. Give men the power to create money out of thin air and they of course will be wise enough not to abuse it! Our society is so advanced that I couldn't possibly understand the ramifications of going back to a barbarous relic as the backing for our currency - only people of Paul Krugman's caliber really understand economics and they say it's a bad idea.

I guess this is because the most prosperous years this country has ever seen were on the Gold standard. I guess this is because the so-called "great depression" was on the federal reserve's watch, as was the irrational boom fueled by excessive money creation beforehand that was part of the cause of the "great depression." Yes, it is true that I have been reading the non-revisionist, non-party history texts and I know this is not encouraged, comrade. I am sure one of our new czars would be upset if they were to hear such talk. As our paper currency degrades further, we will need more and more czars and more and more government control to right the ship.

I also know that every currency in history has failed, whether Gold backed or not. When Gold backed, currencies are destroyed because the government breaks its promise and drops the Gold backing whenever a war needs to be fought or times get too hard. When not Gold backed, currencies generally hyperinflate into oblivion and are then replaced. History keeps repeating over and over again, but this time, gosh darn it, it is different. Bernanke and widdle Timmy Geithner are the most powerful brain trust ever seen in the history of financial markets and will take care of everything for everyone.

Keeping these admittedly Gold buggy-type background thoughts in your mind so that you realize this piece is written by an irrational lunatic, those who are calling for the imminent destruction and collapse of the U.S. Dollar need to remember that we are not the only country on the paper-money-road-to-hell path. We are not doing well, but the following graphic estimating the government debt-to-GDP ratios in 2006 and 2010 help one understand a bit where we are (chart "care of" Deutsche Bank and stolen from The Automatic Earth blog - typical internet reporting...):



I do not fear only for American citizens or the American dollar, as a global crack up boom in assets priced with paper money seems a likely path if things continue on the current track. In Gold terms, we have already been in deflation for years depending on the asset in question. For what asset class left is not deflating in Gold terms? This is the missing link in Prechter's work that he needs to reconsider in my opinion. Perhaps T-Bills have outperformed the stock market over the past decade, but they have lost money when currency depreciation is taken into account. Gold has trounced T-Bills, T-Bonds and the U.S. Dollar as well as the stock market, corporate bonds, real estate market and general commodities.

If China, Japan, the Eurozone, Australia, India, the Middle East and Brazil all agree to crank up the printing presses and create an astronomical amount of new debt to replace that lost by the private sector, and then they all agree to buy each others' debt with this newly created debt, this will be deflationary when Gold is used as the currency of measurement. But will it really feel like deflation to the average gal or guy on the street holding paper currency units? For it is really only Gold that has a done a reasonable job of preserving purchasing power over this past cycle. Gold has reverted to its role as the international currency of last resort.

This is why the "mainstream" inflation-deflation debate has become less meaningful for me - I think we are in a wicked deflation, but it's in terms of Gold. And yet, in the parlance of paper, a rising Gold price is almost by definition called inflation. Six of one, half a dozen of the other. One thing I do know for sure even without a PhD in Ponzi economics: Gold's in a bull market and you don't want to bet against it.

Here's a picture of a nasty deflation - The S&P 500 index priced in Gold over the past 12 years (i.e. the S&P 500 divided by the price of Gold [$SPX:$GOLD ratio chart]):



While the individual sovereign paper currencies rise or fall relative to one another, they are all sinking. Which index accurately reflects this basic fact during the current cycle? The answer is simpler than you think. Gold. That's right, Gold, the senior international currency of this world, awakened from its slumber by the massive abuses of the prior secular stock bull market that have come home to roost. As the pendulum swings back the other way, a further loss of confidence in the teflon Wall Street dons, our apparatchiks and central bankstaz will occur. This will manifest itself via a further decline in the Dow to Gold ratio, which will continue to fall until it gets to 2 or less, much to the paperbugs' disbelief.

Paperbugs Stand Down! Retreat!

We're now getting strenuously overbought. That doesn't mean we can't go higher from here. But once the weekly RSI gets to 80, the odds favor a rest. All surprises will be to the upside in Gold - that's what strong bull markets do. I put in a bid to sell covered December '09 calls on my RGLD 2011 LEAPS and some bids to sell a few juniors that I think are a little ahead of themselves. They may or may not fill.

In the mean time, ain't it just fun to watch (assuming you're not a paperbug)?

Japan - Leading Us Into the Abyss?

Japan is providing a fine script on what governments should NOT do when there is a debt crisis. They have piled on the government debt year after year, tried to hide the banking losses from their real estate and stock market crashes that began in 1990, and think quantitative easing is a good multi-year policy. In other words, they are a basket case and a financial and currency accident waiting to happen. Japan led the world into the current global stock bear market, which is not over, and look set to lead us into the next leg down.

Those calling for a collapse in the U.S. Dollar need to realize that governments like Japan and the UK are equally if not more likely to see an out and out currency collapse before the United States. I am not a bull on any currency right now besides Gold, but to say the U.S. Dollar can't have a few rallies against the Yen or the Pound is just silly in my opinion. All currencies are declining together at different rates and all are declining relative to Gold.

Here is a 4 year look at the Nikkei stock index ($NIKK), using a log scale candlestick chart:



And here's a 1 year daily plot of the $NIKK:



Whether you subscribe to the deflation or inflation thesis or don't care about either one, you shouldn't be lulled into complacency or think that the worst is behind us in financial markets. The absolute most bullish scenario I can envision for the U.S. stock markets is a successful re-test of the prior March 2009 lows and the lows hold. This is the inflationary poop storm scenario where Gold goes to $5000 and potentially far beyond. I think the March 2009 lows fail to hold on the next bear market leg down and we make lower lows. The only question in my mind is the timing, which I haven't proved particularly adept at nailing over these past several months.

I do think that Japan is leading us down in the general stock markets and the recent failures of several U.S. sectors/indices to make new highs with the Dow and S&P 500 is also highly suggestive. The following indices did not made new highs with the Dow and S&P 500 over the past 2 weeks:

Russell 2000 ($RUT)
Dow Transports ($TRAN)
Dow Utilities ($UTIL)
Semiconductors ($SOX)
Insurance ($DJUSIR)
Banks ($BKX and $KRX, the latter having topped in early MAY)
Homebuilders ($DJUSHB)
Commercial Real Estate ($DJUSRE)
CRB Commodities Index ($CRB)

Of course, this could change and each of these sectors could make new highs over the next few weeks. Only Mr. Market knows for sure...

Gold Stock Fractal Thought

A particular reader (ahem, cough, cough, Chemical!) is frustrated by the perceived lack of performance in the Gold mining sector. Gold is at new highs but Gold stocks are not. I believe this provides a good buying opportunity, but has this ever happened before where the Gold price is making new highs but the senior Gold stock indices aren't?

Here's a potential fractal that is ripe for a repeat in terms of what comes next. I believe Gold stocks are going to play "catch up" to the Gold price soon in an explosive fashion, regardless of what the general stock market does. A steep correction could occur, first, of course, but here a chart of the S&P Global Gold Index ($SPTGD - the green area plot) versus the price of Gold ($GOLD - the black line plot) over the past 10 years using a weekly log scale chart:



A repeat of this pattern would see us appreciate in the senior Gold indices by about 50% over the next 4-5 months. We'll see what happens...

Short End of the Yield Curve - WARNING!!!

The "big boyz" are piling into the short end of the U.S. government debt curve. This is not a good sign. This means they are fleeing stocks and looking for "safety" (I use the word because it is what paperbugs think, not what I think). They have distributed their stocks to the public and are now going to let them fall.

Pictures speak louder than words. Starting with the 2 year U.S bond yield (2 year daily chart using a log scale because the moves have been insane):



Here's the yield on a 1 year U.S. Treasury note:



And finally, the 90 day T-Bill yield:



The bond market is screaming deflation. I know, I know many of the big boyz are simply front running the fed for risk-free profits, but this is a big move on the short end of the curve and I think it is meaningful. The last big spike of this size towards zero on the short end of the curve was in September of 2008. Need I say more? Most of the stock investing public doesn't pay any attention to the bond market, and that's just fine with Wall Street. Big money is not so quietly stampeding for the exits from the stock market and the public will be left holding the bag - again.

Now this is where my thesis will be tested. I believe Gold will hold up here on the next bear leg down and even move higher regardless. Yes, it may undergo a correction for any distance back towards $1000/oz. at any time, but I think $1000/oz. is the floor for the Gold price now and a dip back towards these levels would simply provide another buying opportunity. In a stock market panic, Gold stocks will get sold off. In a stock bear market, Gold stocks move to their own drummer, generally sustaining corrections during the steepest downward parts of bear legs in general stocks, then rising the rest of the time if Gold is doing well. I believe Gold will do well.

This thesis relates to Gold's role as money. It is no longer a national currency anywhere, but it is an international currency of last resort and there is less and less trust in paper promises from the spendthrift nations of the world (e.g., U.S., UK, and Japan in particular). I do not think the U.S. is in worse shape than the UK or Japan, we just stand to lose more as the country with the ability to print the world's reserve currency. I believe the international monetary system is continuing to break down and Gold is rising relative to all currencies for this reason. When the yield on U.S. short-term government debt is basically zero, people stampeding into the short end of our government debt curve obviously aren't looking for yield!

This is what Exter's liquidity pyramid is all about. Read about it here if you aren't familiar with it, as I believe it is an important concept regarding the flight to safety in an unsafe financial world. As I have come to realize during my manic swings between inflation and deflation (I started as an inflationist, became a deflationist, and now I'm not sure and not sure it matters to me as a Gold holder at this point of the longer economic cycle), the Dow to Gold ratio will likely provide me the best road map for when to sell my Gold and get back into stocks. Once this ratio gets below 2, I'll be getting ready to sell my Gold and buy a truck load of Gold stocks and then will finally make the switch back to paperbug maybe a year or two after that. This is my rough road map and I don't know exactly how long it will take to get to the 1-2 range in the Dow to Gold ratio.

I would be mighty nervous right now if I was a bull on the S&P 500 (I haven't been for 3 years, but anyhoo...). I would be mighty comfortable staying short the general stock market if I had a long-term time horizon. My main focus right now is on Gold and the Gold miners and looking for opportunities to go long. I may not be able to resist a few general stock short positions if the stock market starts to deteriorate here as anticipated. Santa Claus may not be bringing a rally in the stock market this year...

Unabashed Gold Stock Bull

Gold stocks have outperformed Gold since the crash lows of the Great Panic of 2008. Some have been disappointed with the performance of Gold stocks. I think they have done extremely well and welcome the additional time to accumulate more shares before Gold stock indices blast to new all-time highs. I think Gold stocks are on the verge of a big move higher, regardless of what the stock market does. Here is a ratio chart of the Gold Bugs Mining Index ($HUI) divided by the Gold price ($GOLD) using a 10 year log scale candlestick chart:



Do I think the stock market is about to top out and go lower? Yes. Do I think Gold stocks will follow the market down? No. Have the Gold stocks ever managed to escape stock market carnage before? Many, many times! Everyone remembers 2008 and thinks that is what happens to Gold stocks when the stock market dives. Does everyone forget the 2000-2003 general stock bear market? Gold stocks initially fell with the stock market in late 2000, then COMPLETELY DECOUPLED from the stock market for 2 years and raced higher for MASSIVE gains while the stock market tanked.

And the inflationistas out there ought to be familiar with the 1970s stock bear market and Gold and Gold stock bull market. The absolute worst cyclical bear market of the 1966-1980 secular stock bear market? Hands down it was the 1973-1975 bear, which caused a 50% drop in the major general stock market indices. Take a look at this nasty bear, in all its glory (chart stolen from sharelynx's historical charts of interest page, a great site every market historian should have bookmarked):



And here's what happened to Gold stocks during this time using the Barron's Gold Mining Index (next chart also stolen from sharelynx.com):



And, finally, the Gold price during this time (again, massive theft with props to sharelynx):



It is true that during a true stock market panic, everything is sold. But we have already had the panic part. We still have one or more nasty additional stock market bear legs down to go. But stock bear markets do not define the Gold bull market and never have other than in a very general sense (i.e. secular stock bear markets are when secular Gold stock bull markets occur). We are due for a short-term correction in Gold soon, which will affect Gold mining shares. But I believe we are on the cusp of a major Gold stock blast-off higher once this anticipated short-term correction occurs.

It is not the time for fear, it is the time for accumulation of Gold shares that have undergone significant corrections. I have pointed out many over the last few weeks and others will likely start corrections soon. The first half of 2010 should be VERY exciting in the Gold mining sector in my opinion. And remember, this leg up in the Gold price is the first short-term leg up for this intermediate term bull move, not the last. After a healthy and necessary correction that should last 2-8 weeks begins, we are then due for another leg higher in the Gold price that should be equal to or stronger than the initial leg up! This second leg up will cause Gold mining shares to explode higher, regardless of what the general stock market does.

We are now in the pre-mania phase of the secular Gold bull market, where widespread private institutional money, public institutional money and central banks have entered the fray and are increasingly going to do so. Gold is no longer a secret, but the public is not in this thing yet. Things are getting ripe for an upside explosion in Gold shares. This will further prime the pump for the mania phase, the final phase of the secular bull that has not yet begun. Short-term froth is a VERY different animal compared to a long-term secular top. The Indian government is the quintessential definition of "smart money" when it comes to the Gold market and they think Gold is a good deal at over $1000/ounce. Those screaming "bubble" in the Gold market (the same folks who doubted, shorted, ridiculed and/or ignored the Gold bull market up to this point) ain't seen nuthin' yet.