Friday, April 30, 2010
I do not believe in "pure" technical analysis (i.e. in a vacuum). Knowing that we are in a secular general stock bear market and secular Gold and Gold stock bull market colors my views. A pure chartist may see blue skies from here to Dow 20,000, but a deflationary secular private sector debt collapse plus helicopter Ben and his crew does not equal a new secular general stock bull market in my opinion. While I understand that currency debasement can mask real losses by propping up nominal price levels, I am a long-term Gold investor - not a paperbug. I understand the game and how its played, at least as much as a retail ant is allowed to.
However, it is always important to remember that governments and central banks DO NOT CREATE THE PRIMARY TREND. They can distort it and prolong it, but they cannot change it. The secular turn in the private credit markets has already occurred. No banksta or apparatchik can change this fact. They can replace private sector debt with government debt, but the government is a lousy customer and makes the private debtor, in aggregate, look like a paragon of virtue. Governments will not only default without remorse, but will prosecute the lenders for lending them the money (and good luck repossessing any potential collateral backing the loan...)!
Let this chart of Japanese public versus private debt be a reminder of where we may be headed:
Just because the government steps up borrowing doesn't mean a recovery is going to take hold. I previously posted on a number of global stock indices, INCLUDING CHINA, that look like they might be breaking down. I'd like to continue the theme, as I see the U.S. stock market topping here, not continuing on to higher and higher levels in some type of eternal Keynesian bliss.
The poster child for all of people's economic and investing frustration (and not necessarily unjustly so) is Goldman Sachs (ticker: GS). Here's a 4 year 6 month weekly log scale candlestick plot of the price and volume action in this stock:
Not good when a bellwether breaks down. Rio Tinto (ticker: RTP), one of the world's biggest miners, also looks like it is getting ready to break down:
Speaking of base metal miners, which are an important sector to watch for the health of the global economy, the BHP Billiton (ticker: BHP) chart doesn't look so hot either:
I also wonder if the Brazilian stock market ($BVSP) is working on a double top here:
And to add to the technical data I posted when I asked if there were any stock market bears left the other day, the number of new 52 week lows in the New York Stock Exchange ($NYLOW) is showing a pattern unseen over the past 19 years (the data I have access to only goes back to 1991). I have heard many people speak about the number of new highs confirming the strength of this rally in general stocks. I would like to present the other side of the argument. To do so, I would like to show you the $NYLOW data using a 15 day moving average of this data over the past 19 years to smooth out the data using a linear scale chart. After that is a chart of the actual daily raw data on a log scale chart, which despite the noise gives a perspective on what we've been experiencing lately:
Those invested in Gold don't have to worry. While Gold stocks are volatile beasts, they have shrugged off many a cyclical bear market in the past. Of course, the Great Fall Panic of 2008 is still fresh in Gold stock investors' minds, but that doesn't mean a replay is in the cards. Gold is safer, but Gold stocks are due to outperform the metal even if there is a stock bear market about to begin. You can invest in the U.S. Dollar instead of Gold if you want, but I'll stick with real money for the next deflationary impulse, which is when the point of recognition that our international monetary system is going to fail reaches a critical mass of investors. Do you honestly believe the Portuguese, Irish, Italian, Greek and Spanish PIIGS-y investors (among other non-American global investors) are going to put their savings in the U.S. dollar rather than Gold? HAHAHAHAHAHAHAAAAAAAAAAAAAAAAAAA!
Until the Dow to Gold ratio gets back to 2 (and we may get to 1 or less this cycle), there is little reason to be invested in the general stock markets. This may become apparent again soon if technical analysis is to be trusted.
Thursday, April 29, 2010
The concept of relative outperformance is an important one in a fiat paper world, where meaningless debt tickets that are constantly depreciating in value make it difficult to appreciate the meaning of nominal gains. We calculate value in our heads related to what other things cost. A gallon of gas or a loaf of bread is a stable and meaningful unit of value in our world. A fiat debt paper ticket/currency unit has a constantly changing value, which is the main reason prices are always changing, albeit at different rates and directions depending on where we are in the cycle of inflation.
People who say there was no inflation during the 1990s are totally and completely wrong. The inflation was in financial asset prices! People have been hoodwinked into thinking the only meaningful inflation in terms of end effects is when the price of hard assets like commodities rises. This is because when you can't afford to eat, you're screwed. However, if a dotcom stock goes to infinity, only stock investors care. In other words, the threat to society is different depending on the asset class that is being inflated. Was the recent housing bubble "problematic" inflation?
Anyway, the point is that relative under- or outperformance of asset classes is an easy way to assess the significance of gains. Since we're all on the hamster debt wheel in a fiat paper-money-backed-by-nothing global system, we need to be constantly making our savings grow, otherwise they will evaporate. Not literally, but in terms of purchasing power. The reason our society is so focused on speculation is because the transactional currency we use has become very unstable. This breeds speculation and has throughout history. The end stages of a fiat system before the new dawn are always the darkest.
Even percentages gained are only meaningful when the rate of price increases is taken into account. For example, if you gain 50% in the stock market in one year but the price of food and gasoline increases by 100% in that same year, should you be proud of your financial achievement? The flat to declining stock market over the past 12 years or so has been a disaster when priced in real terms. This disaster is set to continue.
Investors who are bulls on the U.S. stock market should be experiencing intense cognitive dissonance now that the Chinese stock market has rolled over. For if China's economy is slowing, where is global corporate profit expansion going to come from? You can only fire so many people to keep the bottom line looking good!
Gold and Gold stocks are set to pick up the slack created by toppy stock markets. The relative outperformance by Gold and Gold stocks compared to global equities has been undeniable and impressive over the past decade. The secular financial pendulum slowly swings back and forth as it has over the past few centuries.
Here is a chart of Gold stocks, represented by the unhedged Gold Bugs Mining Index ($HUI), divided by the Dow Jones World Stock Index ($DJW) as a proxy for global equities (i.e. $HUI:$DJW ratio chart) using a weekly 12 year candlestick plot with a log scale:
And as sort of a global inverse of the Dow to Gold ratio, here's a chart of Gold divided by the Dow Jones World Stock Index ($GOLD:$DJW ratio chart):
The secular trend is your friend and that trend is set to resume in a MAJOR way.
Wednesday, April 28, 2010
Great day today in the Gold mining patch. Haven't seen many good strength days in the major Gold stock mining indices on days when Gold is flat to down lately. We are going to re-test the December highs in the Gold price soon, but the exact path is uncertain. After two big volume days in major miners and mining indices, we may need a day of rest in major Gold stocks.
With that thought in mind and given the very short-term overbought condition they were in during today's session, I took profits today in my Goldcorp (ticker: GG) and GDX mining index option positions near today's highs. I am letting my bullish option positions in GDXJ (25 strike price August calls) and Yamana Gold (ticker: AUY; 10 strike price July calls) ride. I am also letting all my various individual Gold mining stock and ETF positions ride. My hope is to take the money from the options trades I closed today and put it into more GDXJ calls. I may get back into GDXJ as soon as tomorrow morning depending on the price action. I'll start buying GDXJ if it gets back into the 28 range.
Here's a 15 day GDXJ intraday 15 minute chart thru today's close to show the recent chart action and my micromanaging thoughts:
And here's about where I think we are in Gold stocks for this intermediate-term move, using a 4 month 60 minute intraday chart of the palladium ETF (ticker: PALL) thru today's close as a potential rhyme:
Short term noise aside, we are in a perfect spot for Gold and Gold stock bulls. I believe it would take a market crash to derail the pending move higher in Gold stocks. In such a scenario, Gold would be a better play than Gold stocks. I think it's too early for another crash, but we are certainly going to resume the bear market in general stocks soon in my opinion.
Speaking of resumption of bear markets, several markets look to have rolled over on 18 month daily charts, which is a bearish omen for all the global stock markets that haven't rolled over yet. In no particular order, here are a bunch of them.
First up, Shanghai ($SSEC, see previous post here):
Hong Kong ($HSI) also looks like it is breaking down. I think my previous prediction on this index was pretty good (if you agree, click on one of the ads on this blog and make your not-afraid-to-ask proprietor a few pennies so he can buy more Gold!):
Next up, Portugal ($PTDOW):
And here's Spain ($SMSI):
The final PIIGSie is Italy ($INE, see previous post here):
No need to show the Greek stock market chart - they are suffering enough! An important lesson is learned using the current examples of the European markets above. People think if the Dollar is trashed that the U.S. stock markets will rise. These countries prove it is foolish to rely on this relationship between currency and stock markets. The Euro is going down hard, bond rates are going up for these European countries, and the stock market is also going down. Where the heck should these folks put their savings? I assume you know my answer to this question. If you're not sure, a picture is worth a thousand words. Here's the Euro Gold price over the past 6 months thru today's close (chart courtesy of goldprice.org):
Gold defeats paper. It's just the cycle we are in, homie. The Dow to Gold ratio will get down to 2 (and we may go below 1 this cycle) and then things will reverse and other investments will outperform Gold. Wash. Rinse. Repeat. Go ahead and buy general stocks for the long haul if you want to. I'll stick with hoarding a shiny, barbarous relic.
Tuesday, April 27, 2010
Gold will trump paper debt tickets this cycle. There is no point in fighting the trend. It was unwise to invest in Gold from 1980 thru 2000 and it was unwise to not invest in financial assets from 1980-2000 for the average investor. Similarly, it has been and will continue to be unwise over the longer 10-20 year period that began in 2000 to not be invested in Gold or to be invested in financial assets for the average investor. These are the truths the market has provided and the obvious trends in place.
Today was a great clash of the titans in the market. I am talking about King Dollar versus Gold. Like a death cage match with lots of twists and turns, today was only one day in the long battle for supremacy. To put it bluntly, Gold left the aging current paper champ in a daze today. Gold is re-asserting itself as the preferred currency among global market participants during a crisis.
In round one, which occurred during the Great Fall Panic of 2008, the U.S. Dollar came out swinging hard and fast and knocked Gold to the canvass shortly after the opening bell. But like a 12 round fight in a Rocky movie, Gold got back up as if nothing had happened and was back at $1000/oz by February of 2009. Today's "mini-crisis" is a preview of what's to come this round. Gold will win by decision (possibly a narrow one) with lots of jabs and counter punches, triumphing despite a valiant effort by the U.S. Dollar to score points and stay on its feet.
The point of recognition occurs this round. The people watching the match realize the aging paper champ is no match for an eternally youthful and always shiny Gold opponent. The bets on the outcome will shift to Gold as people realize the inevitable will occur in the late rounds. The U.S. Dollar has some fight left in it, however, at least relative to the other paper contenders out there.
But, alas, the final round will see the knockout blow that ends the paper champ's career. This clash of the titans is an important one. You can be sure that the handlers and promoters for Gold and the Dollar, who are one in the same, already know the outcome as well. The younger members of the promoters' staff, known as paperbugs, think the old champ will find a way to sneak through with a narrow victory, but the more experienced head promoters know that the only question related to the pending Gold victory is the timing.
On a slightly more serious note, Newmont Mining (ticker: NEM) blew away earnings estimates today. Barrick Gold (ticker: ABX) reports earnings before the market opens tomorrow (and Goldcorp [ticker: GG] after the market close tomorrow). The strength of Barrick and Goldcorp today on heavy volume, despite a big and panicky drop in general stock market indices around the world, suggests both of these blue chip miners are ready to blow away earnings estimates. This would light a fire under the Gold stock sector as people finally start to witness ACTUAL LEVERAGE to the price of Gold in the senior Gold miners. If Barrick's earnings are as good as Newmont's and the general stock market indices make even a weak bounce higher tomorrow, we could see a 5-10% upside day in the major Gold stock indices.
Sunday, April 25, 2010
The paper debt tickets (i.e. currency units) that most of us work for are nothing but a concept. That concept is mutually agreed upon. That concept is being abused and will likely be destroyed before a new secular stock bull market can begin.
The paper bubble dynamics are growing more and more unstable with each attempt to stave off pain using the debt press. The debt piles higher and higher and becomes more and more unstable as the deflationary forces in the economy are beat back into submission. But once a critical mass of people realize that the debts are unpayable, what exactly do the debts mean? The United States is unequivocally bankrupt in the traditional sense of the word, as is Japan and most of Europe. And yet, the United States is the largest backer of the IMF and the IMF purports to bail out Greece.
This land of illusion is starting to shatter. The paper fiat international monetary system is one of deception and control. It requires no discipline and is funded by the blood, sweat and tears of those who still produce. Somehow, despite total insolvency by "old school" metrics, the U.S. can now afford universal health care. This is on top of perpetual warfare against imaginary third world enemies, a war against drugs that are less toxic than those prescribed by your physician, social security and all of the other government-sponsored programs/departments/branches and their associated pension benefits that are growing at an exponential pace.
New debt will continue to be piled on top of old and unserviceable debt. Since the private sector is exhausted in aggregate, the government is picking up the slack. But what happens when almost every major economy in the world is the same as Greece and the majority of market participants know it? We are entering the dangerous phase of the paper debt bubble.
This is the phase most beneficial to Gold (and to a lesser extent silver) as the only form of "real" money that can be easily stored/hoarded. People who say we can't go back to a Gold standard are not only wrong, but they are also neglecting the fact that it is already starting to happen in the way that it must to restore balance. This is an optimistic message and one to be embraced by those who actually understand what freedom truly means.
The fiat paper debt hamster wheel forces everyone into serfdom. The greatest years of economic growth and prosperity in the Anglo sphere were during the years of a "hard" Gold standard. I am not delusional enough to expect governments to willingly go down the path that leads to having sound money. I rather trust the free markets to force it upon governments.
I don't see Gold as something to eat in your log cabin while playing with guns, I see it as a way out of the debt morass. Private firms like GoldMoney.com and Bullionvault.com are already paving the way. For now it's Gold storage, trading and limited Gold payments to those who have managed to break thru to the other side of the Matrix. But how long before a firm like Wal-Mart embraces the concept of a digital Gold-backed currency? Why hedge currency risk with the vampire squids when you can use digital Gold and avoid the problem altogether?
What of a world where government-issued currency is but a transient thing that is purchased at the last second only to pay the government their taxes? Don't get me wrong, again, I am not delusional. This is something governments will have to be dragged into, kicking and screaming the whole way. But Gold investors need to focus more on the positive aspects of the future of money, for it has the potential to be bright indeed.
When you think of the convergence of advances in alternative energy that allow people to live "off the grid," couple that with the power of the internet and the virtual interconnectivity of the world, adding a global digital Gold-backed currency that allows people to store real money without worrying about its debasement is a natural next step. Though my thoughts may seem quaint and overly naive to the typical (rightfully) cynical Gold bull, there is a real chance the monetary system will begin to be re-pegged to Gold in some manner within the next decade or so. After the next major train wreck in the financial markets destroys the credibility of those who think they can control asset prices, a significant number of people may be ready to call for and embrace this type of scenario.
This is especially true since the next train wreck in the markets, unlike the Great Fall Panic of 2008, will see the Gold price rise as fast as it fell in the fall of 2008. The deleveraging when the government support-of-everything bubble fails will be out of the Dollar and into Gold rather than the other way around. When it is our turn to have a Greek-style crisis here in America, Gold fever will break out with a vengeance.
But what will quash that Gold fever once it breaks out? The most ardent manipulation attempts have done nothing but slow the rise of Gold over the past decade. What happens when 20% of the American population goes looking for an actual Gold or silver coin (no, not the paperbug GLD and SLV ETF versions, the actual shiny stuff)? Once everyone gets back into the Gold and silver bull mind set that caught hold of the American public back in the 1979-1980 time frame, how will it be quashed this time? Because I can tell you without a doubt that America cannot tolerate 15-20% interest rates given the amount of debt we owe to foreign creditors.
Criminal sanctions, capital restriction, heavy capital gains taxation (more than the current punitive 35% rate), attempts at confiscation of paper or even real metal (perhaps in the name of counterterrorism) - nothing is off the table. Gold remains the enemy of the state for now, but things have a way of changing when tyranny goes too far and becomes too oppressive. But it is easy to see this darker side of the evolution that I believe is to come.
What comes next, however, may be an era of prosperity and peace the world has never seen. And Gold is unequivocally a part of this vision. Paper money backed by nothing is the relic, for it is horribly unjust and defies logic. Those people who don't understand why Gold is perfect money are the ones who need to defend their position, not Gold bulls. The idea that money can be created by printing up pretty paper tickets and/or typing in electronic entries without one iota of effort is preposterous. It is a fairy tale (horror story?) told to children who still believe in Santa Claus and will be looked upon as such in the next era.
Imagine how foolish those who follow us will think we were for not having sound money! For humans are filthy and nasty enough animals as it is. They cannot resist the temptations of money created out of thin air any more than a dog can resist chasing a cat. Something for nothing is a proposition hard to turn down. Of course, paper money benefits a certain class of folks who have every right to engage in whatever means necessary to maintain their status quo. It is wrong to assume that dinosaurs became extinct without a fight.
The dangerous paper bubble dynamics now in place are sure to cause much economic hardship when they finally pop. The uncertainty and fear will cause people to delve into their collective psyches and reach for the financial rock that still acts as the anchor of stability for our monetary system today. No, I am not talking about Paul Volcker, I am talking about Gold. When the dust settles upon this secular stock bear market down the road, Gold will still be there. Just maintaing its value and looking all shiny and what not.
Enough people will finally come to question why they would ever want to hold their savings in the stock market or in paper currency that real change is likely to come about this go round. At this point, so many will hold Gold (and silver) that many will question why they should ever let it go. Perhaps, in the future world I envision, they won't need to until it's time to go to Wal-Mart and buy a loaf of bread with their digital Gold currency card.
Saturday, April 24, 2010
The public just got a little bit interested again on Friday. This is a good sign. I now follow the Rydex Precious Metals Fund as a proxy for retail investor interest/sentiment in the Gold sector. You can too if you want. The total assets in the fund fluctuate wildly, with assets flowing out of the precious metals fund (i.e. people withdrawing their money from the fund) when prices in the Gold patch fall and fund assets increasing when prices rice. The retail herd piles into a trade as prices move higher and higher and they become more and more bearish as prices move lower. Learning to break away from this unprofitable approach of the herd is an important step for every investor. Buy when the herd is uninterested and sell when they can't get enough.
I am not saying this Rydex retail interest sentiment indicator is perfect - no indicator is. On Friday, however, the assets in the Rydex fund "broke out" above $140 million. Here is a chart of the fund assets over the past 9 months or so that I created to show the last time a break out over $140 million occurred following a lull/nadir:
And here's a 1 year candlestick plot of the Gold price in U.S. Dollar terms to show where the two highlighted jumps over the $140 million mark in the previous chart occurred:
If we're setting up for another frenzied bull run in the Gold patch and recent history is a guide, we're likely to hit at least $300 million in assets for the Rydex Precious Metals Fund before the next peak. We may well go above the $300 million level if this is an extended bull move higher, as I am suspecting. I sure wouldn't want to bet against Jim Sinclair's call for a Gold price of $1650/oz by January, 2011.
The Rydex sentiment data is just another piece of the puzzle lining up in the Gold sector's favor. There is another sentiment indicator I will be watching carefully to help detect "the" major intermediate term top. It won't come into play for months, but it also remains in bullish alignment and shows the lack of "froth" in the Gold sector. It is the Central Fund of Canada to Gold ratio chart (CEF:$GOLD). Check this previous post if you're not familiar with my research on this interesting ratio.
Here is a 10 year weekly linear weekly plot of the CEF:$GOLD ratio chart with my thoughts:
It would make sense to have a powerful move higher now in Gold and silver and their related equities. I think the seasonals may end up being less relevant this year and the Gold sector will continue to power higher throughout the remainder of 2010, though with plenty of twists and turns along the way to keep the wall of worry intact. First thing's first, though. It's time to see how strong resistance is at the $1225/oz mark for Gold. How Gold stocks react to this inchoate short-term move in Gold should tell us how strong the resistance at $1225 is likely to be.
If major Gold stock indices strongly outperform the Gold price as it heads towards $1225, we should be set for a strong bull cycle thrust that may well last 6-12 months and Gold should blast through $1225 quickly. If Gold stocks lag or barely keep pace with the Gold price, then resistance at $1225 will likely be significant and we will then need to consolidate for a few weeks at the highs before a move to new all time highs in the U.S. Dollar-based Gold price can occur. I am betting on the former of these two scenarios but will react to what the market gives us.
I remain all in and thus as biased as can be, but I think the public and momentum traders are about to wander back over to the Gold patch for a while. Now that I'm properly positioned in my trading accounts to sell them what they want (at higher prices, of course), I'd like to formally welcome the herd back to the only secular bull market left standing. The secular point of recognition is drawing near for all things precious, shiny and metal.
Of course, my physical Gold is not for sale and I wouldn't consider selling it until the Dow to Gold ratio reaches 2. Oh yes, my sweet little paperbugs, we are going to get there whether you believe it or not. When the time comes, the fiat paper debt ticket proceeds from such a sale of physical metal will of course be used to purchase Gold stocks (if this sounds crazy, see my previous post on the subject).
Great day in the Gold patch. Magically, Gold was off to the races after the AM smack down designed to pick the pockets of those playing the futures options game in Gold (today was expiration day). Everything is now lined up perfectly and today's move higher I think was the real deal in getting us moving quickly towards the December high in the Gold price.
Of course, this recent high is only a potential brief stop on the road to much higher Gold prices in 2010. The Gold chart couldn't look more bullish. Here's a 1 year candlestick price chart of the action through today's close:
Gold stocks perked up today, but they still have a lot of ground to make up. One thing about Gold stocks, however, is that they can move awful fast (in either direction) when they get going. Here's a 10 year ratio chart of the Gold Bugs' Mining Index ($HUI) divided by the Gold price ($HUI:$Gold ratio chart) using a linear scale weekly candlestick plot:
I remain a rabid bull in the Gold patch and I am all in and as biased as can be. Until the Dow to Gold ratio gets to 2 (and we may go below 1 this cycle), there's no safer place to have your paper than in Gold.
Thursday, April 22, 2010
Many people like to look at Japan as instructive relative to the current situation facing the United States (and most of Europe). The current strong up move in stocks has been relentless. It has been no fun and of no use lately to eruditely point out how bad the underlying economy is and how bad the housing market and banking system is. There is little point of understanding the economy as an investor if you cannot make money using the information. Being a general stock market bear has been an incorrect and painful position since the March 2009 lows in many global stock markets.
But this is simply a statement of the trees that are in front of our eyes. A secular bear market is the forest in which the trees live. For those who say that inflation and money printing will keep stocks afloat from here on out, I would direct you to re-study your stock charts in the 1966 - 1982 period. There was plenty of currency debasement and stocks went nowhere in nominal terms for over 15 years. In real terms, buy and hold stock bulls got slaughtered as bad as those who held thru the 1929-1932 bear market!
The current long-term chart of the NASDAQ composite index looks eerily familiar. Here is a log scale weekly candlestick chart of the NASDAQ ($COMPQ) from 1995 thru today's close:
Why does this chart look and "feel" familiar to me? Because it reminds me of the Japanese stock market chart when looking at its recovery after the 1997-1998 Asian financial crisis. Much like the U.S.-centric financial panic into early 2009 with the NASDAQ, the Asian crisis of the late 90s occurred deep into a Nikkei secular bear market. The NASDAQ bubble popped in 2000, so getting caught up in the cyclical bear market of 2007-2009 didn't really make things any worse for the NASDAQ, it just caused the NASDAQ to revisit its previous bottom made in 2002. Japan's stock market bubble burst in 1990 and the Asian financial crisis of 1997-1998 did the same thing to the Nikkei index.
The rebound for the Nikkei out of that 1997-1998 cyclical bear market was fast and furious and crushed the bears. Here's a weekly log scale candlestick chart of the Nikkei stock index from 1985 thru 2000 to show the similarity to the current NASDAQ chart:
And, as one of my favorite themes, here's what came next:
Not a prediction per se, but a warning not to lose sight of where we are and where we need to go before this secular bear market can end. There is too much debt and too much fraud that need to be cleaned up before a new secular bull market in general stocks has a snowball's chance in hell of beginning in my opinion. Now for those who look to helicopter Ben to trash the U.S. Dollar and save the stock market, here is a lesson from history on currency debasement during a similar period in the Japanese secular bear market. The following chart covers the 1999 bull market and subsequent 2000-2003 bear market in the Nikkei stock market ($NIKK, the black linear plot in the bottom of the chart below) in order to show how the Japanese Yen index ($XJY, the main candlestick plot) fared during this time:
Now, returning my thoughts to Gold, the Gold chart priced in U.S. Dollars looks a lot like a chart of the NASDAQ ($COMPQ) as well, but during a different time frame:
I'm sure you know what came next in this case, but just so that you don't underestimate the power remaining in this secular Gold bull market, which is far from over, here's what came next back then in the NASDAQ: