Tuesday, June 30, 2009

Gold - It's Just Time

To borrow a phrase from a recent piece by Martin Armstrong, “it’s just time” for Gold to shine and revert to its role as money. Of course, the powers that be and their minions laugh in contempt at such a concept. Wall Street laughs at the investment that has no growth potential and pays no dividends.

And yet, these are the people who didn’t see this economic crisis coming and now declare that it is over! It may be over for them, since they have lined their pockets with taxpayer funds to mitigate their losses, but for the rest of us, the pain is just beginning. Economic depressions are a process, not a one-time event.

Japan has been in an economic depression for 19 years now, yet you won’t see pictures of soup lines on Japanese television. Their government has a printing press, a fiat currency and has ramped up government debt to levels relative to their GDP that make The United States look like a model of government restraint. Yet, debt deflation still reigns and the Nikkei Japanese stock market index remains 75% below its 1990 peak 19 years later.

Will we repeat this two decade depression (which is not over for Japan by a long shot)? Of course. The only wild card is our currency. History tells us that the U.S. Dollar will hold up well during a deflationary depression and is a good place to put one’s money if one does not wish to trade the bear market. But the reserve currency status of the US Dollar is at risk and the calls for a replacement grow louder every day. If a geopolitical event dethrones the US Dollar, an immediate and significant devaluation of the Dollar will occur.

So, why is it Gold’s time? Many reasons, but here are the main points to consider:

• Gold is an international currency and store of value, not a commodity. Cash is king during deflation and Gold has been chosen as the best form of cash by civilizations over the past several thousand years. Apparatchiks cannot decree otherwise with any lasting success.

• Growth for stocks in aggregate is negative, dividends are being slashed rapidly, and dilution via new equity offerings is coming at a rapid clip. This wipes out the reason for taking a risk with equities right now.

• Gold provides a hedge against a rapid currency devaluation, which many governments around the world are trying to achieve. A holder of fiat cash or government bonds is not automatically hedged against this risk. Gold cannot be successfully debased by bureaucratic decree.

• Other asset classes besides cash will do poorly over the next decade and will likely produce negative returns, while Gold will hold its value. Everyone and their grandmother, with the exception of underwater bankers and real estate industry employees, knows real estate is poor investment and the bottom won’t be in for at least 2 more years (the wildly bullish scenario). Stocks and corporate bonds are dead for the next decade, trading opportunities aside. Commodities will be crushed by the deflationary scenario that has started if it continues as anticipated.

• Trust is evaporating and fear and pessimism are the new long-term sentiment. People underestimate the importance of this concept. Gloom and doom are gaining a head of steam. The future is not looking good for at least 70-80% of people in the U.S., Europe, and Japan. Gold thrives in this setting.

• Gold is in a long-term bull market that demonstrates no signs of being over. In fact, Gold made new highs in 2009 in multiple currencies, including the Euro, Swiss Franc and Canadian Dollar (among others). Here’s a 10 year weekly log scale chart of the price of Gold relative to the Swiss Franc, people’s traditional fiat currency “of last resort”:

• Finally, consider the Dow to Gold ratio, or a ratio of the “price” of the Dow Jones Industrial Average divided by the price of an ounce of Gold in US Dollars. This ratio will absolutely reach 2 before this secular bear market is over (the bullish scenario for those who are anti-Gold) and could fall below 1. In other words, maybe Gold won’t make you rich in deflation but it will preserve your wealth and allow you to buy a whole lot more shares of the Dow Jones once the dust settles. This ratio filters out the effects of inflation or deflation, since the ratio hit 2 in the deflationary 1930s and 1 in the inflationary 1970s. Here’s a chart of the last 30 years of action in this ratio on a log-scale weekly chart:

Now the ratio could reach 2 with the Dow at 4,000 or 20,000 (I think the former is much more likely) and either scenario is bullish for holders of Gold and indicates a higher return for Gold relative to holding the stocks that make up the Dow Jones Industrial Average (or the S&P 500).

I think the intermediate-term low for Gold is already in and we are set to re-challenge $1000/ounce. We may or may not make it through on this attempt, but the time is growing short for the breakout above $1000/ounce to occur. Once $1000/ounce becomes support instead of resistance, the final stage of the bull market in Gold will be set to begin. Based on the recent events in Europe, I would say that by the time ATM machines in the U.S. are installed to allow people to buy Gold from ATMs in this country, then it will be time to start thinking about the bull market in the Gold price coming to an end. A sentiment event like this, coupled with a Dow to Gold ratio at or below 2, is when I’ll start looking to trade Gold for something else. Until then, Gold is the safest and best no-brainer investment and wealth preserver out there.

And don’t get me started on the Gold miners, because once this cyclical bear market in equities is just about over (we’re not close in time or price yet), this will be the go to sector and will strongly outperform other investments, including the price of Gold. Those looking to buy in to the Gold stock bull market are advised to be patient, as good buying opportunities will come along later this summer.

Monday, June 29, 2009

Chart Porn - Fear is Gone

I have been obsessed about the Volatility Index ($VIX) like many traders, as it doesn't seem possible for fear to drop this low. The hubris before the fall is palpable despite everyone knowing that economic conditions are grim and collapsing further in front of our eyes. Perhaps a P:E ratio of 500 is in the cards (we'll get to infinity before this secular bear market is over if Japan is a decent guide)?

A good way to examine the level of fear relative to stock prices is using a ratio chart of the price of the S&P 500 divided by the $VIX ($SPX:$VIX ratio). Looking at this ratio relative to recent prior peaks in the stock markets yields some good chart porn that I thought I'd share (18 month chart with the $SPX:$VIX ratio as a red area plot and the $SPX plotted as a black line chart on top of the area chart):

I'm declaring July an official bear month a few days in advance...

Sunday, June 28, 2009

When does volume not matter?

In a way, I guess it always matters when analyzing trading opportunities, but there are times when it doesn't fit the pattern. Royal Gold (ticker: RGLD), my favorite Gold stock right now, and one I am invested in heavily (and therefore not unbiased) got jacked on Friday out of the blue on heavy volume. I am not thinking about selling or getting bearish, but one certainly has to consider high volume days, as big money moves markets and we retail traders are simply fleas on the elephants' backs. The trick is to get in before the elephants and then get out before the elephants do.

There were some weird volume patterns on Friday, but I think they relate to the "window dressing" concept, which describes how mutual funds and other institutional investors trick retail investors into thinking they're smart. The quarter ends on Tuesday and the market is up for the quarter, so those fund managers desperate for yield reshuffled portfolios to show everyone reading ads in Fortune magazine that they are with the trend and doing OK.

Here's an example daily chart of the S&P 400 mid-cap index ($MID) over the last 22 months:

Window dressing (and/or the infamous Plunge Protection Team) is the only volume pattern that makes sense for me. Waiting until the last possible day of the quarter carries risks if you're a "window dresser," not that we may not see some wierd stuff on Monday or Tuesday. Come July 1st, we'll have no window dressing and no pending options expiration issues to deal with. Be careful out there if you're not short.

Oil About to Tank

and when it does, it won't be bullish for the economy or the future economic outlook. As if it isn't enough that Goldman Sachs just put a bullish target on oil at $85/barrel recently (this is a warning to sell oil), the divergence between the price of oil and oil stocks is a confirmatory warning not to be ignored. The Goldman indicator is rock solid (do the opposite of what Goldman says about 2-8 weeks after they say it), but to have the oil stocks also confirm means oil's run is very close to being over. We may double top or print a minimally higher high in the oil price, but don't bet on it.

Using commodity stocks to predict turns in the underlying commodity price is an important analytical tool for those seeking to trade this sector. It would have got alert traders out of oil last year before the collapse in the oil bubble and it can help oil bulls avoid another whack right now. I am bearish on oil and commodities because I am in the deflationist camp (for now).

Anyhoo, to the charts. Following is an 18 month daily chart with a plot of the oil price ($WTIC - the area plot) and the Dow Jones U.S. Oil and Gas Index ($DJUSEN - the black line plot):

I think commodity bulls need to be prepared for the possibility that their worst nightmare may come to fruition (11.5 year weekly log scale chart of the $CCI, which is more equally weighted than the oil-heavy $CRB):

For those who think this can't happen, I ask you: did your commodity expert predict the fall crash? Did Goldman Sachs tell you oil was going to $200/barrel right before the plunge?

All the economic pieces are in place for such a bearish commodity scenario. People are again using tankers to store oil based on solely on futures contracts price variances that have already locked in a guaranteed profit for the big boyz while demand is dying on the vine. Commodities, with the exception of certain foods, are sensitive to economic conditions. Who the hell wants copper when building and demand for residential and commercial real estate has ground to a halt? And please don't give me the China bullshit - China is screwed. An export-based economy in the setting of an economic collapse in the U.S., Japan and Europe (the world's biggest three customers by far) is not going to be able (or want) to purchase enough commodities to prop up prices.

Don't get me wrong - I'm fully hedged against a dollar devaluation and I recommend everyone purchase such insurance. But I use Gold because it is not a commodity, it is an international currency that can't be debased by ignorant apparatchiks. Gold requires no economic activity to retain its value. When trust breaks down, people look for something that requires no trust. I don't think food or water are bad investments, but the oil price is about to get whacked, as are the prices of base metals. First deflation, then inflation.

Saturday, June 27, 2009

Bearish as Ever - More Data

I believe we are smack dab in the middle of the biggest stock bear market any of us will witness in our lifetime. This colors my views on investing tremendously and creates an inherent bias. If you don't subscribe to the same view, my rants probably seem a little over the top. But when the P:E ratio is well over 100 during the worst housing market crash and bank and Wall Street wipeout since the last great generational bear market (i.e. the 1929-1932 bear) occurs, it's time to take notice.

Another great credit contraction is occurring in front of our eyes and such events take more than 1-2 years to sort themselves out. Another 5 banks failed this week, the largest weekly number for the FDIC to sort out since this cyclical bear market began. There will be more - many, many more.

Technical analysis is a tool many use to time investments or speculations and it is easy to get overly wrapped up in the squiggles on a chart and the indicators and what they mean. I love looking at historical chart patterns to get a sense of what's possible and what's reasonable. Since I think this is a "big, bad" cyclical bear market, I am looking for it to last at least 2.5 years (we are 1.7 years into the current bear).

I also am NOT looking for the markets to make a sustained thrust beyond the 200 day moving average, as this hasn't occurred in prior big, bad bear markets. A "peek-a-boo" above the 200 day moving average can occur for a month or so, but that's about it if prior credit crunch/debt deflation bear markets are a guide. So, I am placing my money on the top in the stock market being in already and patiently (or not so patiently perhaps) waiting for another steep drop right here, right now. Not a correction and then new highs, but a full on resumption of the bear market.

How about a few more data points to cement the bear case beyond what I have pointed out in recent posts:

* There was a record issuance of new stock shares in May, 2009 ($64 billion, which blew away the previous all-time high of $38 billion)
* There was heavy insider selling in May and early June, 2009 (sales to purchases ratio approaching 30:1 at times!)

Here's a chart of the 20 day moving average of the New York Stock Exchange's (NYSE or $NYA) volume for advancing shares divided by the volume for declining shares (i.e. roughly, the bullish/buying volume versus the bearish/declining volume with the 20 day moving average used to smooth out the data points) over the past 2.5 years:

And here's a look at Japan's wicked 1990-1993 bear market about a year-and-a-half into it:

Doesn't look all that different from where we are right now, does it (following is a daily 18 month line chart of the New York Stock Exchange/$NYA)?

As someone who's bearish, I am obviously not going to show an historical chart example that resolves to the upside (I told you - I'm biased!), but here's what happened next in Japan's cyclical bear market for the ages (which was precipitated by a real estate crash and stock bubble bursting at the same time):

Stay in the market and/or go long if you want to, but risk is heavily tilted to the downside and a July mini-panic to wipe out the gains since the March low seems pretty damn likely to me. Significant new lows happen this fall, but printing a nominal new low in most of the major stock market averages before a brief late summer rally wouldn't be unusual.

Thursday, June 25, 2009

Hard Out Here For a Bear

Being bearish on something requires a different temperament than simply switching one's bullishness to a different asset class. I am uber-bearish on traditional asset classes like stocks, corporate bonds and commodities. Being in cash is no fun and not very helpful when one is trying to grow their wealth through investing and speculation.

Talking to most people about going short or buying puts when the discussion turns to investment causes their eyes to either glaze over or start to roll in irritation. It seems that hope is more important than fact. And to be honest, the ones who are hopeful usually do better than those who try to be skeptical. After all, markets tend to move higher or sideways over longer periods of time, not down.

Bearishness is not popular because it often requires betting against people who are trying to do their best. It conjures up images of gloom and doom. For example, Mr. Nouriel Roubini has been called "Dr. Doom" for accurately predicting some of the things that have come to pass. No one thought to call him "Dr. Got it Right" or "Dr. Smarter than permabull Cramer."

This is the nature of things. Even when bears make the right call, they are usually better off keeping their victories to themselves, as their gain may well be an optimistic friend's loss. It seems our financial press would rather cheer lead than investigate, which is what happens when too few mega-corporations control the flow of information and all have the same vested interest in the outcome.

If it weren't for the internet, I am sure I would still be looking to smoke some "green shoots" and simply agonize over which 401(k) bullish mutual fund was best. I think the government needs to shut the internet down or regulate it more - it is too democratic and there are WAY too many people telling the truth in cyberspace. Unfortunately, I have learned a little about this investing and speculating thing and the more I learn, the more I realize bearishness is an asset right now.

But even when bears are right and the markets go down, bear markets are typically more volatile than bull markets. Hard earned and well-researched profits can evaporate quickly without good risk management. The largest and fastest bullish thrusts occur during bear markets, not bull markets. For those who learn the tricks of the trade, bear markets can mean fantastic profits, but they don't come easy.

We have already been through one lost decade of stock investing in the United States and there is no question that we are headed for at least two. Japan is now deep into its 19th year of a secular bear market with no end in sight after having a simultaneous stock market and real estate peak and subsequent bubble collapse back in 1990. After a 19 year bear market, Japan's Nikkei stock market index remains 75% below its early 1990 peak as of the close on June 25th, 2009.

Are we different? Are we better? Are we really not making the same mistakes by keeping bloated, connected large banks alive with taxpayer money and hiding the true losses from full view? Are we really not engaging in the same perpetually failing quantitative easing program Japan did, which created no significant inflation and did nothing to rescue asset prices? Are Ben Bernanke and widdle Timmy Geithner really the economic dream team?

Because, to me, if one is ever going to get bearish on stocks, real estate and commodities, now is the time. The trend is your friend and the rally that began in March is over. There's nothing wrong with being in cash, although previous Kondratieff Winters in history suggest that you may want to hold physical Gold as your cash. Why? Because it can't be debased by desperate banksters and apparatchiks.

Let me re-visit, in painstaking detail, all the reasons this secular bear market is not close to being over:

*The price to earnings ratio for the S&P 500 is now well over 100, at the highest point in the last century.
*Real estate is not yet close to bottoming, which wipes out banks and other mortgage note holders.
*Unemployment is close to 10% and rising.
*California, which has an economy that is the same size as China's, is broke and about to start issuing IOUs because it has run out of money.
*Credit card charge-off rates are now over 10%, the highest ever recorded.
*The entire banking system of the United States, in aggregate, is insolvent. The largest banks, such as Citibank and Bank of America, consider plain old insolvency a goal (they are way worse off than insolvency at this point).
*Nearly half of the venerable Wall Street firms (i.e. Lehman Brothers and Bear Stearns) are already history and the ones remaining are only alive due to fraud/theft and the forced generosity of taxpayers.
*Our auto industry... I'm from Detroit, so I just don't want to finish the sentence.
*Walking away from one's mortgage is more "in" than Paris Hilton.
*Baby boomers are about to start being owed massive entitlements (i.e. Medicare and Social Security) en masse.
*The national deficit has now risen well above 12% of GDP, a level last seen during World War II (how fitting that now our enemies are imaginary, Third World and perpetual - Orwell would be proud).
*Our government is piling public debt on top of a secular private debt bubble collapse, the same scheme that caused and exacerbated our last economic depression in the 1930s and has led to Japan being in a 19 year bear market.
*We remain beholden to a private, non-federal banking corporation known as the federal reserve to "save us" from the mess that they helped cause - this despite the fact that their only solution is always to get anyone with a pulse into more debt (i.e. their rather profitable business plan).
*Our manufacturing base has been dismantled and shipped to other destinations around the globe, so there is little hope of "growing" our way out of the debt morass in the next few years.

Gloom and doom or simply the facts? Yes, I could spin it in a positive light and talk about Goldilocks, green shoots, or some other Wall Street marketing phrase du jour. All I know is that the last secular turn in the debt markets gave us an 89% drop in the Dow Jones over 3 years (i.e. 1929-1932). Markets don't repeat exactly, but they do rhyme.

I believe by the end of this year, people will be hoping and praying to get back to the June, 2009 highs. We will probably just be praying to get back to the March, 2009 lows by that time. With a PE ratio around 120 right now on the S&P 500, let's just say we've got some work to the downside left ahead of us.

So, despite the difficulties, I think I'll keep trying to trade this bear with a portion of my capital. With the rest, I'll just hold physical Gold, my preferred form of cash for a Kondratieff Winter based on history. And once I think this cyclical bear market for the ages is over, I'll put everything I've got into Gold miners, who are sure to thrive in the weak economic environment ahead.

And how will I know this cyclical bear market is over? That's the easy part. I'll just wait for the Dow to Gold ratio to get to 2 (though it could go even lower) and then I'll start looking for opportunities. When I find ones I like at that point, I'll trade in my Gold and invest in something else. For now, the bear market is still in force and risk is extremely high in stocks. Act accordingly.

Wednesday, June 24, 2009

California is Bankrupt

California, the 10th (or up to 7th, depending on who you trust) largest economy in the world with a state domestic product roughly equal to the national GDP of China (or Italy or Spain), is bankrupt. According to this article on California's fiscal situation:

"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.

Now, those who still believe in decoupling and the China miracle should be wondering whether or not they think California can drag the global economy into a depression if China can supposedly drag the world out of it. Can't have one without the other. If the so-called miracle Chinese growth story was going to help the globe, the California basket case economy must be enough to negate it. And I doubt that anyone is counting on the equal-sized economies of Spain or Italy to help global growth get back on track.

The references to the "Great Depression" keep popping up and the statistics seem to indicate that the current period is either similar to or worse than our last deflationary economic depression. The arguments against this scenario usually resort to vapid, ignorant comments discussing an unemployment rate of 25% and the lack of soup lines. The unemployment rate in 1930-1931 was 8-9% (sound familiar?). Soup lines are packed but the media doesn't have time to cover them: American Idol and good sex or murder scandals draw more viewers and keep the corporate masters happier.

Iceland's economy collapsed, Eastern Europe is on the brink, California is flat out broke and about to issue IOUs, some of the largest financial institutions in the United States have failed and/or become nationalized (and others needed government hand outs to survive), the worst housing collapse in the USA since the last economic depression is well underway with no end in sight (no, we're not close to the bottom in real estate yet), bank failures are set to accelerate, GM and Chrysler are toast, the PE ratio for the S&P 500 is now well over 100 and sentiment figures indicate either complacency or outright bullishness.

Now I understand that when things seem darkest that it is time to be contrarian and buy anyway. I get it. I really, really do (and apparently the majority of market participants are way ahead of me in getting bullish near the top of this rally if the put to call ratios are a clue). But after a 35-40% rally within a bear market that isn't over by a long shot, why would anyone be something besides bearish unless day trading? I personally think we're on the brink of another quick move down in general stocks that should start before the week is over (possibly tomorrow).

Remember that the banks, financial firms and real estate firms are the weakest sectors and have led and will continue to lead this bear market down. These sectors for the most part peaked over a month ago and are heading down already. Here's a look at the homebuilders ($DJUSHB) using a 4 month candlestick 60 minute intraday chart:

Green shoots, meet my big brown bear boots.

I Think Gold has Bottomed

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.

Tuesday, June 23, 2009

More chart fun with Mr. VIX

The resumption of this cyclical bear market in stocks is on like Donkey Kong. I have been following the chart pattern of the Volatility Index ($VIX) like a hawk, as its turn is overdue. Today, a "Golden cross" of the 50 moving average above the 200 moving average occurred on a 60 minute intra-day chart (plot made invisible to highlight the moving average crossing):

Why does something like this have me so excited? It is important to not overanalyze markets (i.e. paralysis by analysis) and a Golden cross is old school, basic technical analysis 101. Rising Mr. VIX means falling Mr. Stock Market almost always. Here, in chart form, is why this cross cemented the resumption of the bear market in my mind after roughly 8 months of a declining $VIX (2 year chart of the 50 and 200 moving averages on a 60 minute intra-day chart with the underlying plot made invisible to focus on the moving averages):

Another nail in the bullish coffin. Gravity is a bitch and the stock market is about to find this out.

Regional Banks - a lock for the bears

Think of charts as the symmetry and art of human folly and there's no question that one sector is going right to its March '09 lows and that will simply be a pause on the way to further lows. This is a 60 minute intraday chart of the past 4 months of action in the KBW Philadelphia Regional Banking Index ($KRX), which I have covered before:

It stinks not to get TARP money and not to be able to suckle at the government teat. Regional banks are leading the way deeper into this deflationary economic depression with its attendant stock market bear for the ages. Get short or get out of the way. This is not a drill.

Gold Miner Fundamentals About to Improve

The cost of mining real money (i.e. Gold) out of the ground is about to decrease relative to the cost of Gold (again). Fundamentals DO NOT immediately translate into stock price changes, but they lay the groundwork for stock prices to change at some point in the future. I am intermediate-term bearish on senior Gold mining stocks, but will be looking to buy more once I think the current correction is over. The fundamentals are about to become even more supportive than they are already.

To review, I am bullish on Gold miners because I believe we are in deflation, not inflation. Most people interested in Gold miners believe inflation and/or hyperinflation lurks, but Gold miners do better during deflation than inflation. Why is this true? Simple. Gold is money and cash holds up well during a deflation - this is why Gold is near its all-time highs. Commodities such as energy decline during deflation and this is why they are way down from their all times highs and about to drop further, while Gold is about to rise and re-challenge its all time highs. Commodities, along with labor and capital equipment, reflect the main variable costs for Gold mining firms.

When the price of Gold increases relative to the costs of mining Gold, Gold mining companies increase their profits. This is true whether the price of Gold is increasing, flat or even decreasing! Remember Wal-Mart if you don't understand how a firm can cut the cost of the good(s) it sells and still make higher profits (it can if it cuts costs faster than it decreases the price(s) of the good(s) it sells).

On the other hand, if the oil price (as an example) is increasing faster than the Gold price while both are going higher, Gold mining firms have a hard time making more money/increasing profits (e.g., spring and summer 2008). Certainly there are times in an inflationary environment that the price of Gold rises more rapidly than the price of other commodities, but rarely is this as predictable as during a deflationary environment.

For Gold miners, the easiest way to assess profitability is to divide the price of Gold by the costs of mining. When this ratio is increasing, Gold miner profitability for producing mines is increasing. A crude estimation of Gold miner profitability can be obtained by dividing the price of Gold by the price of a basket of commodities. Though many commodities are not needed to mine Gold, others are essential (e.g., energy).

I use the Gold price divided by the Continuous Commodity Index ($CCI) to follow this ratio. Now, keep in mind that a change in fundamentals will eventually be followed by a change in the stock price, but the lag time can sometimes be significant. However, eventually increased profits for Gold miners should be reflected in their stock price, all other things being equal.

Here is a current chart of the $Gold:$CCI ratio on a daily candlestick chart as of today's close (6/23/09):

Now keep in mind that this ratio chart is bullish for Gold miner profitability and should ultimately improve the Gold mining sector stock prices after a lag, but this ratio chart is not indicative of inflation. During a deflationary depression, which I believe has already begun (i.e. Kondratieff Winter), the Gold price will probably hang around near its all time highs and even make new nominal highs while other commodities tank. Commodities do poorly during deflation, but Gold is a currency and is cash/money, not a commodity.

Firms that dig money out of the ground during a deflation (when everyone needs money) are rewarded handsomely for their efforts. It is cheaper to dig Gold out of the ground when costs such as energy and labor are falling relative to the market price of Gold, thus profit margins increase for Gold miners during deflationary periods. So, this chart is bullish for Gold miners but does not mean that those who hold Gold will get rich other than in a relative sense.

In other words, those who stay invested in real estate, general stocks, and commodities like oil will lose most of what they've invested but those who hold cash (i.e. Gold) will maintain what they've got and increase their wealth relative to their neighbors. I think Gold at $2000/ounce is a reasonable peak during a deflationary depression. The potential dynamics of a currency crisis, should a geopolitical event occur that dethrones the U.S. Dollar as the reserve currency of the world, make the built in insurance policy Gold offers against a rapid currency devaluation important in the economic crisis in which we find ourselves.

However, if the last deflationary depression is a guide, the real money to be made is in Gold stocks, not the Gold price. Once an investor anchors his or her portfolio with physical Gold, he or she should look to Gold mining companies for speculative profits. Now is not the time to invest new money in the senior Gold mining sector in my opinion. This is because the worst cyclical bear market in general stocks most of us will see in our lifetimes has begun a new leg down to re-test the spring '09 and fall '08 lows, which may or may not hold.

Such wicked bear legs down in general stock market indices spare few stocks and risk is too high right now to be investing new money in any stocks, including the Gold miners. Having said this, I believe the lows for the price of Gold will be in this week and then Gold will move to re-test its all-time highs over $1000/ounce. Now is a great time to secure some physical Gold coins or bars if one has not already established an anchor for their investment portfolio. And please do not mistake the fraudulent GLD ETF for an equivalent to physical Gold held outside the financial system - insurance cannot be trusted to those who have already shown a penchant for committing fraud (i.e. Goldman Sachs and JP Morgan are two of the custodians for the GLD ETF).

Monday, June 22, 2009

Gold bottoming

I think Gold is just about done correcting. I am expecting the bottom to come in between $900-$920/ounce and I think there's a good chance it will happen this week. Gold anywhere under $920 is a great buying point for investors.

In the bullish scenario, Gold just bottomed this morning. I would rather see a panic spike down into the $900-$910 range to shake out a few more weak hands and cement the bullish case. Those who hold the most Gold know how to run the weak bulls out so that they can pick up a few more cheap ounces for themselves before the next bull run.

Once this week is over, I think Gold makes a run for the $1000/ounce mark again and this time, new highs in the Gold price are more likely than not. I also think Royal Gold (ticker: RGLD) is about to explode upward with the Gold price. This is also why I think a double top in the senior Gold miners is not out of the question. But before the bull gets too frothy again, remember: if the price of Gold makes new highs and the senior Gold mining stocks don't, this is an indication to sell/avoid Gold miners for the intermediate term, not buy them. All stocks have trouble making new highs during a bear market leg down in the general stock market indices and one has already begun.

This just sets up patient Gold stock investors and speculators with another buying opportunity. Be patient and make more money with less stress (i.e. buy low so you can more easily sell high).

Sunday, June 21, 2009

Here's an A-B-C you can play for a bullish trade right now

I know my last post is not what Gold bulls want to hear, so here's a trade that's ready to go first thing Monday morning for those itching to play the bullish side. Silver miner Coeur D'Alene (ticker: CDE). This is a textbook A-B-C deep correction template (see prior post for explanation) and the volume on Friday was insane right at the bottom. To the 6 month daily chart:

You could buy this first thing Monday morning if it hasn't gapped up (don't chase it higher) and it should be good for a 20% gain from Friday's close. Protect yourself from downside losses using a stop loss and don't get too greedy on the upside. Once we get to 13 on this stock, I would either sell or switch to a trailing stop loss to protect profits.

I am not as bullish on silver miners right now as I am on Gold miners and would consider this an intermediate-term trade, not a buy and hold. Buy and hold for silver miners comes later.

Saturday, June 20, 2009

Gold Stock Correction Timing

I am a big time Gold stock bull based on the deflationary depression that I believe has already begun (for those who don’t understand why deflation is good for Gold miners, look here). The stock market is a dangerous place to be right now and there’s no rush to speculate on the upside right now. Patience will be rewarded as the new bear leg down in the stock market that has begun will take even good sectors down with it.

Gold stocks made their secular lows last fall in the Great Panic of 2008 and won’t be making any lower lows, unlike general stocks. I believe the top is in for the major Gold Miner indices like the HUI, XAU and the GDX ETF. Every stock makes its own movements and I am actually bullish right now on Gold royalty company Royal Gold (ticker: RGLD), but I wouldn’t put new money into GDX right now for longer-term investors.

Senior Gold stock indices usually begin a correction with a typical “A-B-C” configuration. This may or may not be the final corrective low for the entire correction, as corrections can grind on for months, particularly after a strong bull thrust. These corrections are boring and can be frustrating for those trying to get rich quick, but are a necessary part of any healthy bull market.

Rather than base my analysis on macroeconomic events, which so many try to use to justify different outcomes, I’d rather look at the rich history of the current secular Gold stock bull market for clues. We have entered a seasonally weak period for stocks, including Gold stocks, and now is not the time to be making new senior Gold stock purchases for the longer term in my opinion. This is because I believe better buying opportunities lie ahead.

Fundamentals are strong for Gold miners and those who understand how Gold stocks make money already know it. This doesn’t stop corrections from happening and never has! In fact, I am expecting Gold miners to correct deeply at a time when their fundamentals are actually getting stronger. Markets aren’t always rational and this is why technical analysis can help timing new purchases during a bull market.

Here are multiple charts of previous intermediate-term corrections in this Gold stock bull following intermediate-term multi-month bull thrusts like the one that started last fall. These are put in sequential order from oldest to most recent with my comments imbedded in the charts:

So there are three major “templates” for Gold stock corrections during the current secular bull market in Gold stocks, which is not close to being over:

1. Steep correction (most common): 4-8 weeks to get to an important low that makes a good trade or longer-term buy and hold. Look for index to reach the 200 day moving average and RSI to be around 30 on a daily chart.
2. Shallow correction: 4-8 weeks to get to a non-important low. Not a great buying or trading opportunity and one should sit on their hands if this occurs. Look for RSI well above 30 and stock index well above 200 day moving average on a daily chart. Shallow corrections imply more time and price correction will eventually occur later in the summer or fall.
3. Double top: May happen if Gold moves to new highs over the next month, which is a distinct possibility. DO NOT BUY GOLD OR GOLD STOCKS IF GOLD MAKES IT TO NEW HIGHS AND SENIOR GOLD STOCK INDICES DON’T. This is a classic bull trap and will cost investors dearly.

Here is the current chart of the GDX ETF, used because it is easily tradable without options (unlike XAU or HUI), with my thoughts:

I believe the “A” wave in the “A-B-C” correction is over. We will now rise for a week or two (or longer if a double top scenario is brewing), which is the “B” wave of the correction, then decline into a lower low in a “C” wave. In either scenario, or even if the shallow correction scenario occurs, better buying opportunities lie ahead. I think the shallow correction scenario is unlikely primarily because I expect volatility to increase markedly over the next month.

I would avoid buying senior Gold stocks until their RSI is near 30 and they are near their 200 day moving averages, as this provides a much higher reward to risk ratio. Not every stock will bottom at the same time, to be sure. Though such an analysis may seem overly simplistic, one should not try too hard to outsmart a volatile bull market! It also doesn’t pay to be overly bullish at inappropriately early times during one of the worst cyclical stock bear markets that any of us will likely witness in our lifetimes. Babies can get thrown out with the bathwater as the saying goes during deep bear market plunges.

Junior mining stocks and Gold royalty companies are a different animal altogether and this analysis does not apply to these sectors.

Sentiment and the Bear Market Resumption

I have heard a lot of talk in cyberspace regarding the degree of pessimism and bearishness being a contrary indicator. When you come to a site like this, you're going to get an earful of bearish talk right now. But are people too bearish at this stage of the ongoing bear market?

Instead of anecdotal claims of excessive bearishness and looking at comments on chat boards, why don't we look at the actual data? Let's see if the standard sentiment indicators support my thesis that the next bear leg down in the general stock markets has already begun. First up, The Investors Intelligence Percentage Bears chart, courtesy of (i.e. I stole this from) Market Harmonics:

Next up, a 2.5 year chart of the 8 and 20 day moving averages (smooths out the high daily volatility that makes a daily plot tough to look at) for the CBOE options total put/call ratio:

Following are charts of the bullish percentage in the New York Stock Exchange ($NYSE) and the percentage of stocks above their 200 day moving average ($NYA200R) to add some technical data to the sentiment data:

I think we've seen plenty of optimism and we are already past the peak. Reality ain't pretty in the economy we live in and people can only suspend the truth for so long.

Other supporting evidence for resumption of the bear market:

* We've already made it to the 200 day moving average on the major market indices.
* The weaker, leading sectors for this bear market peaked over a month ago and are already heading down (banks, home builders, financials).
* We have entered a seasonally weak period for stocks.
* We have an insanely low Volatility Index (VIX) that has been in a bear market trend for 7 months.
* The fundamentals are getting worse and worse in the real economy underpinning stocks and global trade has fallen off a cliff at a time when the current "raw" S&P 500 PE ratio is over 100!
* We've already rallied roughly 38% in the major indices since the March low - higher in percentage terms than most of the rallies during the worst bear market of the past century (i.e. 1929-1932).

My judgement on the general markets colors my judgement on Gold stocks, which are not immune from a general equity sell-off. This is why I'm not in a rush to buy more Gold stocks here. I already know a better opportunity is coming.

In the setting of a nasty bear market, Gold stocks can go lower or fail to make significant new highs even if the Gold price goes to new highs! I actually expect Gold stocks to rally here as no correction moves in a straight line and a double top is even possible, but the lows for the year in Gold stocks are not here yet - not even close. Patience will be rewarded, as cash is an OK position right now despite all the calls for an imminent dollar collapse and/or devaluation (that comes later...).

Friday, June 19, 2009

Three more bank failures

Just another Friday: 3 more bank failures brought to you by the FDIC.

Bank failures are now coming at a steady trickle that is set to accelerate meaningfully over the next year. Bank failures are highly deflationary in a credit-based society and create further pressure on asset prices. The pace of bank failures is reminiscent of the early 1930s. Things are unfortunately continuing to get uglier and uglier for the economy. The next bear leg down in the stock market, which has already begun, will reflect the economic realities that can no longer be ignored. The expected bear market bounce/rally, a technical event having nothing to do with fundamentals or green shoots, is over.

Another wave of pain is dead ahead. In the next few months, the FDIC will be broke and have to tap the taxpayers for some more money. The pending bankruptcy of California is also an interesting event looming in the not-so-distant horizon. Many banks and states like California continue to bury their heads in the sand and avoid their obvious insolvency issues. The can keeps getting kicked down the road but the end of that road is near for many of these institutions. These are not "black swan" events as they can be fully anticipated, but will be called such by some in the mainstream financial media.

State and other municipal bonds are a terrible investment in aggregate and will get creamed along with stocks and corporate bonds.

Great bear market trading set-ups

are everywhere right now. Here's a good example on the XLF financials ETF (60 minute intra-day candlestick chart):

Charts with juicy set-ups like this are all over the market. Time for the bears to make some money. The $VIX just filled the gap and is getting ready to explode to the upside. Next week (and maybe even the end of the day today) should be fun to watch if you're a bear.

I think the "A" part of an A-B-C correction in senior Gold mining stocks is likely over. Next comes a "B" wave rally to draw in some bulls before a "C" decline with the tanking of the general markets that will likely last into July and provide a great buying opportunity in senior Gold miners. More later on this. Patience, Gold stock bulls, patience. Of course, every individual stock has its own chart and that's why I remain long Royal Gold (ticker: RGLD), which I think will start moving to the upside in earnest next week.

Thursday, June 18, 2009

What's next for Gold and Stocks

I am a big, big fan of Exter's liquidity pyramid. John Exter was a central bankster who worked at the federal reserve in the 1940s and 1950s. His concern about a global fiat money system, once it emerged, was that it would eventually blow out in a deflationary implosion rather than an inflationary one. This is not a common thesis, yet it is one I believe is being proven correct in front of our eyes.

To review, the pyramid looks like this:

Exter believed that as deflation intensifies and gets worse, people "scramble" down the pyramid towards its apex to get more "liquid," since cash is king and other assets are all declining in price together in tandem. People forget about making money and try to preserve what they have.

So, what does it mean when the herd "scrambles" into a lower level of the pyramid? It means people sell the stuff on the layer above and use the proceeds to buy something on a lower level of the pyramid. In other words, asset prices decline at higher levels of the pyramid and increase towards the lower end of the pyramid.

There are stages of "herd behavior," though things don't travel in a straight line. I, for example, decided to go straight to Gold with a portion of my savings once I realized the jig was up, even though I knew it may take a little time for this investment to pay off. Traditional investors went to government bonds or bills this fall. Some poor souls are still trying to bottom fish the real estate market, even though it doesn't have a snowball's chance in hell of bottoming before 2011-2012. But, in aggregate, the herd is trending lower on the pyramid, which means things on the higher levels of the pyramid are unwise investment choices. In other words, what's next for general stocks is more losses.

Gold, as the apex of the pyramid, is trying to balance a helluva lot of paper illusions on its shoulders right now. The pyramid is drawn with Gold at the apex instead of the base for a reason: there ain't enough Gold to go 'round when the base collapses and a substantial increase in the relative Gold price is needed to restore confidence in paper assets and "re-liquefy" the system. Printing paper tickets won't cut it when confidence is lost, as is about to happen in spades.

At each stage of a deflationary collapse, another "layer" of the pyramid is abandoned and the "herd" trends towards burrowing closer and closer to the apex. Let's look at the pyramid again, but with some lunatic fringe rants scribbled across it:

Now, the important thing to remember about this pyramid is that, in extremis, it can be considered the same thing as a hyperinflation. In other words, things at each successive layer of the pyramid get sold off from base to apex. Once federal reserve notes get sold off near the apex of the pyramid, guess what? We're back to the tin foil hat-wearing hyperinflation crowd scenario!

If federal reserve notes are sold off in favor of Gold, it's game over. Now I'm not saying that's gonna happen, but holders of Gold are protected if it does, while holders of federal reserve notes (i.e. U.S. Dollars, which are issued by a private corporation that is as federal as Federal Express and cares about the United States about as much as Putin does) are betting that this deflation stops short of total chaos as in a typical recession.

This ain't a typical recession. If you don't understand that yet, you need to. This is a secular turn in the credit markets, just like occurred in the 1930s. A housing bubble collapse is always devastating to the economy because it wipes out the financiers (i.e. the people who made the home loans). When the financiers get wiped out, say goodnight to the credit markets. When the credit markets get overly cautious, the little gal/guy can't leverage up anymore and is actually asked to pay her/his tab. This is deflationary and kills an economy that relies on credit, as ours does. Ask Japan what it's like, now that they are mired in their 19th year of a wicked secular bear market.

So, yeah, based on history and this little pyramid from one of the smarter "insiders" as a guide, I feel great about holding physical Gold. I'll let the herd come to me and then I'll happily start to sell them my Gold once the Dow to Gold ratio gets below 2.

And by the way, "paper" Gold is not the same as physical Gold held in one's possession. A "note" on Gold, like the GLD ETF, is sort of like a corporate bond in terms of where it resides in the pyramid. If a default occurs, which it likely will in the GLD ETF, people believe that the government and securities law would protect them and pay them in federal reserve notes for their damages. All I can say is: maybe. The government has protected the bankstas through this whole fiasco as it always does and the custodians of the GLD ETF are the same financiers who have fed hungrily at the taxpayer teat throughout this debacle (think JP More-can, Goldman Sucks, etc.). If you think Uncle Sam favors you over the bankstas, perhaps you deserve to be swindled.

Gold stocks are a derivative of Gold and are not the same thing. Gold preserves wealth in this environment, while Gold stocks are a vehicle to speculate and try to increase wealth (and speculation requires taking a risk by definition). Now is not the time to invest new money in Gold stocks in my opinion, but this bear market in general stocks and other "traditional" assets won't last forever. And when the bear market in stocks ends, Gold stocks will be first sector out of the gate rushing into a new bull market and will outperform every other major asset class.

I believe late summer and/or fall will present opportunities in the Gold mining sector almost as good as this past fall. Get liquid, get patient and get ready to pounce once the dust settles later this year if you're willing to take some risk in the Gold mining sector. You will know this sector is the one to put money into due to its relative strength. Watch for general stocks to make new lows this year (and maybe even this summer) while senior Gold stocks refuse to do so.

Wednesday, June 17, 2009

What a Strong Bull Market Looks Like

Here it is in all it's glory, the 10 year weekly log scale chart of Mr. Gold:

Here's a previous historic example of a similar strong bull market at the same phase of the bull where Gold is now (erased names and dates for fun):

And here's what came next in the historical example above:

The other investment/asset class I am aware of still in a long-term bullish market alignment is U.S. government debt (i.e. U.S. bonds), which is a deflationary sign, not an inflationary one. Oil and other commodities are no longer in a bullish alignment. Gold is a currency. Gold is money. Gold thrives in a Kondratieff Winter as people scramble down Exter's liquidity pyramid to the safety of the pyramid's apex.

Bear market targets

There's time and there's price. If you believe, like I do, that a deflationary wipe-out must occur before further cancerous U.S. Dollar debasement (oops, I mean green shoots) can, then you should also believe that this cyclical bear market in general equities ain't gonna take much longer if history is a guide. Most such wipe-outs take 2.5-3.5 years. We're already 1 year and 8 months into this bear market and I personally count the last 7 months (since November panic lows) as one big expanded zig zag correction.

The time issue is important when trading intermediate-term swings and figuring out when it will be time to get back in for "the big rally" or the real re-flation trade (i.e. a new cyclical bull market rather than a 3 month manic melt up correction). The deflationary collapse issue is important because you are not going to see a market in a deflationary collapse mount a big rally that goes far above the 200 day moving average for a prolonged period of time in such a bear market. That just isn't the way they work. Think 1929-1932 bear market and it's the spring of 1931 right now.

So, how far down are we really going to go if you subscribe to the deflationary market wipe-out model? While I realize there are opposing inflationary arguments, I'm not going to revisit the deflation versus inflation argument at this time. In the 1929-1932 bear market, if you buy the "spring of 1931" argument as an equivalent point in time (which I think is quite reasonable), we'd be facing about a 75% loss from here until the final lows that would occur a little over a year from now. Please don't think it can't happen.

But let's take a look at the charts to see what's reasonable and what's likely. Following is a roughly 30 year weekly log scale candlestick chart of the S&P 500 with my thoughts:

Why so bearish? First, history teaches that a debt bubble popping spares very few and the market crash is generally quite severe as a prelude to the subsequent economic depression that occurs. Second, remember the FIRE economy? You know the acronym describing what our economy is based on that stands for "Finance, Insurance and Real Estate")? Well, let's take a look at two of the components of of the FIRE economy. Let's start with real estate. Following is the U.S. Homebuilders Index (10 year weekly log scale chart of $DJUSHB):

Next, let's look at the financial sector using the banks (10 year weekly log scale chart of the $BKX):

Insurance indices have generally only lost about 70-75% peak to trough, so their stocks are the bulls of our economy. Now, the FIRE companies have already laid off an insane number of workers and they are the primary basis of our whole economy. Many of these companies are fighting to survive and many of those currently left standing and not already nationalized won't make it.

So, what is left to drive our broken FIRE economy besides the U.S. government? The auto industry?! Retail?! Hollywood, Apple and Google can only be expected to do so much. The FIRE stocks have already sunk and are set to make new lows and the rest of the market will go down rapidly with them now as the final leg of the bear market gets set to destroy all hope with only a few quick fibrillation-inducing corrections along the way.

Those invested in physical Gold can sleep well at night and simply wait for the Dow to Gold ratio to come down to 2 or below and then prepare to trade their Gold for stocks or other paper investments as the next cycle begins. Gold stocks will not be immune from the downdraft but have already made a major cyclical bottom and will not be making new lows along with the rest of the stock market. I would recommend waiting before putting new money into the Gold mining sector, despite the fact that I think Gold is about to bottom and re-test its all time nominal highs right along side a rising U.S. Dollar Index.

Tuesday, June 16, 2009

Who are you going to trust?

As the debt collapse continues and bankers and governments become desperate to save the system that allows them to continue to lead the lifestyle to which they have become accustomed, trust will break down much further than it already has. Desperate men and women should not be trusted to do the right thing and yet most still look to the desperate to do something other than save their own skins.

Who do you trust to fix this problem and/or point you in the right direction as an investor:

Do you trust your government?
Do you trust the non-federal, for-profit, private federal reserve corporation?
Do you trust Wall Street?
Do you trust insurance companies and other 401k custodians?
Do you trust CNBC?

"You have to choose [as a voter] between trusting to the natural stability of [G]old and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for [G]old."

George Bernard Shaw

Once you accept that this is not a run-of-the-mill recession and that an economic depression just like the 1930s has begun, it is not hard to see what comes next. Leaving your money in a 401k stock mutual fund and hoping for the best is not a reasonable options. If you are not convinced, perhaps the new leg down in this vicious cyclical bear market, which has already begun, will convince you.

The primary goal in such a scenario for conservative investors is to try to maintain what you’ve earned/saved (i.e. not lose most of it) and to get out of debt. The best options to achieve these goals from an investment standpoint are cash and Gold. But as the 1933 government-decreed cash devaluation showed, your U.S. Dollar cash is not safe in the longer term. Gold, on the other hand, is the ultimate form of cash because it cannot be debased and requires no faith in the government to do the right thing. Gold is money and is a global currency, not a commodity.

Those who would sell you on the benefits of the stock market and “staying the course” are the same ones who claim they never saw this coming (and I unfortunately believe many of them). These are also the people who would sell you paper Gold and tell you that it is the same as holding physical Gold without all the hassle or risk. For example, JP Morgan and Goldman Sachs are a few of the banker custodians for the GLD ETF.

There are now confirmed reports that the Canadian Royal Mint is missing some of its Gold, for reasons currently unknown. I am happy to assume that this is an honest mistake, just as I am happy to assume Wall Street and the banking system didn’t know giving home loans to anyone with a pulse regardless of credit risk would not cause problems down the road. This doesn’t change the point that we are all responsible for our own financial security.

"If you don't trust [G]old, do you trust the logic of taking a beautiful pine tree, worth about $4,000 - $5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars?"

Kenneth J. Gerbino

Gold can protect your wealth but your wealth is not safe in the stock market, corporate bond market, or real estate. Commodities will do very poorly in a deflationary collapse, but will do well if the U.S. Dollar is dethroned as the world’s reserve currency. Though the U.S. Dollar will lose its reserve currency status at some point, it is not at all a certainty in the next year and the damage that will likely be done to commodity prices in the mean time will soon leave people hoping to get back to the November, 2008 lows.

Gold is the easy, no-brainer play for this environment. Most who study markets are familiar with the saying to the effect that “cash is king in a bear market” and “cash is king during deflation.” Gold is the best form of cash in the current environment and has a built in insurance policy against a significant U.S. Dollar currency devaluation.

Many who understand the potential for the Gold price to move higher don’t understand that by using paper proxies for actual physical Gold coins and bars, they are actually hurting the Gold bull. Bankers would like nothing more than for people to accept paper proxies for actual physical metal. How many paper claims per physical ounce of Gold are there in the world? Central banksters around the world hold more physical Gold than anyone and they will always prefer it remains that way. They know that he/she who holds the actual Gold makes the rules.

I don’t think people should plan on holding a significant amount of physical Gold forever, but in times like these, a portion of one’s savings belongs in actual physical pieces of Gold metal. Once the Dow to Gold ratio gets to 2 or less, this will be the time to consider trading most of one’s Gold for another opportunity. And for those who want to increase their wealth while others are having their wealth destroyed, Gold stocks will far outperform the price of Gold and a fresh buying opportunity is only a few months away.

Monday, June 15, 2009

Stock Market Rally is Over

Done. Finito. Put a fork in it. Be short or be out of the way if you're an intermediate-term trader. Forget commodities and forget inflation. The next bear leg down in the stock and commodities market is here. Yes, it is possible that there could be an up day in stocks and commodities tomorrow, but I believe the intermediate-term top for the stock market is in and that a full on resumption of the bear market has begun.

The U.S. Dollar is rising from the dead for yet another intermediate-term rally, commodities are about to plunge deeply, and stocks are set to re-test the lows of March, 2009 and/or November, 2008.

Gold will once again separate from other commodities because it is not a commodity, it is money. That doesn't mean Gold stocks won't take a hit with the regular stock market, because they will. I'll be back in the Gold mining sector looking to buy in the late summer or fall depending on the price action.

I stuck my neck out and called for the stock market top in the New York Stock Exchange ($NYSE) on a daily closing basis - this is a foolish but fun game to play. I believe that call will be proven correct (my call on the Wilshire 5000 Index I believe will be off by about 20 points on a closing basis). The trend line of the $NYSE has broken to the downside after a tremendous and rapid bear market rally that has restored hope beyond belief in the middle of the worst economic meltdown any of us will witness in our lifetimes. Kudos to the green shoot marketers for drawing in so many retail bulls to the slaughter.

Housing hasn't bottomed, bank failures are set to accelerate, international trade is falling off a cliff, unemployment continues its rise unabated, and earnings are dropping precipitously around the world (except for the Gold mining sector). Get out of the stock market unless you are short or a long-term Gold stock holder. Continue to hold physical Gold as an insurance policy, cash equivalent and hedge against a geopolitical crisis that dethrones the U.S. Dollar.

To the charts. First, the New York Stock Exchange ($NYSE), which is less inclined to be assaulted by da boyz with their tape-painting / game playing (18 month daily candlestick chart):

The Volatility Index ($VIX or fear gauge) has broken out of its channel:

The regional banks, using the KBW Philadelphia Regional Banking Index ($KRX) as a proxy, made a top over a month ago and have just started a fresh second leg down:

The government does not create the primary trend and the trend is now strongly deflationary and down in almost all asset classes. Of course the government would like to inflate its way out of this mess, but why do people expect the government to succeed? Did I miss their demonstrated competence in handling financial crises?

If your answer is the printing press, need I remind you that Japan is still mired in a 19 year deflationary bear market despite the government "stimulating" the economy with their printing press for the past decade? Printing more debt cannot reverse a debt bubble collapse until market forces have run their course. Of course we will have inflation eventually, but deflationary collapses are brutal, fast and can wipe out years of inflationary gains in asset classes (as they have already started to do).

Sunday, June 14, 2009

Junior Gold Mining ETF?

The folks behind the GDX ETF, Van Eck Global, are apparently planning to launch a junior Gold mining ETF. Here's a link for those interested in reading the preliminary info.

This is big news and will bring liquidity into this sector of the market. A diversified basket of miners is exactly what is needed in the junior Gold mining sector due to the high individual company risk. I think Van Eck Global is smart and is starting this fund at the right time (looks like it will take a few months for it to be available). I for one will be buying junior Gold miners in spades before the year is over and will certainly use this planned ETF if its holdings and expenses look good.

Junior Gold miners are going to become a raging bull market soon and this ETF, if it comes to fruition, will only hasten the stampede into this sector once it gets going.

Gold stock correction

Though a double-top is possible, I believe the intermediate-term bull move in senior Gold stocks is over. So the question for Gold stock bulls is when to put more money into the sector. There are two issues in gaming a correction in a bull market - time and distance.

I think both are important. If you look at previous corrections in Gold stocks, some important "pointers" can be learned. There is no question that trying to time a bull market can be fraught with hazard and you can miss out on profits and even lose money in an obvious bull market using such tactics.

However, I for one am going to continue to try. Gold stock corrections at the intermediate-term stage take a minimum of 4-6 weeks to reach the price bottom and even then they usually meander around for several months in the summer and don't get moving until the August-November time frame. "Sell in May, go away, and come back after Labor Day" is unlikely to be an unprofitable strategy this year.

I know that Gold bulls don't want to hear it, but now is not a good time to put new money into senior Gold miners unless one is truly committed to dollar cost averaging into this sector over the next several years. Junior miners and explorers are a wild card, as these are about to become lottery ticket plays and timing them is an arduous task for people far better in trading than me.

For rough guidelines, I think waiting AT LEAST 4 weeks from the June 1st top is prudent. I also believe it is HIGHLY likely that senior Gold mining indices (e.g., $HUI, $XAU, GDX) will touch their 200 day moving average on a daily chart at some point before this correction is over. I also would not buy the senior Gold stocks until the RSI on a daily chart is solidly below 40 (and preferably at or near 30). These three guidelines are probably the best recommendations I could give.

If the Gold mining indices aggressively and precipitously drop to their 200 day moving average within 2 months, then that could be a trading opportunity for a summer swing that may be good for a 30-40% bull trade (or just a good long-term buying opportunity with the understanding that a second low will likely come in later at similar levels). If the correction is shallower and choppy, it will likely last until the fall as a sleep-inducing affair until the 200 day moving average can catch up to the price.

It must be remembered that I am a short-term deflationist and the type of bear market I believe we are in for general stocks has a long way to go. If we break below the March lows in the general stock market indices (which I believe we are going to do), there is no way Gold stocks won't get caught up in a heavy and deep correction. It would be naive in my opinion to think otherwise.

However, when people are dumping Gold stocks again this summer and/or fall, just like last fall, I will be buying. Here and here are some of my real time calls to buy Gold mining stocks from last fall.

Given the heavy volatility that I expect dead ahead, my hunch is that the Gold stock correction will be violent rather than shallow. This may present two buying opportunities (i.e. a zig zag correction with one bottom coming up in the next 4-8 weeks and the second bottom in the fall) before the next leg up in Gold mining stocks. Here's a chart of GDX as a representation of a buyable Gold stock index with my thoughts:

Though I think it is too early to buy the senior Gold mining stocks right now, I remain bullish on small cap Gold royalty company Royal Gold (ticker: RGLD) and continue to hold 2010 bullish LEAP option calls on this stock. RGLD has a propensity to march to its own drummer and doesn't always follow the senior Gold stocks. It's long-term chart is much different than most senior mining stocks and it has recently undergone a long-term breakout from a mult-year trading range (see previous comments on RGLD). The fractal I am following from 2001 remains in play:

And here's a current RGLD weekly chart thru Friday's close:

I personally believe that there is more money to be made going short in general stocks right now than chasing Gold miners but for those who want to play the bull side, patience is now key in the senior Gold mining stock sector. There will be plenty of time to buy at lower levels than today to maximize profits. For now, I think being risk averse (e.g. in U.S. Dollar cash, Gold or short-term U.S. government bonds) and waiting for a better buying opportunity in Gold stocks or being short the stock market are the best options. I would not put new money into senior Gold stocks right now. I still believe Gold has a good chance of making a nominal new high in the next month after the current mini-correction is over.

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