Today gold is trading slightly above $1,600 per ounce US$. In late 2011 it reached above $1,900 per ounce US$. It had a marvelous run, from $350 per ounce to $1,900 per ounce. Those that jumped on this train did very well indeed. It is now 1 1/2 years later.
Pundits everywhere were projecting $2,500 per ounce and $5,000 per ounce. Technical analysts everywhere were projecting a further bull market in gold. Yet the charts showed differently. Cymor cautioned against blindly buying gold several times.
It is those that come to the party late, that always suffer. Nothing goes in a straight line in the stock market. A good pick usually overshoots reality and then moderates. Gold is such a commodity. As early as October 2011, just as Gold was trading at its highs, Cymor urged caution. We felt there would be a correction and there certainly has been. Gold is down $300 from its high which is a 16% correction.
The Rationale For Gold
There is a wide body of belief that believes the world is tottering on financial ruin because of the massive debt loads incurred by governments and privates alike. The feeling is that the debts are so large, that they can never be repaid, and inflation, or re-structuring, are the only alternatives. The debts of almost every country are at historical highs. The debts of the USA are at the levels per capita reached to finance WWII. The debts of Europe dwarf those of the USA. The debts everywhere are enormous. The debts of Japan dwarf those of Europe.
There are some problems with this theory. Firstly, this borrowing had to come from somewhere. The oil imports of the last 30 years have produced enormous sums of money sloshing around the world. The normal solution to this problem, is rising prosperity elsewhere, or re-investment of these monies in the host country – USA. The money meanwhile travels the world looking for a home and a Return on Investment.
The next issue is that gold, contrary to the beliefs of gold bugs, does not rise in proportion to the rise in inflation. It is true that there is a relationship, but unfortunately it is never a direct relationship with the rise in inflation. As inflation rises, interest rates rise. As interest rates rise, it becomes more and more expensive to hold gold which pays no dividend and has zero return on investment aside from changes in its value.
The next fallacy in the theory of the gold bugs, is that some dramatic action or event will inevitably occur because of the lack of sustainability of these debts. If a single country cannot pay its debts, a revaluation or currency crisis occurs. But this problem is worldwide, and I think that every country in the world will not have a revaluation at the same time. Our modern society would be critically wounded. This is what the gold bugs believe will happen. We do not believe this will happen. For a detailed analysis of this situation, read our previous blogs.
Technical Analysis – The Current Activity of Gold Seems Normal
In September 2011, Gold reached a high over $1,900, which was quite amazing. It was an unprecedented run up starting in 1999, with a major pause in 2007 when it reached $1,000 and then retreated to $700. Then the rise started again, and with very few pauses, the price of gold was like a rocket, rising constantly until it reached its high of $1,900. You were very happy if you had listened and bought gold in any period before September 2011.
On the other hand, if you listened to the Airheads and bought anytime afterwards, unless you were lucky, you were disappointed.
Since the fall of 2011, gold has performed poorly. Since then it has not reached its high again. First it had a series of lower lows and lower highs, which is a very weak signal, falling to below $1,600. In the summer of 2012, it started climbing again. Technical analysts immediately interpreted this as the pullback allowing gold to gain strength for its next meteoric rise. When it started to climb again, analysts were excited and projected the previous high would be broken. Gold was sure to rise to $2,000 and beyond.
That was not to be. Gold faltered at its previous lower high around $1,800. Then gold faltered further and began to fall. The recent fall has now accelerated. Last week, from February 5, 2013 at $1,670, gold has fallen to slightly over $1,600 in only 10 days, with the fall accelerating in the last few days.
Maybe gold is gathering strength for its next move up. More likely there will be long wait for this to happen. The rise in the summer of 2011 from under $1,600 to $1,900 could be considered a gap in the chart. This rise was exaggerated and far too strong for the reality of its value. There was no reason for this astonishing rise, except people climbing on the bandwagon late in the game.
What is normal in charting circles, is that when a stock or security jumps too fast, it creates a “gap” in the chart, and what is expected is a fall in the future to “fill in” that gap. That is what is apparently happening now.
Buy When There is Blood in the Streets
Gold producing and near producing junior resource companies are severely depressed currently. That market has fallen so badly that many companies are in danger of actually have to shut their doors. The price of the shares of all of these companies have no relationship whatsoever to the intrinsic value of those companies. They are an incredible bargain right now. Consider that the average price of producing an ounce of gold from the ground is roughly $600 to $900, depending on type of resource, infrastructure and location. Of course, there are prospective mines with a much higher estimated cost of production, but these were never economical and will not be economical in the near future. If the price of gold remains at $1,500 or $1,600, or anywhere above $1,200, then a mine producing gold at a cost of $750 would indeed be very profitable. The shares of these miners are now severely depressed. They are bargains.
Remember the adage “Buy Low, Sell High“. Do we have to repeat where this market is now? Buy low.
Remember what Baron Rothschild said so many years ago – “Buy When There is Blood in the Streets.”
Need we say more? If you want to do well in the market, look for companies near or in production, companies that have the financial resources to continue, companies that have rich and marvelous deposits.
Remember that following the crowd is normally a formula for losses. This is an obvious opportunity. Remember what happened in 2008. Those that fled in terror, lost their money. Those that realized that the market has violent swings, and always has had violent swings, were rewarded by a dramatic and continuing rise in the price of stocks after the crisis did not destroy the world. The current crisis, is still not a crisis. It is a fear that a crisis will occur. Even if the crisis does occur, the world will survive and the stock market will survive.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.