Gold Versus Paper

Ummm, Really?

2012-02-13T19:44:00.000-08:00

My worst trading performance has been when I have gone short. I have made big money (like when I was leveraged short during the fall of 2008 as documented here and here), but I have also lost large amounts of money fighting the hoards of determined bulltards still stuck in last century's paradigms. The tsunami of paper depreciation unleashed upon us over the past decade makes shorting any market much more hazardous than being long. Trust me, I have learned my lesson in this regard the hard way.

Right now, my subscribers and I are short senior Gold stocks as a scalp trade (after catching the high in the GDX ETF on February 2nd). So far, so good. It is almost time to flip back to going bullish on the precious metals sector. When I look at the general common equity markets, I see rabid paperbug froth everywhere. Just a few minor points of extremely bullish sentiment to point out.

First up, here's a chart from a piece by sentimentrader.com, which examines the ratio of money flowing into a Rydex bull mutual fund versus a bear fund (i.e. examines retail money flows into bullish bets versus bearish bets):

Next up, a chart of a proprietary NASDAQ sentiment indicator from Market Harmonics:

Record highs, eh? I can see why, what with the super-strong economy and what not. And here's the opinion of the trusted and revered investment advisors that always buy low and sell high for their clients (sarcasm off). Following is the NAAIM (National Association of Active Investment Managers) sentiment survey thru last week:

I am thinking a sharp chop lower in common equities followed by a drunken and staggering final charge into a March peak. After that, we'll have to see. But for now, risk is exceedingly high in common equities. There's rarely a need to tell a Gold bull about such risk, as those who have crossed over to the dark side and embraced the secular bull market that is the enemy of the state rarely need reminding that we are in the cycle where paper declines relative to real/hard assets.

Own physical Gold and sleep well. When the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), consider waking up from that comfortable financial sleep and looking for something to buy with your bling bling. And if you're interesting in speculating in the paper markets after you have established a core position of physical metal held outside the banking system, consider trying my low cost subscription service.

Waiting to Pounce on Precious Metal Profits

2012-02-08T19:52:00.000-08:00

Let me start by re-iterating that I am a secular permabull on physical precious metals, particularly Gold. When you're dealing with the end of the road for the current international monetary system (a la the 1930s and the 1970s), there's only one asset that is a complete no-brainer to own. As a hint, that asset is shiny and owned by every central bank in the world "just in case."

However, I also like to trade. When trading, I would sell or buy anything if I though there was a profit to be had. For example, my subscribers and I have been short senior Gold stocks as a "scalp" trade over the past week. Does this make me a traitor? I don't think in those terms, as I am a more practical Gold bug/bull. The more paper I make, the more metal I can buy.

However, once the current short-term correction finishes, it is back to bull mode. Gold, silver, and Gold and silver stocks - they're all going to go higher. The only real conundrum is which of these items to buy as a bull trade once the correction is complete. In another week or so, we'll hit bottom and find out which of these items will outperform.

I like the prospects for the entire precious metals patch. From a trader's perspective, I think silver has an obvious minimum target when using the SLV ETF. Here's an 8 month daily chart of the SLV ETF thru today's close to show you what I mean:

Once we correct a little (likely in a scary fashion over a few days for silver and senior Gold stocks, as they both seem to enjoy volatility as much as Bernanke likes creating money out of thin air), a decent 15-20% move higher is likely. After that, we'll have to see. All precious metal bulls know that we'll ultimately make new highs in silver above $50/oz., but the exact timing is uncertain from a trader's perspective. This is why it is best to simply buy physical metal and hold on for the volatile ride. However, some of us like to speculate with a portion of our capital and this message is for you fellow punters out there in the PM patch.

Now, the senior Gold stocks are the basket case of the PM sector. All this crap about Gold stocks leveraging the price of Gold and having bullish fundamentals doesn't mean anything if they won't perform here and now. And I'll be honest, I'm very concerned about their recent performance. That doesn't mean there isn't money to be made trading the senior Gold stock indices like the GDX ETF, but I am not impressed with the move off the late December bottom so far. Here's an $HUI:$GOLD ratio chart to show you what I mean:

A permabull will tell you that any minute now, Gold stocks are going to blast higher and if you don't buy right now (yesterday, in fact), you're going to miss out on a quadrillion dollars. Me, I don't think so. I think this warning signal should be taken seriously. It means that the senior Gold stocks could be headed for something like this over the next few months (2 year daily chart of GDX thru today's close):

This is not a prediction, by the way, but if senior Gold stocks don't start outperforming Gold soon, don't be surprised if something like this happens. I trade Gold stocks, I don't own them. I prefer to own physical metal and then speculate in stocks and paper metal (as well as anything else that looks like it might be good for a winning trade). Investing and trading are very different and require a different type of focus and attitude. With physical Gold, I never worry about the price on a day-to-day or week-to-week basis (unless I am looking to buy more). Why? Because I understand the secular bull market in Gold and why it won't be over for some time. I never lose sleep or worry if Gold drops 10 or 20% when priced in my local currency (i.e. US Dollars). Wake me when the Dow to Gold ratio gets to 2 (and we may well go below 1 this cycle).

The bottom line is that we're going higher in the PM sector. Exactly how we get there, only Mr Market knows for sure. But I believe there are profits to be made speculating in the paper markets. After calling the exact day of the bottom in the PM patch for my subscribers and I in late December, we sold our long trading positions in senior Gold stocks 2 weeks ago in anticipation of the current correction. We went short senior Gold stocks on February 2nd, catching the high that day. In a week or so, we will be going long again in the PM sector. If you'd care to join us in the dark jungle known as the paper markets, a one month trial subscription is only $15. But please, don't even think about subscribing until you've secured a core investment in actual physical metal held outside the banking system.

The Last Gasp

2012-01-29T19:55:00.001-08:00

I am speaking of the intermediate term move in paper assets versus hard assets, affectionately referred to as "Gold versus paper" around here. Paperbugs had their moment in the sun these past few months and I hope they enjoyed it. The reversal in fortunes has begun.

This reversal of fortunes is on a relative basis of course, as the sea of electronic money created out of thin air in the last few months is enough to make Rudolf von Havenstein blush. When the currency units around the globe are dissolving in front of our collective (and dismayed) eyes, relative wealth becomes a more meaningful concept than to contemplate what a quadrillion means.

Bernanke decided to help the US Dollar along last week by extending a monetary policy of insanity, approved by Keynesian clowns everywhere, namely that of further destroying the value of savings and the average person's ability to keep up with the costs of living. In the absence of reason or checks on the power of centralized monetary authorities, debasement of currency can always be achieved in a paper monetary system. And a Gold standard simply means that the Gold standard can be suspended in times of trouble. Easy money, baby. It's almost as old as the concept of money itself.

In the later stages of a monetary system, speculation runs rampant as a means to try to keep up with the ravages of inflation. We are there now and I am one of the many pied pipers claiming to have the answers to establish gains in excess of this pernicious and global monetary catastrophe unfolding at an uncomfortably rapid pace. I believe physical Gold (and silver) held outside the banking system are the easiest and most conservative means of preserving wealth in the current secular cycle (which is far from over), but I also like to speculate with a portion of my capital.

Currently, the charts to me are unambiguous. It is time for hard assets to trump paper once again. First, the chart nearest and dearest to my heart, the Dow to Gold ratio ($INDU:$GOLD). Here is a 7 year log scale ratio chart of $INDU:$GOLD thru Friday's close:

And here is a chart of the S&P 500 index divided by the price of commodities using the CCI Commodities Index (i.e., $SPX:$CCI), employing the same 7 year weekly format thru Friday's close:

In the short-term, I believe both the precious metals sector as well as other risk assets like commodities and common stocks are set to decline for a few weeks. After that, however, my subscribers and I will be looking to go long again in the precious metals sector after closing out trading positions on Friday for big gains. I don't advocate speculation, as it is riskier than buying and holding physical precious metals to profit from the further gains that lie ahead in the secular precious metals bull market.

However, for those who are interested in speculating with a portion of their savings, I offer a low-cost subscription trading service that focuses on the precious metals sector but also looks for opportunities in common stocks, commodities, currencies and bonds. I believe there is a significant amount of money to be made trading in the PM sector over the next few months (and, of course, beyond).

Has the Central Fund of Canada Given Us Another Silver Buy Signal?

2012-01-11T20:09:00.000-08:00

I stumbled onto this little gem about a year ago and I think it is about to work its magic again. I am speaking of the ratio of the Central Fund of Canada (CEF) to the price of Gold. Please see the original blog post for an explanation of this CEF:Gold ratio.

This CEF:Gold ratio barely triggered a buy signal for silver on December 27, 2011. Of course, a "barely triggered" signal may be all we are able to achieve if silver is getting ready to rocket higher after a brutal but fairly typical (for silver) correction from the the spring, 2011 highs. Here's a chart of this ratio thru today's close to show the buy signal for silver (the top plot is the price of silver, while the lower plot is the CEF:$GOLD ratio):

Coupled with horrible sentiment for the restless metal and rampant fears of a deflationary collapse, I think the low is already in for silver. I give you this chart of money supply growth courtesy of shadowstats.com:

This type of monetary madness is what gave rise to silver's last run! We'll have to see what happens, but I think the CEF:Gold ratio will once again prove to be right. I like metal stocks over metal right now and silver over Gold. However, I like anything precious and metal-related at current levels. My subscribers and I are fully invested in order to profit from a further advance in the PM sector, so I am biased. Why don't you join us - a one month trial is only $15.

Calling the Bottom in Precious Metals

2011-12-30T18:45:00.000-08:00

Now that my subscribers and I are fully into bullish positions in the precious metals sector, I hope they won't mind me telling you that I called for the bottom in Gold stocks on Thursday morning (12/29). I believe the bottom is in for silver, Gold and their respective stocks, although the metals may need a re-test of the bottom while I think Gold or silver stocks (as sectors) will only make higher lows on any corrective action.

There are some major bells ringing in the sentiment department for the PM sector that should not be ignored. First up, a chart from Guy Lerner (link to article pasted onto the chart), which plots the Market Vane sentiment (i.e. percentage of bulls, bottom of chart) against the price plot of Gold:

Since this chart was published, according to Richard Russell via a blog post on King World News (I don't subscribe to Market Vane, so I'll take Sir Richard and King World News at their word), the number has dropped further down to 56%. As the chart above shows, major bottoms in Gold have been formed in the 50s range on this sentiment indicator. We are there.

Next up, a chart I created in Excel for the Rydex Precious Metals Mutual Fund using the net asset value of the fund, which measures the flow of money into and out of the fund. When the plot in the chart covering the last 5 years below is low, the herd is bearish (i.e. bullish from a contrarian perspective):

The persistent multi-month malaise in this sentiment indicator I think is indicative of the lethargy in the Gold stock bull camp. Gold stocks have sucked over the past year or so, let's be honest. "Gold up, Gold stocks down" is not the way to build enthusiasm among Gold stock investors, to be sure. But these sentiment indicators tell us that the time to be bullish on the precious metals sector is at hand.

Furthermore, Gold and silver have complete-looking corrections to me using both time and price. The late September swoon in the metals (Gold to low 1500s and silver to low 26 level in USD terms) was enough price damage, but the current re-test satisfies a time dimension that was needed to reset the sentiment in the sector. Now that we have re-tested the lows, all the experts have intelligent and coherent reasons for why the PM sector will continue to decline. I wish them well, but I am betting against them with everything I've got. I am now 100% long Gold stocks in my trading account and my physical metal stash has been improved by some timely holiday gifts of silver from Mrs. Claus.

And how about that COT report for silver? It was bullish last week and this week added a sliver of further bullishness to the picture. See prior post and here's the current COT report courtesy of Software North:

Meanwhile, the Dow to Gold ratio is stretched to the upside like it has been only a few times in the past decade (14 year log scale chart of $INDU:$GOLD follows), indicating a significant reversal has likely already begun this week:

The Gold stocks tend to rise when the Dow to Gold ratio is falling (outside of meltdowns/crashes like in 2008) and who hasn't seen a chart of the Gold stocks to Gold ratio telling us that Gold stocks are cheap on a relative basis (12 year log scale chart of Philadelphia Gold and Silver Mining Index to Gold price ratio [$XAU:$GOLD]):

While others are bearish on Gold, silver and Gold and silver stocks, I am staunchly bullish here. And please keep in mind that I have been bearish on Gold stocks since August. See my late August post that elicited hate-type email from Gold stock bulls. And now that we reached the low 20s in the GDXJ ETF as predicted in late August, I am very bullish on the GDXJ ETF and all Gold stock indices.

In my subscription service, I send out weekly updates as well as interim updates when indicated and email trading alerts when I think it is time to pull the trigger on a trade. Here is the interim update I sent out to subscribers Wednesday night (12/28/11), which was followed up by an email trading alert Thursday morning advising subscribers to buy Gold stocks (as well as metal, although I think the metal stocks will outperform this cycle):

Gold Versus Paper December 28 2011 - Interim Update

Only time will tell if my call for the bottom Thursday morning was right. If you are interested in analysis like this consider giving my low-cost subscription service a try. I am a secular permabull when it comes to Gold, but I am pragmatic in my paper trading account and will go long or short any sector (including shorting the PM sector) if I think there is opportunity there. Right now, the opportunity is in the precious metals sector from the long side and I think my subscribers and I are going to make lots of money to start 2012.

Seriously Silver

2011-12-24T13:03:00.001-08:00

The latest COT report on silver is sure to be the talk of the town among precious metals bulls. It is, in short, amazingly bullish. Without any further rambling, here is the latest COT report for silver courtesy of Software North:

To see the commercials at 42% bullish on silver is mind blowing for those silver bulls that follow these reports. To put the current set-up in perspective, here's a 4 year chart of the weekly COT data in a different format, courtesy of timingcharts.com:

What does this set up mean? Well, it means you should be buying silver! Specific trading recommendations reserved for subscribers.

Chinese and Indian Tails Wagging the Global Equity Dog?

2011-12-21T18:57:00.000-08:00

There is no significant decoupling in our current global economy. As I am typing this, the Chinese stock market (Shanghai Index or $SSEC) is making new lows (intraday basis) for the current decline it has been undergoing. Is the Chinese market signaling what comes next for developed stock markets like the US and Germany? Is the tail predicting what the dog will do? I think it is.

Here's a 2.5 year daily chart of the $SSEC with a daily plot of the S&P 500 ($SPX) below the $SSEC plot thru today's US market close:

I think another decent decline is imminent in "advanced" economy stock markets that haven't already experienced it. Japan is already in the midst and another BRIC economy market, that of India, looks very weak here. Here's a 6 month daily chart of the $BSE Bombay Index thru the close on 12-21-2011:

The Volatility Index ($VIX) is also screaming for equity bears to come out of hibernation. Here's a 6.5 year daily chart of the $VIX thru today's close:

Meanwhile, the "Gold versus paper" ratio is settling in and trying to find a bottom here. There is now an ETF that allows traders to bet on this ratio, a double leveraged ETF with ticker FSG. It represents a double-leveraged way to bet that the Gold to S&P 500 ratio (i.e. $Gold:$SPX) is going to go higher. Here is a 6.5 year daily log scale chart of this ratio thru today's close, using the GLD:$SPX ratio as a proxy:

Of course, the easiest way to play the "Gold versus paper" trade, which is the secular trade of the past decade (and it is not close to ending), is to buy physical Gold and avoid paper financial assets like stocks altogether. For those who like to trade with a portion of their capital, however, we are very close to the re-entry point for this ratio trade in my opinion.

Until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), Gold will continue to outperform paper. It's really that simple. The twists and turns give commentators like me a chance to hear ourselves talk and traders a chance to try to juice the gains of a "buy and hold" strategy, but they are simply noise for conservative investors who understand the current secular trend. If you are crazy enough to try and trade in this environment, consider giving my low-cost subscription service a try. My subscribers and I have recently been and are still short emerging markets and are waiting for a good entry point to go long Gold stocks as our next trade.

Lower Lows For More Important Items

2011-12-12T17:54:00.000-08:00

As someone in the USA who tends to read more US-centric commentary, I continue to see analysts look almost exclusively at the US markets. Because US stock markets have been relatively strong recently, a frequently read conclusion is that the US economy is holding up well and terms like "de-coupling" are making their way back into the financial lingo. This is a ridiculous concept in the current global economy, but people want to believe good times are just ahead just like when "green shoots" and "goldilocks" were bandied about in prior cycles.

The US is not decoupling, it is lagging. Just as emerging (and other) markets topped later than the USA in the 2007-2009 bear market, so the US is the laggard this time. It doesn't mean the USA will avoid the pain or another nasty bear market (one has already begun in my opinion, but the "slope of hope" is alive and well). I am continuing to document the signs of this bear market for those interested in preserving their wealth through what promises to be turbulent times, indeed.

I previously pointed out markets making lower lows below their October lows in a previous post. Continuing along that theme are some very important additions to the list. First up, China, using the Shanghai Index ($SSEC). Here's a 6 month daily chart thru today's close:

Next up, India ($BSE):

For commodity bulls, are you paying attention to the CCI Commodity Index ($CCI), which is more balanced and less oil-weighted than the $CRB Index?

Here are the so-called BRIC nation returns since their cyclical bull market peaks thru today's close:

Brazil: Down 21.6% since Nov. 2010 peak
Russia: Down 36.5% since April 2011 peak
India: Down 24.6% since Nov. 2010 peak
China: Down 34% since Aug. 2009 peak

The engine of global growth has been gummed up with bad debtor paper and declining demand. The global recession has already begun and the exact timing of each market making its biggest declines is the only game worth playing in my opinion. Meanwhile, the precious metals (PM) and PM stocks continue to decline. A very important buying opportunity is approaching in my opinion in the PM sector, but I don't think we're there yet.

My subscribers and I are currently short emerging markets while waiting to go long in the PM sector. If you're crazy enough to try trading in these markets, consider my low cost subscription service. Otherwise, just keep buying physical Gold on price dips and sleep well at night knowing you own the world's oldest and most reliable currency.

Gold - The Simple Secular Thesis

2011-12-08T19:02:00.001-08:00

It's more subtle and sophisticated than "buy Gold and get rich." But in the end, not much. Traders and speculators are always looking for the edge - much like the hares racing the tortoise. But the tortoise method of investing for this secular cycle is important and should comprise a significant portion of one's portfolio regardless of your preferred time horizon when investing and/or speculating/trading. After all, when MF Global can happen in one of the so-called safe haven countries (i.e. the USA), then isn't a component of safety without counter party risk important? Holding paper fiat currency and stuffing it under the mattress requires infinite faith that the apparatchiks and central bankstaz pulling the strings will not fall into the trap of human nature that has plagued every currency, including those backed by Gold, since currencies were first invented. I am speaking of debasement and debauchery.

And understand that currency under the mattress and certificates of confiscation (i.e. government bonds) may outperform equities and real estate as general investment sectors over the remainder of the cycle. I am not sure and I don't care, as this is a game I am not willing to play with my hard-earned capital.

The bottom line is this: the charts and secular trends scream that we are in a secular private sector credit contraction, also known as a depression in impolite company. For uttering the word "depression" is an admission of failure and we all know that confidence must be maintained, regardless of reality. Close your eyes, stamp your feet and repeat after the apparatchik: "Remain calm. All is well."

Here is the skinny on the secular trend for at least the next few years and potentially a decade or more: it's actually pretty easy. Hard assets, using general commodities as a proxy, have been and will continue to outperform financial assets such as common stocks, corporate bonds and real estate (individual specific opportunities and travesties aside, as I am speaking in broad sector-type terms). Additionally, Gold will continue to outperform general commodities and will continue to rise relative to all major paper currencies (i.e. outperform paper cash, as "hard" cash is preferred to paper promises in our current secular environment).

Don't believe me? Look at the charts! First up, the ratio of commodities, using the CCI Commodities Index (i.e. $CCI, which is more balanced than the oil-heavy CRB Index) relative to the Global Dow Jones Stock Index (i.e. $DJW, a less-than-perfect proxy for global equities). Here is a 20 year monthly chart of the $CCI:$DJW thru today's close:

Next up, the Gold ($GOLD) to commodities ratio chart (i.e. $GOLD:$CCI) over the same period of time using the same monthly log-scale format thru today's close:

That's it. The only subtlety comes in because of the issue of "nominal" versus "relative" return. In other words, if Gold goes to $700 US/oz from here and general commodities and the global stock market indices go to zero or near zero, you may show a "loss" on paper, but will gain immensely in relative wealth and won't have to pay capital gains tax. This is the scenario Robert Prechter of Elliott Wave fame envisions. In this scenario, just hold paper US cash and do better than everyone else. I think Gold is the perfect hedge, as it has already proven that it can hold its value this cycle even in severe deflation. Remember 2008? Everyone talks about how Gold dropped from $1000 US/oz down to $700/oz but they always fail to mention that by February of 2009 Gold was back at $1000/oz while the stock market continued to fall! In other words, Gold was flat, just like US Dollar cash was flat. To say that the US Dollar index rose more than Gold is only relevant to traders playing in the currency markets. Holding paper cash and physical Gold netted the exact same return during the worst deflationary wave of this generation: 0%.

And then what happened after the dust settled in March of 2009? Did physical Gold double in value or did paper cash under the mattress? 'Nuff said. Those who say 2008 can't happen again are wrong, but they usually miss the point. Gold hedges against this outcome while providing upside potential if a repeat of 2008 doesn't occur, while paper US Dollars hedge against a repeat 2008 outcome with no upside potential on the other side of the deflationary wave and further loss of purchasing power if 2008 doesn't repeat. Paperbugs, wake up!

Bottom line: ask the Greek people. Their stock market ($ATG) is now down about 90% from the 2000 peak, which is slightly worse than the 89% loss in the Dow Jones from 1929-1932. A deflationary-type stock market collapse by any reasonable standard applied. Did people in Greece earn a better return holding paper Euro notes or paper US Dollars (or short-term government debt denominated in these currencies) since 2000 or better holding Gold? Again, 'nuff said.

Gold stocks are a hybrid. Gold they are not, despite what bulls say (and what I used to believe before I took the time to investigate the actual facts market history provides for those interested). Gold plus counter party, business and political risk is not the same as unencumbered physical Gold held outside the banking system However, the potential speculative gains in Gold stocks are significant. This is one of the areas I focus on in my subscription service. Once a core position of physical metal is secured, then speculation with a portion of one's capital may be appropriate for those seeking higher returns.

So, knowing these secular trends have existed is one thing, but when will they end? Well, the usual sign posts are not archaic relics to be laughed at and degraded as CNBC likes to do. When the dividend yield on general common stocks reaches greater than 6% on average, then perhaps it will be time to start looking to trade some metal for some paper. And when my favorite secular ratio, the Dow to Gold ratio, hits 2 (and we may well go below 1 this cycle) then it may be time to start trading Gold for paper.

Until then, I'll stick with the secular theme that has worked wonders so far. History is repeating right in front of our eyes. This time won't be any different. My advice is to buy physical Gold, hold it outside the banking system, and enjoy the fireworks with your wealth intact (and likely increased) and your purchasing power enhanced.

For those crazy enough to speculate in this environment, consider my low cost subscription service. My subscribers and I are currently short emerging markets and waiting for a bottom in the precious metals sector to start speculating in Gold stocks from the bull side.

Last Comment On Japan (for now)

2011-11-25T18:44:00.001-08:00

I promise that for now, this is the last time I will comment on the Japanese stock market. I only feel the need to scream from the rooftops on this one because I am not seeing anyone else commenting on it, and I believe it is HUGELY important. The third (?) largest economy in the world is demonstrating conditions ripe for a stock market meltdown.

Here is my Elliott wave count on the Nikkei Japanese stock market ($NIKK), with all its bearish implications. Following is a 37.5 month weekly candlestick chart thru Friday's close with my thoughts:

We're not just below the recent October fall lows, we're looking at a crash-type scenario in the Japanese stock market. How this happens in a globally interconnected market without a strong move to the downside in Europe and the USA is beyond me. My subscribers and I have been short emerging markets and remain so for now. Soon, we will be looking to buy into the precious metals sector for a bull trade, but for now it is "batten down the hatches" time.

If you're interested in trying to trade these dangerous markets, consider my low cost subscription service. If not, my advice is to buy physical Gold and sleep soundly.

Making Lower Lows

2011-11-22T16:44:00.000-08:00

There are a few global stock market indices that have broken below the recent early October fall lows. This is not a good sign. The most important of these is Japan, which I wrote about a few days ago. Here is a 6 month daily candlestick chart of the $NIKK Japanese stock market index thru today's close:

And here's Austria ($ATX), Europe's latest entry into the crisis competition, using the same chart format:

Next up, Portugal ($PSI):

Finally, everyone's favorite basket case, Greece ($ATG):

Will the rest of the world's stock markets, which are above their recent fall lows, hold up or will they follow these countries to new lower lows? Only Mr. Market knows for sure, but I am not optimistic on common equities here. When sovereigns are falling/failing, it is best to get out of the way and stay liquid. Gold is the best form of cash to hold through an international monetary crisis, as it has no counterparty risk and cannot have its value successfully inflated away by desperate governments and bankstaz (unlike paper currencies). Until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), Gold will continue to outperform stocks, bonds, real estate, other commodities and cash on a secular basis.

If you are crazy enough to try and trade in this environment, consider giving my low cost subscription service a try.

Japan Sleepily Triggers While Everyone Is Watching Europe

2011-11-18T20:49:00.000-08:00

I have been closely following the Japanese Nikkei Stock Market Index ($NIKK) lately waiting for it to break down below the neckline of a big "head and shoulder-y"-type topping pattern that has been going on for over 2 years now. Well, this week it finally broke on a weekly basis. Ignoring other important global markets is a mistake for American and European traders. The fact that Japan broke down this week means there should be very little weight given to the bullish case for common equities in my opinion (unless this break down quickly reverses course, which seems unlikely at this point).

Here is a 3 year weekly candlestick chart of $NIKK thru today's close with my thoughts:

The target for this breakdown is below the March, 2009 lows regardless of which drawn neckline is used! A general rule for technical analysis is that the bigger and longer the formation is, the more significant it is when it finally breaks one way or the other. A second weekly close below the neckline next week would pretty much seal the deal and it may turn into a waterfall-type decline quickly if this happens. We could drop 2000 points in 2 months or less.

Japanese traders have been through almost 22 years of a secular bear market with no end in sight. They are going to sell first and ask questions later and so are the international traders and investors that have ridden through the seemingly endless Japanese market storm. This breakdown, if confirmed next week, is bearish for all of the global equity markets and would cement the case for a new, potentially big leg down in the current cyclical global equity bear market in my opinion.

Meanwhile, the USA gets ready to come back into the global news flow focus with its "debt committee." It should prove to be just as embarrassing as the summer debt "discussion" debacle. Don't expect any solutions, but there should be lots of finger pointing and chest thumping from the bozos driving the federal fiscal short bus.

In the end, the markets should decline once again in a fairly scary fashion, just enough to get everyone panicking. That's when helicopter Ben will ride to the rescue with some new twist on printing money out of thin air (hopefully with a fancy and misleading name to boot). Until then, Gold and silver stocks as well as silver are unlikely to be safe places to hide and the Gold price may well get smacked down a little more, too. However, the next leg up in the secular Gold bull market should be rather glorious and Gold stocks should finally start to participate. In the mean time, though, buckle up for some volatility. I continue to maintain that this isn't 2008, but that's only because it's worse.

If you're crazy enough to trade in this environment, consider giving my low cost subscription service a try. If you're actually sane, then just buy physical Gold (and a little silver) on every dip, store it outside the banking system and sleep well. Once the Dow to Gold ratio hits 2 (and we may well go below 1 this secular cycle), then it may be time to consider selling or trading your shiny metal for something else.

Some Fat For Bulls to Chew On

2011-11-02T18:22:00.000-07:00

I am a secular bear on financial assets like stocks. This is my bias. Although I understand we cannot have a replay of the 1930s in America (unlike Prechter), it has already occurred in Greece with an 87% loss from the 2007 peak to recent lows in October (versus 89% for the Dow in the USA in the 1929-1932 bear market). It is different in America because we can use the printing press while Greece cannot, unless Greece decides to leave the Euro. Hard core Gold advocates need to understand that a paper currency can result in deflation, as long as it is not aggressively debased/abused relative to the needs of the debtor (governments that issue currency are almost always wretched debtors with no intention of repaying their debts in nominal terms).

I have no concerns that America will fail to debase her currency yet again. I laughed at commentators who said we had a few hawks in the last "fed" (not a government institution) meeting and thus there was hope for the US Dollar. The current meeting today had only one dissenter, and he wanted an EASIER monetary policy. These central bankstazs are almost as predictable as crack fiends. Please keep in mind that I remain bullish on the US Dollar relative to other paper currencies for the intermediate term, but this a game of relativity and trampoline jumping, after all.

In any case, I remain bearish on stocks despite knowing that paper heroin will be dispensed at the first sign of trouble. In fact, "Operation Twist [part 2]" by the "fed" was greeted with a Bronx cheer, as the addiction runs so deep that a promise to keep interest rates near zero for a year or two was not enough to get the financial markets high again (until new lower lows were made). Tolerance is a bitch, as any addict can tell you. It used to only require a 0.25% rate cute, but now we are in Wonderland and stronger and stronger doses of currency destruction are needed to keep the party going.

There are some signs that the recent insane rally of 20% or so in less than a month (for US equities) may have been enough to collapse the wall of worry and start the next bear leg down. Seasonals are in favor of us continuing a rally into year end, but these are not normal times. My main concern is that of time. Have we had enough time to correct the bearishness that reigned a short 4 weeks ago? Only Mr. Market knows for sure, but there is data out there that concerns me.

I'll start with two charts from Market Harmonics, a site that provides free sentiment data. First up, the daily "NASDAQ Sentiment Index," a proprietary measure of sentiment for the NASDAQ (when the plot is high, sentiment is bullish and vice-versa):

We're not exactly wallowing in bearishness according to this sentiment indicator, eh? Next up, an intermediate term sentiment indicator related to a ratio of money flows into two Rydex mutual funds dedicated to being bearish versus bullish, respectively. When money flows into bullish funds more than bearish funds, this indicator rises. In other words, this indicator is based not on opinion alone, but on actual money flows from investors/traders. Fading the herd is often a good idea at the intermediate-term extremes:

Wow. New all-time highs for the past decade! I guess everyone is a momentum chaser now, huh? We are all trying to make up for losses over the past 10 years from the monetary inflation foisted upon us by central bankstaz and governments around the globe. The volatility and momo chasing is reminiscent of the Weimar Germany experience (i.e. we're all speculators to make up for purchasing power losses), but that's another story altogether.

The $NYSE Summation Index ($NYSI) is also a decent indicator for medium term trend and suggests at least a period of consolidation here if not a significant move to the down side for common equities:

The bullish percentage index for the S&P 500 ($BPSPX) also suggests the need for a rest here if not a new leg down in equities:

In the meantime, Gold is getting set to have yet another year of positive gains. So boring and predictable that paperbugs can only decry its volatility now, which is far less than the volatility for common equities. The so-called "bubble" in Gold can only pop once paperbugs like Krugman capitulate and realize that Gold can save the state from itself. As James Rickards points out, the USA is the Saudi Arabia of Gold, so why wouldn't we play our trump card when the poop hits the rotating blades? Gold remonetization will save the day for the US government and those who hold physical metal outside the banking system will be rewarded for having the knowledge of history required to escape the current slow-motion implosion of the international monetary system taking place right before our eyes.

If you are crazy enough to try and trade in this environment, consider subscribing to my trading service. Otherwise, buy physical Gold, store it outside the banking system and enjoy the fireworks.

Challenging Conventional Assumptions

2011-10-24T19:07:00.000-07:00

There are many old adages in the market that are like stereotypes: they may work more often than not, but there are enough exceptions to make them dangerous when applied blindly. I have been reading commentators talking about the US Dollar and how the Commitment of Traders is extremely bearish because the "commercials" are bearish on the US Dollar and they are the "smart" money. But are these insiders the smart money for all of the different futures contracts and are they usually right? Of course not.

When it comes to the US Dollar (and, by implication, the Euro), the commercials have a terrible history when it comes to predicting the intermediate-term trend and have more often than not been dead wrong over the past 5 years or so!

Let me show you a chart stolen from finviz.com to show you what I mean. This is a weekly chart of the US Dollar over the past 5 years or so thru part of today's action with my comments:

So, is the US Dollar about to collapse against other paper currencies or will recent history repeat and the US Dollar move higher from here? I think the latter.

This doesn't mean Gold (and silver) can't rise, as all paper currencies are sinking relative to Gold and will continue to do so until the Dow to Gold ratio hits 2 (and we may go below 1 this cycle). However, this may have implications for favoring Gold stocks over Gold once we hit bottom.

Specific trading recommendations reserved for subscribers.

A New, Simple Way to Play the Dow to Gold Ratio

2011-10-23T12:22:00.000-07:00

Since I haven't noticed anyone else out there commenting on it, I thought I would offer my kudos and thanks to the folks over at Factor Shares for launching a new series of spread ETFs for traders. The product that has my attention and interest is a double leveraged spread of the Gold to S&P 500 ratio. This is a simple way to play the Gold versus paper theme that is near and dear to my blog. Though the Dow to Gold ratio is better known, an S&P 500 to Gold ratio is really no different.

The new ETF I am referring to has ticker FSG and you need to do do your own due diligence if this is something that interests you. Please understand that I had never heard of the Factor Shares company before they released this product, I am not versed in the counterparty risk this product may carry, and I have no relationship with the company behind this new ETF. Like all leveraged ETFs, there is slippage that will plague this product and thus FSG is better used for trading rather than as a "buy and hold" vehicle. However, we are fast approaching a "buy" point for this ETF due to the oversold nature of the Gold to S&P 500 ratio right now.

Here is a 5 year daily log scale chart of the Gold ($GOLD) to S&P 500 ($SPX) ratio (i.e. $GOLD:$SPX) through Friday's close with my thoughts:

The FSG ETF has been trading now for about 8 months and it looks like its volume is starting to pick up, which is a good thing:

Meanwhile, the bearish sentiment on precious metal stocks and precious metals is starting to get to a point where it is time to start thinking about going long. I think we may need one more plunge, but that should just about do it. If we get a "falling knife" in the Gold stock indices and precious metals over the next few weeks, I will be looking to catch it.

Specific trading recommendations reserved for subscribers.

Exciting Times

2011-10-01T06:37:00.001-07:00

The big picture is shaping up quite nicely now that we have ended another quarter. A nasty cyclical global equity bear market has begun, the third of the ongoing secular bear market for "advanced" Western economies that began in 2000. As an advanced economy, Japan is the odd man out, as they have been mired in a secular equity bear market for almost 22 years now. There are some interesting "big picture" nuances to this cyclical bear as they relate to precious metals that should provide phenomenal profit opportunities for those with cash on hand.

First up, the rally I have been expecting in the US Dollar Index ($USD) has begun. Unlike many Gold bulls, I don't subscribe at all to the "dollar to zero next year" theory. I think cash is a great position right now and I was the opposite of bullish on Gold when Gold hit $1900/ounce recently. I was also bearish on Gold stocks at that time and told my subscribers to avoid them completely, though I wasn't brave enough to short them. For now, when looking at the "big picture," the US Dollar Index rally is absolutely set to continue. Here's a 6.5 year monthly chart of $USD thru Friday's close with my thoughts:

I am not saying the US Dollar (or any fiat currency) is a good long-term investment. Far from it. But the US Dollar is rising based on the same thing that happened in 2008. Many continue to deny that we are going through another 2008 episode and yet it is starting to happen right in front of our eyes. No, it's not exactly the same, but the same principle applies: forced de-leveraging due to a liquidity crisis. This is US Dollar positive and equity and commodity negative. People scream that Bernanke and his interventionalist compatriots around the world would never let it happen, but this is naive at best. Not only are they not as smart as the markets, but they are often far behind the curve when the crunch hits. Additionally, a cynic (realist?) would point out that another crisis would give central bankstaz and governments cover to do what they love to do: print more money, bailout banks and other corporations that contribute the most money to political campaigns, and enact ridiculous new rules and regulations that only benefit their friends.

In the meantime, the S&P 500 US stock market has all the classic markings of a new bear market. And this is one of the healthiest advanced economy stock market charts out there! Stocks are dangerous here and should be avoided in my opinion. Here's a 12.5 year monthly chart of the S&P 500 ($SPX) thru Friday's close:

During this emerging period of turmoil, however, the fundamental fuel to fire the next leg higher in Gold stocks is evolving right on cue. I believe that physical Gold held outside the banking system is a safer and better long term buy and hold opportunity compared with Gold stocks. However, I like to trade the miners when I think they are going to provide leverage to the Gold price (note to Gold stock bulls: they often don't). We are fast approaching one of those good times to be long Gold stocks. The Gold to commodities ratio (or Gold to oil ratio if you wish) gives us an idea of whether the operating margins for producing Gold stocks are expanding or contracting, all other things being equal (and all other things are never equal, but this is a "macro" sector analysis data point). If the Gold price is rising faster than the variable costs of getting Gold out of the ground (e.g., energy), this is good for profit margins. When profit margins are expanding, it is rare that stock prices don't eventually follow suit, although the timing is the tricky part for traders.

In any case, here is a 6.5 month chart of the Gold ($GOLD) to commodities (using $CCI as a proxy) ratio using a monthly plot of $GOLD:$CCI:

The future's so bright for Gold miners that they've gotta wear shades according to this chart. And I don't think the move higher in this ratio is done yet. I see an explosive move off the bottom once it comes for Gold stocks, but I don't think we're there yet. However, soon we should see yet another epic buying opportunity (a la 2008) in the Gold mining sector. We may have already seen the bottom in the Gold price, but we will likely need to re-test it, whether the re-test ends up being slightly lower or higher than the recent low near $1550. The speculative fever in Gold has been broken for the short to intermediate term, a healthy thing. Trust me when I tell you that this fever will come back into the Gold market soon and eventually rage out of control. Are you buying Gold now while prices are low or will you wait until prices are higher again and then kick yourself for not buying while there was a sale?

The Dow to Gold ratio will hit 2 before this secular cycle ends, and we may well go below 1 before this mess is over. Specific trading recommendations reserved for subscribers.

Another One Bites the Dust

2011-09-24T23:06:00.000-07:00

I am referring to Portugal's stock market ($PSI) quietly sinking below its 2008-2009 Armageddon lows and closing below these lows on a weekly basis. Portugal joins Greece in achieving this dubious distinction. Here's a 3.5 year weekly chart of $PSI thru Friday's close to show the recent action and break down:

Far from being a sign that the worst is over, this breakdown may portend another 50% drop in the Portuguese stock market if Greece is a guide (and I don't think the Greek stock market is done falling, either). The Spanish and Italian stock markets are only about 10% above their March, 2009 lows. Meanwhile, mainstream US financial media continues to debate whether or not we are even in a bear market yet! Gotta love tout TV and its intentional misleading of the average investor that is trying to learn something by watching.

Last week's market action was brutal in the precious metals patch as well.

It is shaping up to be an interesting fall, to be sure...

I don't think the US Dollar rally is over and I don't think the stock market slide down the slope of hope is over, either. Specific trading recommendations reserved for subscribers.

Not a Permabull

2011-09-22T08:52:00.000-07:00

Watch out here if you are a Gold stock investor. I am not a permabull on Gold stocks, as I have learned my lessons well and studied history rigorously. If the market continues to melt down through October, which is what I expect, Gold stocks will get hit. Silver stocks will get hit even harder. And juniors will get hit harder than seniors in both sectors.

I warned about a dangerous neckline in the GDXJ ETF before. We are now at the neckline and threatening to break down below it after the obligatory dead cat bounce at the neckline:

If we get the breakdown and waterfall decline into the low 20s in GDXJ, it will be a fabulous buying opportunity for those with the cash to do so. In the mean time, I am bearish on Gold stocks and all other equities and have been warning my subscribers to avoid Gold stocks.

Tick Tock, Tick Tock

2011-09-17T10:46:00.000-07:00

I remain convinced that a nasty new cyclical bear market in common equities has begun. Now that Germany's stock market ($DAX) has dropped 35% from its May peak, there is little point in Wall Street trying to pretend that this is "just another correction/buying opportunity." The US stock markets have held up better than most, but this is about to change in my opinion. In fact, it was Germany that held up much better than the US in late 2007/early 2008, only to play catch-up later once the bear market really got rolling. Now, the crisis is centered in Europe (for now), so Germany and the US get to reverse their roles relative to the prior cyclical bear market of 2007-9.

Greece continues its deflationary collapse as predicted. The Greek stock market ($ATG) is now down 84% from its late 2007 highs, versus 89% for the Dow Jones in the 1929-1932 bear market. Close enough and I don't think the decline in Greek shares is over yet. Japan's chart looks like it wants to break down yet again (3 year daily chart of the Nikkei Index thru Friday's close follows):

Meanwhile, one of my favorite indicators for this secular bear market, the industrial metals to Gold index, is screaming for caution. I like the $GYX industrial metals index, but the copper:Gold ratio uses the same concept and the chart looks the same. The message is simple: if Gold is rising faster than industrial metals (i.e. falling $GYX:$GOLD ratio or falling $COPPER:$GOLD ratio), the underlying economy is likely to be in trouble. Here's a 6 year weekly chart of the $GYX:$GOLD ratio thru Friday's close with my thoughts:

Meanwhile, the Dow to Gold ratio continues on another cyclical down move within its secular downtrend that began in 1999. To keep Gold bulls focused on the big picture of "Gold versus paper" (i.e. paper=stocks as a proxy for financial assets), here is a monthly chart of the Dow to Gold ratio ($INDU:$GOLD) over the past 10 years thru Friday's close (log scale):

I also think ol' Uncle Buck is beginning yet another death dance rally. This separates me from the "Dollar to zero tomorrow" crowd, but doesn't temper my belief that Gold will top $2000 before the year is over. All fiat paper currency is sinking relative to Gold, just at varying rates. Here's a 20 year monthly chart of the $USD Index with my thoughts:

I think it is shaping up to be a great fall for bearish stock trading and bullish Gold trading. I wouldn't short stocks before the fedspeak meeting next week, as I think the current equity dead cat bounce can go a little further in US markets, but I also wouldn't fear that apparatchiks and central bankstaz can stop the train wreck that's coming. Unlike most Gold commentators, I am not yet bullish on Gold mining stocks and continue to favor metal over metal equities for now. Specific trading recommendations are reserved for subscribers. Join us!

Beggar Thy Golden Neighbor

2011-09-06T19:38:00.000-07:00

Every country wants to devalue their currency. In other words, every government around the world wants to destroy its citizens' savings. This is the madness that passes for PhD level economics. Destroy the value of people's labor to "stimulate" further indebtedness as wages fail to keep up with the cost of living. But how can every country devalue at the same time?

They can't, some say. I say, of course they can. They can all devalue against Gold and have been for a decade now. The so called bastion of stability, the Swiss, a country that got rid of most of their Gold, has now decided to peg to the Euro, cost be damned. This is irresponsibility defined and destroys confidence.

Confidence destroyed constitutes the fundamental underpinning of a strengthening Gold bull market. We have just begun the parabolic phase with the summer blast up to the $1900 USD/oz level. There's no turning back now. The scramble for physical Gold is now going to intensify and the price movements are going to get more intense to the upside. Any government can devalue relative to Gold even if they can't spark lending in the economy. This is a retarded goal, but speculation is all about exploiting the retardedness built into the system by apparatchiks without a clue. An anchorless global fiat system is of course going to explode and be replaced with something more rational, but the transition will create winners and losers.

Those thinking Gold is too expensive are going to be profoundly shocked at what comes next. Roubini. Gartman. Nadler. The pied pipers of the financially damned. We are in a massive deflationary collapse being fought tooth and nail with unfettered money printing. A massive war between inflation and deflation. But I have long stopped trying to pick a winner in this tug-of-war and instead settled upon the obvious beneficiary - Gold.

Financial instability and lack of confidence benefit Gold. Those who say Gold can't be a hedge against both inflation and deflation are completely wrong. This is like saying Democrats and Republicans can't both be for pro-welfare and pro-warfare policies since they are opposing parties. And yet, Obama is a war president and Bush signed into law Medicare Part D. If the inflation or deflation are mild, Gold doesn't do well. But Gold benefits from the monetary extremes that destroy confidence. We are there and things are about to deteriorate further (short term expected bounce in the stock market aside).

I agree this is no 2008, but that is only because the problems are worse and Gold will rise this time during the market collapse, regardless of the movements of the US Dollar Index. I actually remain a US Dollar bull for those interested in playing the paper currency games, but I'll take the "long physical Gold held outside the banking system" trade instead, thank you very much.

Gold is by far the best asset class for the next few years and will remain the premier asset class until the Dow to Gold ratio hits 2, and I am increasingly convinced that we will go below 1 this cycle.

Metal Versus Metal Stocks

2011-08-24T17:23:00.000-07:00

Gold versus Gold stocks. A topic near and dear to my heart. One that I have studied relentlessly for the past several years. I am no mining expert. I am not the one that can point you to the next "ten bagger" in the junior mining sector. But I have been right in insisting that my subscribers favor Gold over Gold stocks and I continue to favor Gold (and silver) over the companies that dig these metals out of the ground. This is sector analysis, not an individual firm analysis.

Gold stocks are undervalued say the Gold stock bulls. The fundamentals are improving thanks to a rising "real" price of Gold. These things are true. But a "value trap" is believing that things that are cheap can't get cheaper. They can.

Now, I trade Gold stocks, I don't hold them for the long term. My long term investment for this secular precious metals bull market is physical Gold held outside the banking system, and a little bit of silver. Why? Because Gold stocks are not Gold, they are a paper derivative of Gold. And when the poop hits the fan, like it did briefly a few short weeks ago, Gold stocks get thrown out with other stocks. Sure, they may hold up better than base metal stocks or banking stocks, but a break even proposition when Gold is rocketing higher seems like a poor trade to me. I'd rather hold the GLD ETF and make some fiat money rather than be loyal to the Gold stock cause and not make any money.

When the Gold sector is healthy and in "proper" alignment, the juniors should be leading the seniors higher. One can use a ratio of the GDX ETF (i.e. the senior miners) to the GDXJ ETF (i.e. the junior miners) to get a sense of whether the seniors or juniors are outperforming. Here's the data during one of the bigger bull runs of this secular Gold bull market (a GDX:GDXJ ratio chart over the past 6 months):

This is the opposite of what a strong Gold stock bull market looks like. Now, the flip side of this argument is that the senior Gold stocks can lead the move and the juniors follow later. Perhaps, but we are not exactly at the beginning of this move in Gold are we? Others would argue that Gold stocks were dragged down by the stock market and thus this is not a fair period to analyze. I would argue that we are headed for a full-on poop storm after this dead cat bounce in common equities completes and that Gold stocks better get used to it!

Also, the junior mining sector, as represented by the GDXJ ETF, is clearly showing a big head and shoulders top here, which could of course be negated at any time. For now, though, caution is clearly warranted and hope is not a good strategy. Here's a chart of GDXJ over the past 18 months to show you what I mean:

And what of the micro-cap Gold stocks or the explorers? The GLDX ETF, a representation of this sector, looks terrible! Here's a chart of the daily action of GLDX since its inception in early November of 2010:

I am very bearish on the stock market once this bounce in general stock markets completes. I know that this is not 2008, but that is only because the problems are worse and the outcomes in financial markets should be even more severe. Gold is the premier asset class for this cycle. Gold stocks may be on sale again after the carnage is complete and I plan to have some dry powder to buy them if things work out as I think they will. I advise Gold stock bulls to use caution here. If the head and shoulders pattern in the GDXJ ETF reverses, I'll be there to notice and switch to a bullish posture. But for now, I still prefer Gold over Gold stocks.

Few Gold stock bulls realize that some of the best gains in Gold stocks occurred AFTER the Dow to Gold ratio bottomed on a secular basis. It happened in the 1970s and in the 1930s. I am no permabull on the precious metals other than as a long-term buy and hold for the physical metal. Gold and silver stocks are a trade to me, not a religion. Gold, on the other hand, is the anchor of the international monetary system, whether it is officially declared to the sheeple or not. Cash is king during a bear market and there is no better form of cash than that which cannot be conjured up by decree.

If you are crazy enough to try to trade in this market environment, I invite you to try my low-cost subscription service, which focuses on Gold, silver and Gold and silver mining stocks, but also trades opportunities that arise in other markets. My long-term investment advice is free and hasn't changed for years: buy and hold physical Gold until the Dow to Gold ratio gets to 2 (and this ratio may well get below one this cycle).

The Other Side...

2011-08-18T19:00:00.000-07:00

I always smile when I see some mainstream article about a market rout or discussion of a market swoon on "TOUT" (i.e. sucker) television. They love to show a distressed professional trader on the stock market trading floor after the markets are down. Something like this:

The flip side of this guy is the Gold bull out there with physical metal that knows enough not to trust the stock market. For every sad guy (and gal) on the NYSE floor getting hammered, there are others out there growing in number that look like this:

Sorry, but we traders and investors out here ain't all fraught with despair over the current market movements. Those crazy, weird people who invested in shiny hunks of metal with no intrinsic value (according to CNBC) are doing quite well, thank you.

And as the Dow to Gold ratio descends upon 2, and we may well go below 1 this cycle, we out here eating physical Gold will continue to smile at not falling for the fraud that is known as Wall Street and for doing our homework on where we are in this economic cycle from a long-term perspective.

Technical Analysis Put to the Test

2011-08-15T20:35:00.000-07:00

Tea leaf reading (i.e. technical analysis) is not a hard science, but it beats the efficient market hypothesis in my opinion. One has to start somewhere when trying to learn how to trade and invest. For example, Gold is in a beautiful, clear and undeniable secular uptrend. Easy to see and hard to dispute unless you are a paperbug.

I would like to show a chart and predict an outcome based solely on technical analysis. Now, I admit, I am cheating a little since I know something about the fundamentals being that my soul is stationed in the area of interest related to this instrument, but nonetheless, the charts speak louder than my understanding of the fundamentals in my opinion.

The chart is a 1 year daily chart of "high yield municipal debt" (i.e. junky local government U.S. debt) thru today's close:

My prediction is not wishy-washy. I believe a major decline will occur in this instrument and I don't think we will make it thru August before it begins.

Let's see if technical analysis works in real time. Of course, if it doesn't, one could certainly argue that it is the practitioner that is at fault rather than the art...

Paperbugs Won't Get It Until It's Too Late

2011-08-12T09:27:00.000-07:00

A brutal cyclical common equity bear market within this secular bear market for common stocks has already begun. Meanwhile, the parabolic phase in the uncommon Gold secular bull market has just begun with the latest thrust higher. Please don't mistake the forest for the trees: Gold should be correcting now and common stocks are due for a dead cat bounce higher. But these shorter-term considerations are not where the big money is made for retail investors now are they?

A shiny piece of metal continues to trounce common equities and this trend is set to continue. The best way to view this for American investors is by using the Dow to Gold ratio (i.e. $INDU:$GOLD), a chart I have been harping on long before I started ranting on the internet. How now Dow over this secular period of stock investor misery? Let's look at a 20 year monthly chart of the $INDU:$GOLD ratio:

This ratio is going to 2 and we may well go below 1 this secular cycle. The paperbugs still talk of dividend yields and how they are higher than the bond yield. This is true, but what good is a 3% dividend yield if the stock goes down another 50% over the next few years? And, using the dividend yield with an appropriate historical perspective (next chart stolen from a piece by Mark Lundeen), we are near a top in the stock market, not a bottom:

Trust me, we will get back to a 6% yield in the stock market before this secular bear is done mauling the paperbugs. A double digit yield wouldn't be surprising. The calls for a bottom here with a continuation of the cyclical equity bull market are amazing to me and show just how entrenched the belief in infallible central banksta wizards has become. These wizards are powerless to stop the new cycle now that the tide has turned, just like in late 2007. Manipulation works well only when it is in the direction of the trend, otherwise a few days to a few weeks is about it. The fact that Europe had to ban short selling to get a bounce in their markets suggests that we likely will make one more low before a multi-week dead cat bounce. This dead-cat bounce could be anemic or fast and furious - I don't know. A fast and furious bounce would be anticipated and better to keep the bulltards in this thing as long as possible before wiping them out.

Folks, we are already in a bear market in the majority of the world's equity markets by the standard definition: a 20% loss. Here's the list from peak to trough for multiple markets, in no particular order:

China ($SSEC): August 2009 peak to this week's lows: 30% loss
Brazil ($BVSP): November 2010 peak to this week's low: 35% loss
India ($BSE): November 2010 peak to this week's low: 22% loss
Russia ($RTSI): April 2011 peak to this week's low: 29% loss
France ($CAC): February 2011 peak to this week's low: 31% loss
UK ($FTSE): February 2011 peak to this week's low: 22% loss
Germany ($DAX): May 2011 peak to this week's low: 28% loss
United States ($SPX): May 2011 peak to this week's low: 20% loss
Italy ($INE): October 2009 peak to this week's low: 44% loss
Other PIGS countries: A little bit more than 20% down... (sarcasm off)

Get the picture here? I understand buying stocks here AS A TRADE, but not as an investment. We are going much, much lower in common stocks. And what of Gold? Ah, the shiny, worthless, barbaric metal that is the best performing asset over the past decade. Let's just say things are about to get hot to the upside after the current correction concludes.

Looking at Gold on a weekly chart gives us a clue as to what comes next. Here is a 12 year log scale weekly chart thru Thursday's close to show you what I mean:

This type of MACD shift to a higher range has been seen in multiple prior secular equity bull markets as the parabolic phase higher began. I don't think this time is an exception. It's just that time in the investment cycle, nothing more. And the fundamentals support this fledgling move completely. While US Dollar-based deflationists call for a massive US Dollar rally, they will be shocked to see how high Gold goes relative to the US Dollar during a deflationary crash when no one trusts their governments and confidence is lost. And the US Bond permabears will be shocked how well government debt in the US holds up as the herd flees the stock market.

And for all those who say that this is not a replay of 2008, I agree. Things are much, much more serious now and the corresponding bear market has the potential to be even more devastating. When the banking system is broke plus many nations in the world are broke and at the breaking point, you are talking about a replay of the last year or two of the 1929-1932 bear market. It will be more drawn out this time (will it end in 2014?) due to endless apparatchik interventionism, which will fail again and again, as it always has in the past. Being a bear will become dangerous, as events in Europe this week related to abrupt banning of short selling demonstrate. Paper Gold may be banned or curtailed as things spiral out of control, so don't say you weren't warned.

Physical Gold held outside the banking system and away from the prying eyes of bankstaz and governments is the single best investment option out there. Period. The Gold bull market is not over by a long shot. Some physical cash under the mattress (i.e. outside the banking system) to cover short-term expenses is also not a bad idea.

If you're crazy enough to trade these dangerous and heavily manipulated markets, consider giving my trading service a try. We trade Gold, silver and Gold and silver stock indices, as well as other markets when opportunities present themselves.

The Global Equity Bear Market Is Back

2011-08-07T09:59:00.000-07:00

The global cyclical bull market in equities is over. What we saw last week isn't a correction in an ongoing bull market. This bear market is likely to be nasty and protracted. Before it is over, the early 2009 lows are at risk of being breached for just about every stock market in the world (excluding Greece, which is already far below the March, 2009 lows). Forget peripheral Europe, the core is now in big trouble. Ditto for the United States and United Kingdom. And did Japan ever really get out of trouble? China is toast for the intermediate term and so are the rest of the BRIC emerging markets.

Short-term, we are way oversold and due to find a bottom and bounce. Intermediate and longer term, it is time to get very defensive. I think Gold, the U.S. Dollar and short-term U.S. debt will continue to function as safe havens for the time being. Longer-term, the U.S. is in trouble and they will likely do the wrong thing - the deflation bogey man can quickly turn into the heavy to hyperinflation bogey man with one more major misstep. I like the U.S. Dollar around these levels for those that like to trade currencies, but I'll stick with physical Gold held outside the banking system and will sleep very well at night. Even if we do get another 2008-like correction in the Gold price (if you can't handle a 25% correction, you will be shaken off this secular Gold bull long before it is over), this would only provide another stellar buying opportunity. Physical Gold is an investment for me, not a trade.

The Dow broke its 2009 lows on a weekly closing basis when priced in Gold. This is a big deal and portends a further major loss of purchasing power for those remaining in common equities. Here's a log scale weekly chart of the Dow to Gold ratio (i.e. $INDU:$GOLD) over the past 5 years to show you what I mean:

The "real" bear market for the Dow Jones Industrial Average started in August of 2009 as the above chart shows, but the herd doesn't recognize the pernicious inflationary effects of trying to reflate that which cannot be reflated at this point in the cycle until it is too late. Much like the 1970s, attempting to keep the stock market afloat will require inflation to be high enough that the actual retail investor loss for a buy and hold strategy during the secular bear market of the 1970s in the U.S. was as great as the 1930s on an inflation-adjusted basis. We are facing a crisis that is at least an order of magnitude greater for the US this time around, so the amount of inflation that will be needed this time around to maintain some semblance of the illusion of prosperity makes a 5 digit Gold price a reasonable proposition if policy makers do the wrong/expected thing.

If you thought the last bear market in 2007-2009 was nasty, what happens when whole countries are going under instead of just big banks? The amount of paper that will have to be emitted to "fix" this problem is mind-boggling. If a massive and unprecedented policy response isn't forthcoming, a deflationary-type crash where the Dow may well go to less than 5,000 will be the outcome. I think the political and popular will will favor massive inflation as the only palatable policy response. That doesn't mean it will stop the cyclical global equity bear market that has begun, but it may mean that the 2009 lows will hold or be only slightly breached in some countries.

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