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2012 wasn't a fun year for most Gold bulls. Seeing the S&P 500
outperform Gold and seeing Gold stocks get decimated through the 1st half of
the year was enough to create suicidal sentiment that is now only marginally
improved after another prolonged correction in the precious metals (PM)
sector to end the year. But as the many calls for an end of the PM bull
market by several of the same people who have been wrong / missed out the
whole way up get louder, the risk in the PM sector gets lower and lower.
The bigger picture hasn't changed and isn't going to for some time: a major
private sector secular economic contraction in the West being fought with
manufactured money/credit units by governments and central bankstaz. This is not a period to favor paper, as
reflected by common stocks, over Gold. My trade of the year for 2013 is the
same as my favored trade back in August: go long the "Gold to Dow"
ratio (or short the "Dow to
Gold" ratio).
The secular chart of the S&P 500 (a broader index) to Gold ratio shows
that time has run out for the paperbugs on this
correction:
Of course, such a ratio chart doesn't tell us anything about nominal
prices of either of these items. But it does tell us that a shiny piece of
metal with no dividends or growth prospects should continue to trounce the
wizards of Wall Street over the next several years. This is the forest one
does not want to lose sight of the next time Warren Buffett talks about how
perplexed he is by Gold. Perhaps Warren should have listened to his father,
Howard (a congressman), a little more:
"I
warn you that politicians of both parties will oppose the restoration of
gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children
and your country to galloping inflation, war and slavery then this cause
demands your support. For if human liberty is
to survive in America, we must win the battle to restore honest money."
[Read more: http://www.businessinsider.com/tired-of-warren-buffett-trashing-gold-here-are-some-quotes-from-his-gold-loving-father-2012-2?op=1#ixzz2GeRslYDz]
Now, I am not interested in politics, as I fully expect politicians to play
their role and do the exact opposite of the right thing regardless of which
party or platform they claim to represent. I also don't believe that a Gold
standard can fix the world's problems, as governments controlling money is
the problem, not the form of monetary system governments foist upon the
masses. In most countries in the world currently, one is free to save in Gold
rather than paper currency, which is the important thing for pragmatists like
myself. But if one uses history as a guide, I think
Howard Buffett was closer to the mark than his son Warren.
In any case, Gold will win over Warren and his paperbug
minions this cycle because it is simply the time for this to occur. Cycles in
markets exist much like cycles in nature, as financial markets are but a
manifestation of the thoughts and emotions of one of nature's more curious
species. We are in a secular fear and uncertainty cycle for conventional
financial assets, which benefits Gold.
Moving from the philosophical to the tactical, now
is the time to be bullish on Gold and its derivatives, not bearish. The
intermediate term correction from the fall 2012 highs in the PM sector was
much longer and deeper than I thought it would be, but we are where we are
now. And keeping a healthy perspective on the intermediate term, the current
set up is much more likely to lead to a bullish outcome than a bearish one.
Here's a 12 year weekly chart of Gold thru Friday's close to show you what I
mean:
And the beleaguered Gold stock sector is also oversold and
significantly undervalued for the 3rd time in the past year. An interesting
phenomenon occurred to end last week, however, in the small cap Gold mining
sector. Using the GLDX ETF as a proxy for the explorer/small cap Gold mining
sector, here is the weekly price action over the past few years thru Friday's
close:
I remain wildly bullish
on the whole PM sector. If you would like some assistance navigating the PM
sector with an orientation towards trading the intermediate-term swings, I
publish a low cost
subscription trading service that is only $15/month. Otherwise, keep the faith and hold onto your PM
sector items tight. Don't let the short and intermediate-term noise distract
you from what still promises to be a secular bull market for the history
books. The Dow to Gold ratio will hit 2 (and we may well go below 1 this
cycle).
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