Gold
We all know the meaning of "let the buyer beware" and its Latin version Caveat
Emptor. Caveat Venditor has been our unscholarly version of "let
the seller beware".
The first seems applicable to important highs for gold and the other at important
lows for the Precious Metals Sector.
Like now, or at least soon.
To be clinical, it is worth reviewing the orthodox views of the gold community.
This is highly critical of intrusive central banking and particularly so of
reckless central banking. It is important to condemn this, but it has been
painful to position gold or silver to "get even" with Fed stupidity and bureaucratic
ritual.
Supply/demand research has been widely used, but as history shows it is not
up to the changes in metal prices in a world of financial asset inflation,
volatility and then financial asset deflation. What's more, such "fundamental" research
did not work at the end of the huge speculation in tangible assets that blew
out in 1980. Our research service got its start in 1976 when retained by two
global mining companies located in Vancouver. This is when it was learned that
supply/demand analysis was part of the culture of mining but hopeless in actual
forecasting of significant price reversals.
This has been the case in both base and precious metals and the failure of
such research in silver, for example, has been remarkable. Silver, we are breathlessly
advised, is always in short supply. Then upon disappointment in method, we
are told that governments are competent enough to rig bullion prices down.
But Mother Nature regularly shows that as a speculative boom culminates, the
behaviour of silver relative to gold acts like a credit spread. The gold/silver
ratio goes down in a boom and turns up as the boom fades.
And then there is the notion that the ancient ratio of 16 will come back.
Three hundred years of evidence firmly says "No!".
Our research has always focused upon prices in the senior currency. The gold/silver
ratio traded close to 15 through to the bubble that completed in 1772. On the
subsequent long post-bubble contraction that completed in 1792, the ratio rose
from 14.7 to 15.4.
On the next era of bubbles the ratio was at 15.5 when commodities and CPI
inflation blew out in 1816. That long post-bubble contraction ended in 1844
when the ratio had increased to 17.2. No big deal in amount but it defined
a trend.
The next secular commodity boom completed in 1865 with the gold/silver ratio
at 16.6. It was at 17.3 when the 1873 financial bubble completed. On the Great
Depression that ended in 1895 the ratio increased to 34.1.
From the incredible financial dislocations of the French Revolution and the
Napoleonic dictatorship to the banking discipline of Victorian England the
ratio increased from 15.5 to 34. Actually it had little to do with the remarkable
change in politics and culture. It was that on the long post-bubble contractions
the gold/silver ratio increased - significantly.
At the height of the secular commodity boom in 1920 the ratio had declined
to 22. In 1929 it reached 42 and it set a secular high at 91 in 1940.
At the peak of the 1980 buying frenzy in gold and silver the ratio briefly
reached 16. As the contraction progressed our target for the gold/silver ratio
became around 90. This was exceeded in the banking crisis at the end of 1990.
The high was 104 in early 1991.
The "ancient" pattern has continued with the ratio declining to 45 in 2007
and soaring to 93 in the 2008 Crash.
The low with the mania in precious metals in 2011 was 31. The high this week
has been 74 and as this post-bubble contraction fully develops our target for
the gold/silver ratio is around 100.
The behaviour of the silver/gold ratio has been a reliable guide to important
swings in the Precious Metals Sector. We have been using it since 1987 when
we noticed that in the 1980 blow-off the ratio changed some weeks before the
rise in both metals ended.
On each bull market silver outperforms gold and the key to calling the high
has been in the momentum peak in the silver/gold ratio. When the RSI soars
to above 78 it indicates that speculation is becoming excessive.
This reached 92 in 2011 and we noted that that level had not been accomplished
since January 1980 and that speculation had reached a "dangerous" level. We
also thought that the bear would not be as bad as post-1980.
On the way down there were some big swings. The first of which drove the RSI
to 86 in September 2012 and the second drove it to 84 in June of this year.
Both were noted as dangerous levels and were followed by significant declines.
Some months ago we thought that the next buying opportunity in gold stocks
would appear late in October. A couple of weeks ago we advised "not yet".
Gold share weakness continued to month-end. The HUI set its high for the year
at 252 in July and closed the month with a low of 152. This is at the Crash
low of 150 set in late 2008. The latest plunge drove the Daily RSI down to
22, which is low enough to limit the decline.
Traditionally, gold shares lead the swings in the bullion price. At the top
in 2011 the HUI/Gold rose to .42 in April-May and turned down. Gold set its
high in early September. A meaningful rally for precious metals could be led
by this turning up from the low of .13 reached on Friday.
The sell-off in the HUI relative to gold has been severe, driving the Weekly
RSI down to 20.9, which is very oversold. However, stocks have been outperforming
bullion for a few days and it will need further technical work to gain conviction.
There are a number of ways to review the action preliminary to a cyclical
bull market for gold stocks. One is the popular focus upon what the dollar
price of gold is doing. This is speculation based upon currency changes that
may not relate to improving operating margins for gold producers. Another very
popular method is to keep track of monsoons, the Indian wedding season and
the number of camel-loads of gold going into the Arab souks.
Sadly, this has much to do with supply and demand analysis and has not been
reliable during great inflations in financial assets.
Investors should look to to gold's real price which for at least 300 years
has been an indicator of adversity or prosperity for the gold industry. But
before expanding the outlook for the latter it is worthwhile to look at another
popular diversion. This is the focus upon consumption, of which jewelry sales
are followed very closely. But as seen in 1929 and in 2008, such consumption
declined sharply with the contraction. Fortunately, as with every severe post-bubble
contraction since the first in 1720, the investment demand for gold soars as
bauble consumption declines.
Our proxy for gold's real price is not the price as deflated by the CPI. The
calculation has been unreliable since Clinton's first term. We use our Gold/Commodities
Index (GCI) which seems close to The Economist's All Items Commodity Index.
Gold is money and not a commodity so it is not in our index, or in The Economist's.
Gold's real price has set an important low in the year a great bubble climaxed.
That is on all six examples from 1720 to 2007. On the last one, the GCI turned
up in May 2007 signaling the start of the great collapse that became visible
in June of that fateful year.
It increased until February 2009 and in turning down it anticipated the end
of the financial panic in March.
This has been the first business recovery and financial boom out of a classic
crash. Gold's real price bottomed and turned up in June of this year when the
credit markets began to deteriorate. The latter has yet to become dramatic,
but the GCI continues its advance, which reflects improving prosperity for
the Precious Metals Sector. This is likely early in a cyclical bull market
for the real price and stock prices could eventually follow.
In the old days, senior gold producers would be the first to recover, then
the middlingsized companies with eventually speculative juniors joined late
in the party. Nowadays they all come out of a bottom at the same time.
Traders could cover shorts. Investors and traders could begin to accumulate
the sector, preparing for the development of a cyclical bull market. Depending
upon the size of the portfolio, positions can include the seniors or juniors
directly. Many may find the ETFs convenient.
The melancholy conditions prevailing at the bottom of a bear market in precious
metals provide outstanding opportunity. This page uses some usually reliable
methods to guide decisions. However, there was a bad one a number of decades
ago (it could have been back in the days when traders comment on stock analysts
was "In a bull market who needs them, and in a bear market who wants them.").
Many companies were dead or dying but a broker, sensing opportunity wanted
to accumulate. Not willing to afford a secretary, he got the phone numbers
and dialed each company. If someone answered he hung up and bought the stock.
This was in the days before answering services.
It is an apocryphal story and it worked out. This one will as well.
Also after decades, we looked up Caveat Venditor and it is real.
Over the past 300 years, gold's real price has shown some fairly reliable
patterns. One is that it sets a significant low as a great financial bubble
blows out and then recovers during the post-bubble contraction. The first was
with the South Sea Bubble in 1720 and the latest classic bubble completed in
2007. It was number six.
Typically, the contractions run for some twenty years with the nearer-term
business cycle setting weak expansions and concerning contractions. Gold's
real price turned down in February 2009, the panic completed in March and the
first expansion out of the 2008 Crash started in June 2009.
Gold's real price declined with the expansion and set a significant low in
June. The rising trend since is well established and quite likely in the early
stages of another cyclical bull market. Eventually precious metal stocks will
follow.
Interesting Chart Pattern: The dreaded Vomiting Camel Pattern (VCP) in Gold
