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Speculators in the general US equity
markets are not the only ones who have been entertained by an
uncharacteristically wild summer this year. Gold and especially gold
stocks have performed just about every kind of wild gyration imaginable
during recent months.
While the volatile summer
has certainly been emotionally challenging for all playing the markets, it
was really a blessing for speculators. For those who are able to
harness and suppress the inherent human greed and fear dwelling within their
own hearts, this year has proven to be very profitable across the whole gold
arena.
It has been about 4 months
now since I hammered out my GoldTrends 2 essay, so
this week felt like a good opportunity to take another look at the gold
charts. We built some new graphs with current data in order to attempt
to once again command the strategic perspective in the sometimes chaotic gold
and gold stock action.
As daily volatility hammers
investors and speculators alike and challenges worldviews and perceptions, it
is incredibly easy to become mired down in the tactical daily market
noise. Just as a good military general craves a satellite-level
big-picture strategic overview of any unfolding campaign in war, gold
speculators and investors can benefit tremendously by stepping back, ignoring
the countless tactical day-to-day distractions, and focusing intently on the
strategic big picture.
Gold’s strategic
fundamental picture is well known. It is believed that around 140,000
metric tonnes of gold have been mined in all of world history. Today
about 30,000 of these tonnes are believed to be held by various central banks
around the world. Most of the rest is in private hands, either in the
form of pure investment gold like coins and bars or worn as jewelry.
Each year all the
world’s mines only manage to painstakingly chisel 2,500 tonnes of fresh
gold out of the bowels of the earth. This number divided by the total
gold supply yields an average annual gold “inflation” rate of
about 1.8%, right in line with centuries-old historical averages. As
long as fiat currency supplies around the world including the dollar are
generally inflating faster than the total global gold supply, each ounce of
gold will ultimately grow more valuable in currency terms.
Case in point,
mega-inflationist Alan Greenspan has ballooned the
US MZM money supply by an absolute 12.9% in the last 12 months. This
hugely inflationary environment is fantastic for gold! Relatively more
dollars chasing relatively fewer ounces of gold each year yields higher gold
prices. Unfortunately, since sycophantic bureaucrats who hate freedom
are running central banks all over the world, they too are inflating rapidly
and intentionally destroying the savings of their people. Gold thrives
in such environments of socialist government-sponsored theft through
inflation.
As an added bonus, gold is
also running a gaping natural annual supply and demand deficit. Today
worldwide gold demand is believed to exceed 4,000 tonnes. Marginal new
investment demand for gold, crucial for its price, is almost certain to
continue increasing as the brutal supercycle Great Bear market in US
equities continues to pour out its wrath upon the markets.
As more and more investors
worldwide grow weary of their relentless general equity losses and they witness
the magnificent gains the gold investors are reaping, a deluge of fresh
capital is almost certain to flood into the very small and
lightly-capitalized gold and gold stock markets.
Fundamentally, the gold
market looks like an outstanding investment and speculation opportunity in
coming years any way you slice it.
Fundamentals are crucial to
determining price and trend direction, but fundamental analysis is unable to
provide buy and sell signals. Since we know the fundamental strategic
environment for gold is quite dazzling, we can use technical analysis to
flesh out the current situation for gold and gold stocks. If good
fundamentals coincide with positive technical action, the probability of the
gold rally continuing is very high.
Obviously, the key to gold
and gold stocks performance is the price of gold. The correction in the
gold price since early June has definitely tested investors’ and
speculators’ mettle. By transcending the daily tactical market
noise and looking at the big picture however, it is readily apparent that
gold’s strategic uptrend remains intact. Gold still looks gorgeous technically!
Since gold bottomed under
$257 on April 2nd, 2001, its technical uptrend action has been just about
perfect. The chart above is a textbook example of the early stages of a
bull market, an orderly rise for over a year within a well-defined trading
channel.
Trough to peak, the Ancient
Metal of Kings managed an impressive 28% gain in only 17 months. Gold
is truly in a bull market, as the very definition of a bull market is a 20%+
gain over a year or more of time. Compare this with the S&P
500’s grinding 9% loss over the exact same time frame! Slowly but
surely gold is garnering more investor attention and seducing non-traditional
gold investors into taking a serious look at the evolving gold bull.
Gold’s correction in
recent months, while tactically excruciating for those investors and
speculators suffering through it day-by-day, doesn’t look threatening
at all on the strategic chart above. Note that gold had rocketed above
its strategic trend channel in May, approaching a long-term resistance level around
$325-$330. Gold was repelled from those crucial levels and soon fell
back into the top-half of its long-term uptrend channel.
While it certainly looked
ugly from the myopic perspective of those mired in battle, with the benefit
of a God’s-eye view the pullback looks extremely bullish. The two
bold dotted-blue lines above mark gold’s long-term strategic uptrend
channel, the support on the bottom and resistance on top. In between
these two primary channel guides lies a smaller dotted-blue line, labeled “2” above. We call these parallel
lines within existing strategic trend channels “midlines.” For
an excellent real-world example of how trading a midline proved extremely
profitable in the ongoing NASDAQ bust, please see my earlier “Bear Market on Target” essay.
Regarding this gold
midline, note that it used to be a resistance level for gold, the yellow
metal was repelled upon slamming into it from below. The two red
arrowheads pointing down to the midline flag these episodes last year. Extremely
encouraging however, twice now in 2002 the midline has actually proven to be
bottom support for gold, marked with the two green arrowheads pointing up at
the midline in the graph.
One key bit of wisdom in
technical analysis states that in bull markets old resistance levels
gradually morph into new support levels as the bull run charges ever
higher.
In the delicious gold chart
above, the midline appears to have changed from a level of topside resistance
to gold last year into a bulwark of bullish support for the gold price this
year. My partners and I are starting to wonder if the midline will
actually turn out to be the new heavy bottom support line for gold’s
ongoing strategic uptrend. Only time will tell, but evidence is
accumulating in favor of this hypothesis.
A second observation
further cements the bullish nature of gold’s recent correction. Another
technical analysis general rule is that retracements
of 50% to 62% are common in healthy bull markets. The 62% number is
derived from simply rounding up the ubiquitous Golden Ratio of 61.8% between
numbers in a Fibonacci Series. A
healthy pullback in a bull market is expected to be between half and 62% of
the preceding rally. Interestingly, this occurred twice already in 2002 in the ongoing gold
bull, a good sign.
Note the two black percentages
in the graph above. They mark the retracement
bottoms of their respective preceding rallies. Gold’s first sharp
rally this year, marked with the little black arrowheads, saw a 55% retracement before it continued its long march to the
heavens. The second major rally this year, marked with another set of
black arrowheads, witnessed a 63% retracement.
For all intents and purposes, this was essentially a garden-variety Fibonacci
retracement.
The bottom line is the
technical strategic picture for gold still looks fabulous. Its
long-term strategic uptrend remains rock-solid, old resistance lines are
evolving into new support lines, and normal healthy retracements
of rallies are the rule of the day. When gold’s outstanding
technical situation is overlaid on top of its stellar fundamentals,
probabilities are vastly in favor of the gold bull
continuing to gallop ahead and gain strength in the future.
From monitoring our
incoming e-mail and private consulting activity at Zeal, as well as
periodically checking in with popular gold investor hangouts like Gold-Eagle’s world-famous Gold Forum, it was very apparent that
gold stock investors were pretty darned nervous during the latest gold
pullback. Hopefully this next graph will help calm some fears for the
next time a normal healthy gold retracement rolls
around.
There are at least two
things that every gold stock investor must absolutely, positively remember.
First, the only good reason
to ever even consider owning a gold stock is because an investor or
speculator is expecting a gold rally. As I explained in my recent
“Gold Stock Investing 101” essay,
the primary allure of gold stocks is their leverage to the price of
gold. The single most important, and really only truly important,
variable for general gold stock prices is the activity in the price of
gold. When gold runs higher, gold investor sentiment and gold stocks
soar. When gold languishes, gold investor sentiment and gold stocks
wither.
Second, even though there
is a direct and ironclad relationship between gold stock prices and the price
of gold, it is strategic, not tactical. Just because gold is up 3% or
down 3% in a single day does not mean that gold stocks should necessarily be
up or down that same day. Tactical market noise makes gold stock
movements on a daily basis much more random than one would think. When
trying to draw conclusions and understand meaningful relationships between
the gold price and gold stocks, one must analyze a longer period of
time. A day or even a month is usually too short.
So yes, gold certainly
drives gold stocks, but not necessarily on a minute-by-minute basis. The
huge caveat here is not to get mired down in the details of what happens in a
single trading session. Who cares what happens in one day? There
are very, very few single days in market history that are actually truly
important. Transcend the tactical day-to-day market noise and always
focus on the strategic big picture!
The graph above shows the
gold price on the left axis. Compared to it on the right axis are two
data series indexed back to the first trading day in 2001. The red line
is the price of gold, indexed to 100. The blue line is the AMEX Gold BUGS Index, known by its
symbol HUI, also indexed to 100.
Not surprisingly, gold
stock investor sentiment, and hence gold stock price
levels, are intimately tied to the price of gold over time. Whenever
there is a spike in gold, greed takes over and gold stock investors and speculators
buy like crazy, ramping the unhedged
HUI index. Conversely, when the gold spike or rally takes a breather,
gold stock levels fall as fear takes over as the popular emotion du jour.
You can watch the
always-entertaining oscillation between the psychological extremes of greed
and fear in gold stock investors and speculators by simply monitoring popular
web chat sites like the Gold-Eagle Gold Forum
periodically. When gold is running higher, the comments are exceedingly
positive and folks are talking about how they are going to retire as
billionaires in a few weeks and buy their own third-world countries. Conversely,
when gold is falling, folks are bickering and lamenting in despair about the
endless manipulation of the gold price by various groups.
While the recent retracement of gold was not out of line in percentage
terms as we discussed above, in absolute dollar terms it was the biggest gold
pullback of this rally yet simply because it started from a much higher level
than any previous gold retracements. Similarly,
the sell-off in gold stocks was the largest to date in this rally in absolute
terms and it spooked the majority of gold investors and speculators.
This kind of action is
fully expected in a bull market however. The lessons to be learned,
unless you are day trading, are to stay focused on the big picture, not the
day-to-day turbulence. Do your own due diligence, buy your own gold
stocks, place prudent trailing stop-losses on your
positions just in case, ignore the daily noise, and relax and watch the bull
unfold. Worst case, if you are stopped-out, you are granted a great
opportunity to review the scene and redeploy capital if you arrive at the
conclusion that the strategic fundamentals and technicals
are still sound.
Don’t sweat the
day-to-day tactical distractions, focus on the
crucial long-term strategic trends!
One final comment on this
second graph. Note the red “Gold Indexed” line above, how
flat it is from a strategic perspective on a zeroed axis. A few weeks
ago I was talking with a Wall Street Journal reporter out of London who was doing an article on gold
bugs. She asked me if I thought gold would go “all the way up to
$400 again someday.” I laughed at her. She asked me what
was so funny. I told her that $400 was a joke, nothing,
that we were holding out for a multi-year strategic gold rally like
the 1970s that could ultimately push us through the US$5000 per ounce
range. I am sure she thought I was clinically insane after that
comment, but nevertheless we had a fun chat!
Keep the flat zeroed-gold
line above in mind and check out a comparison graph between the 1970s and
today, like the final graph of my “Gold Defies Naysayers”
essay. Believe it or not, a similar strategic long-term gold rally
today climaxing in another gold bubble would take gold to $5000+ if the rally
was similar in percentage magnitude to the 1970s episode! Gold went
from roughly $35 in the early 1970s to an $850 single-day bubble in early
1980, an enormous 24x gain.
If gold’s ultimate
low this time around proves to be in the $255 range as the charts are
suggesting now, a similar 24x increase in the price of the Ancient Metal of
Kings would yield an astounding gold bubble blow-off single-day top of over
$6000 per ounce. Will it really happen? Who knows, but markets
work in cycles and historical precedent suggests we certainly could be
blessed with a massive gold rally again.
The strategic perspective
must always be maintained by investors and speculators! What we have
witnessed thus far in gold and gold stocks, although exciting and already
very profitable, is nothing compared to what a real historical gold bull
market can look like when the dust finally settles. A 28% rally in
gold, what we have seen thus far, is simply a nice beginning, nothing to
write home about yet!
Finally, I would like to
close with a brief technical look at the unhedged
HUI gold stock index.
Interestingly and not much
of a surprise, the gold stock technicals look much
like gold itself, just exaggerated a bit to reflect the extraordinary
leverage to the price of gold that quality unhedged
gold mines enjoy.
The HUI index is in a
definite strategic uptrend. It broke out way above its trend channel
this year, and has since retraced 60% of its major rally, a normal and
totally healthy occurrence in a primary bull market. Its midline, just
as with gold, has evolved from hammering gold stocks as an overhead
resistance level to buttressing gold stocks from below as a strong support
level. Just like gold, the unhedged gold
stocks look beautiful technically and there is no reason to believe our
latest retracement was anything more than that,
just a bullish correction.
For you volatility buffs
also speculating in the ongoing bear market in general US equities, we threw
in a short 10-day intraday volatility moving average as well. Unfortunately
there is no VIX equivalent in the gold stock world, so the HUI vola MAs will have to suffice. It is interesting to
note that the recent HUI correction, while sharp, didn’t catapult volatility
up to the types of extremes we would expect to see if it was rolling over
into bear market mode.
The HUI unhedged
gold stock index, even after its correction, is still up a glorious 79.7%
year-to-date in 2002! The S&P 500 plunged by 20.1% over the same
period, destroying over a trillion dollars of scarce capital and shattering
countless dreams. Even though CNBC and Wall Street are doing their best
to totally ignore the stellar performance of the champion gold stock sector,
the information will get out. You just can’t hide extraordinary
performance for long, especially in a horrible supercycle
bear market!
Gold’s fundamentals
and technicals are outstanding. Gold and gold
stocks are absolutely in bull markets per the textbook definition. Nothing
in the charts suggests the trends are about to change for the worse. On
the contrary, they continue to look better with each passing month!
The GoldTrends remain impressively bullish!
Adam Hamilton,
CPA
August 16, 2002
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this information? We publish an
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Questions for Adam? I would be more than happy to
address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more
information.
Thoughts, comments, or
flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually
increasing e-mail load, I regret that I am not able to respond to comments
personally. I will read all
messages though and really appreciate your feedback!
Copyright 2000 - 2006 Zeal
Research (www.ZealLLC.com)
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