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Article originally submitted to subscribers on 21st
May 2007...
Central Bankers
poured $500 Billion Dollars (that’s Billion!) into the monetary system
last week. The sheer quantity of intervention indicates an enormous monetary
dislocation is taking place -- current gold prices remain firmly bid.
Wow! Last week's
action left us breathless simply due to the sheer magnitude of money being
forced down the markets throat. What we have here is a situation where risky
fixed income investments ala CDO’s and sub
prime mortgages have been written down to Zip Nudda!
Now obviously
holders of these securities are not exactly writing them off their books, but
what is happening is in an effort to fund redemptions the banks / hedge funds
/ pension funds or whoever holds these securities is finding they are UNMARKETABLE
at exactly the time it really counts!
That left
Central Bankers holding the bag to provide liquidity and help fund
redemptions. This was necessary to prevent holders from selling other assets
and causing a severe market rout.
An argument against gold stock investing is that they are just another asset
class for hedge funds to dump when required to fund redemptions. So why buy
Gold or Gold Stocks when they seemingly offer no protection against a market
meltdown?
Of course it is
a valid argument in the short-term (as we have all too painfully witnessed),
but it fails to acknowledge that market participants understand that the
central bank bailout will cause
the money supply to rapidly increase. Gold has done a great job against an
increasing money supply over the last 6 years.
In fact it is
this tussle which has caused the
AMEX Gold Bugs index to remain range bound for over 1 ½ years.
Chart 1- HUI
finds strong support at 280; Current Gold Prices outperform Gold Stocks.
Now the game
gets interesting!
Gold stocks had a
terrible last couple of weeks which resulted in them testing major support
(lower green line at 280).
Gold stocks versus the Dow continue to
probe important resistance (red line). In a long-term Gold Bull market we
would expect Gold Stocks to Outperform the Dow.
And finally Gold Stocks have
underperformed against Gold Bullion and broken below support (bottom of chart
– blue line). This is important because
Gold stocks normally lead Gold bullion which portends to the possibility of more
gold stock weakness.
Putting it all
together we still think that the outlook for Gold Stocks remains
exceptionally positive. In fact, the recent turmoil has made the fundamental
case for Gold Stocks even stronger (although it’s hard to see when you
get the wind knocked out of you). In particular, we recently mentioned in
Prime Interest Rates and the market value of Gold that the safe haven status
of Bonds is about to encounter substantial headwinds which should push
investors to realize that Gold is the only asset of last resort.
More commentary and stock picks follow for
subscribers...
Greg Silberman
CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author only. Please conduct further research and
consult your financial advisor before making any investment/trading decision.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.
_______________________________________________________________________
This
article is intended solely for information purposes. The opinions are those
of the author only. Please conduct
further research and consult your financial advisor before making any
investment/trading decision. No responsibility can be accepted for losses
that may result as a consequence of trading on the basis of this analysis.
Information contained
herein is obtained from sources believed to be reliable, but its accuracy
cannot be guaranteed. It is not intended to constitute individual investment
advice and is not designed to meet your personal financial situation. The
opinions expressed herein are those of the author
and are subject to change without notice. The information herein may become
outdated and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
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