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This
essay is based on the Premium Update posted November 20th, 2009
At Sunshine Profits we’re holding gold and we
find ourselves in very good company with some of the world’s biggest
players. The smart money is definitely in.
Central banks are net buyers of gold for the first
time in 22 years.
According to a report by
precious-metals research firm GFMS, for the first time since 1987, central
banks around the world bought more gold in the second quarter than they sold.
India recently bought 200
tons of gold from the IMF and it won’t surprise anyone if China
steps in to purchase the other 200 tons offered for sale.
Some
of the world’s most successful traders are in gold.
John Paulson’s hedge fund holds a massive gold
position in the SPDR Gold Trust (GLD) and large positions in gold miners.
Star
hedge fund manager, David Einhorn, who predicted the fall of Lehman Brothers,
used to stay away from gold for personal reasons. His grandfather was a gold
bug who held on to his gold position for 30 years waiting for the U.S.
greenback to collapse and for inflation to run amuck. Apparently Einhorn now
thinks that grandpa may have been right all along but just had his timing
wrong. He initiated positions in gold for his fund.
“Being
a patient investor is one thing. Being 'wrong' for three decades is quite
another,” wrote Einhorn in a letter to his investors. “To
everyone's dismay, we believe that some of Grandpa Ben's predictions are
playing out.”
The smart money is in, but it’s clear to me
that the real fireworks will start when Main
Street catches gold fever. The gold market is
small. The market cap of all the gold stocks in the world is less than that
of Microsoft or Walmart. So, when the public finally rushes into gold...
Well, that’s when we’ll be very glad that we got in early.
Speaking of getting in and out of the market, there
are times (during before local tops) when it makes sense to be in- and out of
the market at the same time. I believe that a word of additional comment here
would be useful, as I get the feeling that it might be perplexing to read
that it might be useful to do one thing (enter the market) with a part of
one’s capital and do the opposite (wait/sell) with the other part.
Generally, the action that one is supposed to take
depends on their risk tolerance - and consequently their portfolio structure
and attitude toward money management. Risk-averse Investors should have more
capital invested in PMs also during corrections, while risk-loving Speculators
might be inclined to monitor market closely on a daily basis to catch even
the small moves in the price of gold and silver. Therefore, depending on your
preferences, you will need to monitor prices of metals in different time
frames, and you will define different moves as “small” or
“big”.
From the long-term point of view even $50-$100
downswing is really small - think about a chart with gold's rise from $250 to
$5000 - a $50 move is barely visible. On the other hand, the geo-political
situation is tense and the risk of a meltdown in the financial markets is
relatively high - meaning that a single event can cause gold's price to rise
$100-$1000 or so - for instance if the Chinese officials decided to dump
their dollar reserves on the market. This is not likely to take place in the
near term, but given the enormous effect it would have on the price, I
believe it is better not to be totally out of the PM market with a large part
of one's capital (long-term holdings).
Conversely, if it is the short-term speculative
capital that you want to focus on, please keep in mind that trading means
using rather limited amount of capital for each trade. After all, there is a
certain amount of capital that you should use at most, and if you use more
than that, you can lose money on average (!) even if you are mostly correct
in predicting moves of PMs. Therefore, if you use a small amount of your
short-term capital anyway, you don’t need to worry about a single big
event that would drive gold’s price very high (you are covered, thanks
to owning bullion, and using a part of your capital for long-term
investments), and focus on what is probable in the short term. Here, a $50
move is very often a difference between a winning, and losing position, so
focusing on such moves and exiting positions once a correction is looming,
might be profitable.
Having
said that, let's move to the analysis of the current events on the precious
metals market. This week I will provide you with my thoughts on silver and PM
stocks - charts courtesy of http://stockcharts.com.
 
Silver
reached its long-term resistance line, which means that further gains might
be postponed. On the other hand, should gold rally from here - and that is
the likely outcome - silver's rise may be stopped by at its previous highs of $19.55 or $21.44.
Generally,
much depends on the gold market, so once we get exit signals from it, it will
mean that might be a good idea to close one's silver speculative (!)
positions as well.
Silver
often tops in the form of a double-top pattern, so it would not surprise me
to see silver decline a bit, only to re-test its recent highs and decline
afterward.
The
precious metals stocks are also near their resistance level.
Gold
stocks are very close to their old 2008 high, and given the strength of the
current momentum it is possible that this level will be touched during this
rally. I have used the word "touched" intentionally, as it seems
the PM stocks would need to take a breather before they break into new highs.
Currently,
the HUI Index is trading near a less significant high (marked with a thin
vertical line on the chart), which may also stop this rally, if gold is to
decline from here. However, based on the above analysis of gold charts, this
is not a likely outcome so PM stocks may also move higher before topping.
Based on information available today, I've marked the probable topping area
with a red ellipse. Let's see if the short-term chart confirms the above analysis.
I've
used the GDX ETF as a short-term proxy for PM stocks, as it allows me to
analyze volume. The latter has been decreasing recently, which is an early
sign that the rally is slowly running out of steam (buying power is drying
up). The value of volume is not at a dramatically low level that would cause
me to send out a Market Alert, but it certainly suggests that if mining
equities are able to move to their previous highs, this is likely to mark a
local top.
Naturally,
the key question is "when?" As always, "now" is the most
difficult time to invest, but once again the cyclical tendencies help us put
the daily price swings into proper perspective. In the past, the red vertical
lines were very close to local extremes (tops or bottoms), so it might be the
case also here. This time, the next vertical line suggests top/bottom in
early December, possibly in its second week. This may correspond to
the top, at which the HUI Index reaches its 2008 high.
Summing
up, apart
from points raised in my previous essay, additional signals pointing to
looming correction come from silver and PM stocks. The momentum is strong, so
the correction may not materialize today or tomorrow, but based on what we
see today, it seems that the temporary top will be reached within the next
few weeks. The full version of this update is about 4x bigger than the
free version and contains many additional charts and analysis with critical
implications to you. Subscribe now, and find out why $7000 gold and
$400 silver aren't really irrational!
To
make sure that you are notified once the new features are implemented, and
get immediate access to my free thoughts on the market, including information
not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day
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Thank
you for reading. Have a great and profitable week!
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
Also
by Przemyslaw Radomski
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