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There is an old market
adage which says every Bull market contains the seeds of the next Bear
market.
Not only is that true but
we would extend it to read every correction brings into being the next up leg
and here I am referring to the Gold market.
Many new investors get
turned off gold stocks because they are incredibly volatile and require
oodles of patience. What investors sometimes don’t realize is that Gold
stocks, unlike other stocks, have the entire banking establishment to contend
with. That is, the Fed and Wall Street remain kings for as long as the system
is denominated in the very asset they control -- paper money. Once investors
flee paper and move into bars of Gold or bars of Silver, the game is up. The
establishment therefore fights tooth and nail to prevent Gold prices and Gold
Stocks from fully expressing themselves.
Ofcourse their efforts
are doomed to failure in much the same way as any exercise in market
suppression is doomed to fail. Case in point is the fact that the gold price
has moved up over 1.5x and major gold stocks over 5x
since the beginning of 2000 (even whilst faced with all this opposition). No
amount of paper will prevent the gold bull from ultimately expressing itself
but it will take time. A lot of time. Investors must realize this and learn
to exercise Herculean amounts of patience!!
In July Gold Stocks finally
looked like they were embarking on the long awaited breakout but as has been
the case for over a year and a half they were rudely turned back.
Chart 1 - XAU turned back at 160
Once again we are left
asking ourselves has anything really changed or is
the latest breakout part of a long series of false breakouts?
We believe the answer is
yes, although it is hard to recognize, the fundamentals for gold stock prices
are becoming more bullish.
In recent articles we
discussed how credit spreads have been widening and that gold will ultimately
become a beneficiary of this flight to quality.
In addition we have been
telling subscribers the next round in the gold bull market would only get
started once the stock market began falling. Well we’ve got that now!
A falling market would
cause the Fed to reduce interest rates and with it the real rate of interest
would fall (the real rate of interest is the nominal rate less expected
inflation – in a falling stock market environment the expected
inflation rate would be falling along with the nominal rate). Lower real
interest rates make holding Gold (an instrument which has no yield) more
attractive.
And here is yet another cog
quietly clicking into gear – Gold versus Economic Sensitive Industrial
Metals:
Chart 2- Gold vs. Industrial Metals (top); Gold
stock price (bottom)
We all got excited back in
October 2006 when the Gold started outperforming Industrial Metals (the chart
moved higher). The reason is that industrial metals are economically
sensitive and the implication is that if they are weakening against Gold,
global growth was slowing. With slow growth comes
the prospect of lower interest rates and an increase in money supply as
authorities try to stimulate the economy.
Unfortunately October
turned out to be a red herring and the entire move was retraced between
February and May 2007. Now things are looking up again. The market
value of Gold is once again outperforming Industrial metals and has
achieved two important technical milestones in the process:
The first is a double
bottom in the 1.25 – 1.3 range. This support has been tested twice
(October 2006 and May 2007) and held both times.
The second is that the
chart has recently broken out of a reverse head and shoulders pattern (marked
in blue) portending to higher gold versus industrials metal prices in the
immediate future.
Finally, Gold stocks
(bottom of chart 2) exhibit a somewhat positive correlation with the above
ratio, so aside form the short term pain, the implications are that Gold
Stocks may yet buck the trend and prove themselves a
worthy counter cyclical asset of choice.
More commentary and stock picks follow for
subscribers...
Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
February 15, 2007
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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