| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 By Prieur du Plessis, on January 12th, 2012 posted in: Gold, Investment  19 people had their say - chime in!
Since its precipitous decline of more than $350 from August to December last year, gold bullion has regained almost $100 of its loss. The yellow metal two days ago managed to climb above its 200-day moving average in what appears to be an upside break from a mini inverse head-and-shoulders pattern.
Source: StockCharts.com I remain bullish on the fundamental outlook for gold for, among others, the following reasons:
Having said this, I believe gold has more consolidation ahead before resuming its bull market. Pull-backs during this period should be used for adding to positions. I often get asked what Richard Russell, 87-year old writer of the Dow Theory Letters, nowadays says about the outlook for gold. In short, he sees a world “economic train wreck” ahead, and views gold as the “last man standing”. A few of his comments are below. “For a decade I have been urging my subscribers to move into gold – either physical bullion or otherwise. Now I am at it again PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market. “This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety? “There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world’s only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold. “Almost every nation on earth has indulged in the same kind of fiscal madness. To cover the insane spending, nations have had to create an almost endless amount of fiat currency. This avalanche of “money” has steadily reduced the buying power of almost every currency. The result is that it takes increasingly more paper currency to buy one ounce of real money – gold. “Gold may now be ending its latest correction. If I am correct in this, gold is in a buying zone.” The long-timer has spoken! Source: Dow Theory Letters , January 11, 2012. More on this topic (What's this?) Why the Gold Slump is Not Over (Investment U, 1/9/12) Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year (Money Morning, 12/30/11) Why I “Hope” Gold Prices Crash (Learn Mining News, 1/4/12) By Prieur du Plessis, on January 11th, 2012 posted in: Gold, Investment 6 people had their say - chime in!
The gold price has been working its way higher since hitting bottom in late-December and yesterday managed to breach its rising 200-day moving average. To put matters into perspective, friend Chris Puplava, portfolio manager of Puplava Financial Services and contributor to the Financial Sense website, agreed to Investment Postcards sharing the article below with its readers. In September of last year we saw gold jump two standard deviations above our gold intermediate-term risk indicator’s average, a feat only seen on three prior occasions (2006, 2008, 2009). Since then, gold has significantly worked off its overbought condition and fallen by over 20% to its recent low on December 29th. Now, the recent decline has been sufficient enough in both time and magnitude to drop our gold indicator to a very oversold reading of more than 1 standard deviation below its historical average. The last time gold was this oversold was back in 2008 and represents the second most oversold reading since gold’s secular bull market began, and likely represents a major buying opportunity as the long term fundamentals (negative real interest rates, global currency debasement) remain.
As with gold bullion, the same can also be said for large cap gold stocks as seen by the NYSE Arca Gold BUGS Index (HUI). Our intermediate term risk indicator for the HUI is also at extremely oversold readings of more than one standard deviation below its historical average. Readings in this vicinity have served as major buying opportunities in the past as gold stocks have soon recovered after finding a footing.
It has been remarked by many analysts that gold stocks have significantly lagged behind the price performance of gold bullion. This action has significantly depressed the values of gold shares which are selling at valuations last seen in 2008 when viewed by the price-to-sales ratio (P/S). Given the elevated price of gold, gold miners are flush with cash and represent bargain values. It is typically readings near 6.5 in the P/S ratio that gold miners run into trouble. Also, holding the price of gold constant, with the current P/S ratio for the HUI coming in at 4.0681 the mining index would need to rally 60% before gold stocks would begin to become overvalued, which would give a price target of $832 for the HUI Index.
For investors who continue to believe in the secular bull market for gold bullion and have a decent level of patience, today’s miners represent an attractive long-term entry level given their significantly oversold condition and cheap valuations. Source: Chris Puplava, Financial Sense, January 10, 2012. More on this topic (What's this?) Why the Gold Slump is Not Over (Investment U, 1/9/12) Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year (Money Morning, 12/30/11) Why I “Hope” Gold Prices Crash (Learn Mining News, 1/4/12)
The fascinating infographic below come courtesy of NumberSleuth.org (via The Big Picture). Click the image for a larger graphic.
Source: NumberSleuth.org, January 5, 2012 (hat tip: The Big Picture). 
I often get asked: “What does Richard Russell say about the $350 decline in the price of gold?” The simple answer is that the octogenarian writer of the Dow Theory Letters remains unfazed, and is preaching the gold gospel as strongly as before. The excerpt below from his latest newsletter summarizes Russell’s viewpoint. “Below are the last day of the year quotes for gold. 2000 — $273.60 “This year’s close for gold marks the 11th year for a higher year-end gold closing. To my knowledge this is the longest bull market of any kind in history in which each year’s close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history. “I note the frustration and anger of the anti-gold crowd. To miss 12 years of rising prices is enough to make any investor furious with himself. I would guess that 99 percent of Americans have never participated in the gold bull market. Thus, sour grapes is the sentiment of the gold-haters. Happy to say my subscribers who listened to me in the early years of the gold bull market have enjoyed the riches restored upon them by the greatest bull market in history.” More on this topic (What's this?) Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year (Money Morning, 12/30/11) Why the Gold Slump is Not Over (Investment U, 1/9/12) Why I “Hope” Gold Prices Crash (Learn Mining News, 1/4/12)
The article below is a guest contribution by Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors. It wasn’t a pretty week for gold prices. The eurozone’s epic endeavor to conquer its sovereign debt issues forced some institutional investors to liquidate profitable gold positions to meet a rising need for liquidity. In addition, falling confidence in the euro and other global currencies pushed investors tumbling toward the relative safety of the U.S. dollar. As we outlined for you last week, the key phrase is “relative safety” because we know that it could only take a slight breeze to blow the dollar’s house down. Back on August 22, I wrote that gold was due for a correction and that it would be a non-event to see a 10 percent drop in gold. I wrote, “This would actually be a healthy development for markets by shaking out the short-term speculators.” This morning’s gold price of $1,590 is about 15 percent from the high, which is a little greater than predicted, but a non-event just the same. I believe the long-term story remains on solid ground. In a report this week, Credit Suisse reiterated the bull market for gold is not over, saying, “We do not believe the key fundamental drivers of the [gold] bull market have dissipated. While there are risks, in our opinion gold is getting close to attractive levels for new longs to be initiated.” Gold Stocks vs. the Federal Budget This chart, which we’ve highlighted several times, shows the size of the surplus or deficit in the federal budget. When the federal government is spending more than it takes in, gold and gold stocks tend to outperform the broader market. It’s important to point out that it’s the political policies, not political parties, that drive this phenomenon. During the 1990s, when President Clinton was in office, there was a budget surplus and investors could earn more on Treasury bills (about 3 percent) than the inflationary rate (about 2 percent). This gave investors little incentive to embrace commodities such as gold, and prices hovered around $250 an ounce.
Since 2001, increased regulation in all aspects of life, negative real interest rates, welfare and entitlement expansion funded with increased deficit spending have created an imbalance in America’s economic system. It’s this disequilibrium between fiscal and monetary policies that drives gold to outperform in a country’s currency. The Federal Reserve capped interest rates near zero back in 2008 and the federal budget deficit ballooned to $1.4 trillion. In fact, both the deficit as a percentage of GDP (negative 11 percent) and federal government debt as a percentage of GDP (nearly 65 percent) are at the highest levels since 1950. This has helped fuel gold’s rise through $1,000 and $1,500 an ounce. Striking Portfolio Balance with Gold Stocks Gold stocks have historically ranked among some of the most volatile asset classes. Over any given one-year period, it is a non-event for gold stocks to move plus or minus 38 percent. This DNA of volatility is about three times that of gold bullion, which carries an annual volatility around 13 percent. Despite this volatility, our research shows that investors can use gold stocks to enhance returns without adding risk to the portfolio. In 1989, Wharton School finance professor Jeffrey Jaffe completed an academic study that illustrated the effects of portfolio diversification into gold stocks. Jaffe’s original study covered the period from September 1971, just after President Nixon ended convertibility between gold and the dollar, to June 1987. During Jaffe’s study period, the average monthly return for the S&P 500 was 0.89 percent. Gold stocks, as measured by the Toronto Stock Exchange Gold and Precious Minerals Total Return Index, converted to U.S. dollars, performed considerably better, returning an average monthly return of 1.42 percent. On the risk side, gold stocks had greater volatility (measured by standard deviation) than the S&P 500. But Jaffe found that, because of their low correlation to U.S. stocks, adding a small percentage of gold-related assets to a diversified portfolio slightly reduced overall risk. Here is an updated version of Jaffe’s results.
To find an optimal portfolio allocation between gold stocks and the S&P 500, the efficient frontier plots different portfolios, ranging from a 100 percent allocation to U.S. stocks (the S&P 500) and no allocation to gold stocks, and gradually increases the share of gold stocks while decreasing the allocation to U.S. equities. Assuming an investor rebalanced annually, our research found that a portfolio holding an 85 percent allocation to the S&P 500 and a 15 percent allocation to gold equities* had essentially the same volatility as the S&P 500 (horizontal axis) but delivered a higher return (vertical axis). In other words, the addition of a small allocation to gold stocks increased portfolio returns with no increase in the portfolio’s volatility. Continue reading Striking portfolio balance with gold stocks More on this topic (What's this?) Why the Gold Slump is Not Over (Investment U, 1/9/12) Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year (Money Morning, 12/30/11) Why I “Hope” Gold Prices Crash (Learn Mining News, 1/4/12) By Prieur du Plessis, on December 18th, 2011 posted in: Gold, Investment 2 people had their say - chime in!
Calling the death of gold’s bull run, and the beginning of a gold bear market, with Dennis Gartman, The Gartman Letter. He said in latest newsletter: “We have the beginnings of a real bear market, and the death of a bull … So much damage has been done to the psychology of the market in the past week and so many late longs caught off guard that forced liquidation shall be the outcome.” Source: CNBC, December 14, 2011. More on this topic (What's this?) Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year (Money Morning, 12/30/11) Why the Gold Slump is Not Over (Investment U, 1/9/12) Why I “Hope” Gold Prices Crash (Learn Mining News, 1/4/12) |
![[Most Recent Charts from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_4.gif)
 (requires Windows Media Player) 
|      
   | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Copyright © 2012 Investment Postcards from Cape Town - All Rights Reserved Performance Optimization WordPress Plugins by W3 EDGE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Email
ECRI Leading Indicator: Turning for the better?
Roach on U.S. economy, Fed policy, China, Europe
Prieur’s Readings (Jan 30, 2012)
European choices
Recent Comments