Gold, is it time to buy

Posted by Ray on September 2, 2009 under Main | Be the First to Comment

Everyone is talking about gold over the past 24 hours mostly because it went parabolic today. Those who follow me know that I am a big gold fan, but we are seeing many others jumping onto the bandwagon about the yellow metal. The big question is why is it having these giant leaps and will it continue.

I believe you are seeing gold increase because of economic uncertainty and the fact that it has strong fundamentals right now. I am not sure if it will break above the $1,000 mark and hold, it has always sold off when it reaches this area. However, based on the action we are seeing I do believe now is the time it will break and hold that threshold. I believe that China is the driving factor behind the sharp increase lately as they diversify their holdings and are hedging their dollar assets.

Another rumor, strictly a rumor from where I stand, is that the Chinese will revalue their currency and perhaps peg it to the Euro as the EU is now China’s largest trade partner. People cite the movement in the CNY for the latest rumor, but I do not know if that is really going to happen. I do think it could happen, but who really knows, rumors are just rumors. If this did happen then gold would go parabolic overnight and the dollar would take a bath, but I do not foresee this happening. Regardless, what we do know is that if you owned gold for some time you have done very well.

I think what we are seeing is a lot of short covering and the Chinese middle class stepping up to the plate and buying gold. All throughout history China and India have been huge fans of gold and many believe it brings luck, but more importantly they see it as money. Whether it brings luck or not, who knows, but what we do know is that the population of both China and India could easily suck up existing supplies if they are indeed buying the metal.

Surprisingly we saw gold and silver hold up very well in the face of a strengthening dollar, which is unusual, a few days ago. Usually when the dollar increases all precious metals take a nice nose dive, but not lately, although the strength in the dollar is not very impressive to say the least. I think that people are moving towards gold as a safe haven as they realize that gold has maintained its value this year and that the crisis is still not over yet. Having gold during uncertain economic times has always been a good bet and that, in my opinion, is what we are seeing.

In the recent past I said I liked gold and recommended picking it up under $960 an ounce. It did go below that mark so I hope people did buy it, but I am not so wild about buying it after such a sharp move upwards today. I think we will see a selloff tomorrow for those taking profits and after the selloff I would then consider buying it, no specific price target, but I would dollar cost average in. While I am bullish on gold, I am more bullish about silver.

Traditionally the gold to silver ration, GSR, has been tighter than it is right now. From 1792-2002 the GSR has a mean of 31, 31 ounces of silver to 1 ounce of gold, but currently we have a GSR of 63. That means that silver just about half the price it should be according to the traditional GSR. If the GSR returns to its traditional average silver should be trading at about $31.40 an ounce, double its closing price. To me that looks very bullish especially because the fundamentals are there. All the easy silver has been mined and we do not recycle it while every piece of electronics you have contain silver in order to make them work.

My point is, yes buy gold in a cautious manner, but also buy silver as you will get more bang for your buck. Essentially, silver can double in price when gold may only go up a few percentage points. It is also about diversification and if you buy precious metals then you need to diversify between them. I am currently a buyer of all precious metals in this order; palladium, silver, gold and platinum. While gold usually gets the spot light, silver and palladium usually get ignored which makes them a good buy as their prices will follow the majors, gold and platinum.

Play it safe and dollar cost average in.

I own SLV, GLD

The Dollar, The Short-Term Outlook

Posted by Ray on August 17, 2009 under Main | Be the First to Comment

I have been very bearish of the dollar for some time and on a long-term perspective that remains true, but short-term is a different story. This last rally we had was more a function of a weakening US dollar and a drastically oversold environment rather than a function of real economic recovery. Contrary to popular belief the market does not represent the state of the economy.

In fact, it is a very poor indicator of economic conditions. As the talk about a new bull market and the economy has ‘recovered’ ensued over the past month it was primarily based on ‘less bad’ information. While people were trying to make you feel better about the real situation they forgot to examine the fundamentals or other reasons for equities to rise. In this case it was purely a fact of a few things that no one, for whatever reason, really looked at. The reasons are as follows:

1. A very weak dollar which eroded your real rate of return in the S&P or Dow.
2. Improved economic data, but by no means was the data as good as the market let on.
3. Drastically oversold situation heading into March where the markets were just decimated.
4. Asia’s economy does have decent signs of recovery, so that makes many assume we are recovering at the same rate which was false.

Since my call on August 7^th when we had strength in the dollar, the markets and commodities did not get crushed was indeed the top in the short-term. As the dollar continued its climb equities have declined, but the rise in the dollar is happening for a specific reason, a flight to quality. The likes of Goldman Sachs, Morgan Stanley, etc. knew that the conditions in equities were overbought in July and that there are still major fundamental problems within the banking system, hence the 77 closed banks so far this year.

When I put it together 2 weeks ago it was clear as day for me to see that as you were buying equities Goldman & Co. were selling and buying the dollar. I, obviously, cannot be 100% on that, but I assumed it was a good educated guess and was convinced to tell you all about it. I did sell into that last rally and sold even more last week because I fear a pretty nasty decline in our near future. I suspect there is going to be some revelation that regional banks are having a tougher time than we think and that some type of ‘Black Swan’ is about to take center stage.

This is why I am somewhat bullish shot-term on the dollar as the flight to safety picks up steam, which it will if I am correct. This, however, is very bad news for commodities which will become far cheaper in the near future as the dollar strengthens. In fact, this looks eerily similar to last summer before the real crisis hit. Now, I do not think things will get that bad, but anything is possible. The good news for all of us ‘gold bugs’ is that gold will get much cheaper moving forward. While I think gold will go lower short-term I am a long-term bull because we will eventually have inflation and that is why I always say buy gold in increments and not all at once.

Now, the Elliot Wave International CEO thinks the dollar is going to multi-year highs, but I highly doubt that. We will be the last country to absorb our excess liquidity, if we ever do absorb it, compared to Europe and other countries. Leaving the liquidity will either devalue the dollar further, which is my opinion longer term, or it will create inflation according to all the experts. Both way, this is a short-term outlook and you need to invest for the long-term, but make adjustments to what you can see in front of you in the present.

There is no doubt that we are heading for something pretty interesting and while I will not be happy to see my GLD and SLV, plus physical, go lower I welcome the buying opportunity. In fact, I am very excited over the prospect that palladium could go as low as $200 or so as I have had my eye on a 2006 Canadian Palladium coin. I also think we could see platinum drop to the $900ish area as well, which is exciting if you have been looking to buy some below its pricey $1,200 current level. Silver could drop back to the $10ish area and gold could drop to the low $800ish.

Remember, I am a long-term bull on precious metals, just currently a stronger dollar is not good news for them right now.

The Dollar, Markets and Gold

Posted by Ray on August 11, 2009 under Economy, Markets | Be the First to Comment

We have had a nice rally in the dollar which has cooled a bit today, but it should have spelled disaster for gold, but it did not. A higher dollar also means equities are under pressure and yesterday we should have had a nice selloff instead of a flat day, more or less. However, the real story is gold and its ability to not get crushed under the weight of a strengthening dollar.

Those who read my articles regularly know I am bullish on gold, mostly as a hedge against a weak dollar, but also for long-term inflationary pressure. Regardless, a higher dollar usually spells disaster for the price of gold and while the price has reached, in my opinion, a nice entry point it has held up rather well in the face of the dollar. This is telling me that clearly demand for the yellow metal is in high demand and the fundamentals remain strong.

It is also telling me that the flight to quality has begun as the dollar increases, gold increases and equities decline. As stated several times, the market has priced in perfection for economic growth which should scare you to death because we will never get perfection. The fundamentals of the economy remain weak, regardless of what you are hearing or reading, and this weakness will become apparent moving forward into the fall.

I think it is evident that 3Q GDP will surprise most, but not at a 4.5% growth rate. I think a number of between 0-2% is about right, but hey let’s not let the facts get in the way of the new bull market. Unemployment, housing and commercial real estate are the major weakness in the economy and until we get actual stabilization in these areas, not just a one month reading, but a multi-month reading, then GDP will not grow at some of the ridiculous numbers of 4%+ that we hear being kicked around.

As the dollar weakens today we will see some strength return to equities, but we will also see gold move higher as well. I do not think this trend is long-term as I believe that firms are positioning themselves for the flight to quality that will happen in the next 30 to 60 days. The fall is usually weak for the markets and this is a cyclical move, in my opinion, however the coming market turmoil that is expected will exacerbate this move and we should see nice dollar gains followed by higher gold prices.

I believe that we will have several entry points for gold so I would recommend dollar cost averaging in over the next couple of weeks, buying on weakness. I really like the metal below $960 an ounce, but it could go lower, but I am a long-term bull. Volatility is going to be high in the near future so buy with your head, not your emotions. If you want to trade it then use charts and disregard my comments as I am a holder of the metal, not a trader. If gold is too rich for your blood then buy silver which I believe has plenty of upside potential, perhaps even more than gold especially longer term.

I own the GLD and SLV.

Gold, a Liquidity Bubble

Posted by Ray on August 6, 2009 under cnbc | Be the First to Comment

CNBC interviewed Gold Fields CEO, GOLD, and questioned him about investment demand citing investors are not fearing inflation, which is not true. Mark Haines, who I like, then went on to ask if ETF ownership is creating a liquidity bubble in the yellow metal. I guess this is a legitimate question, but when you add up CNBC’s position on gold it is always negative.

I see a pattern of anti-gold bias on CNBC even as most people recognize gold as a legitimate investment and hedge against the dollar and inflation. The irony is that Fast Money had an advisor from Morgan Stanley on last night who is an ultra wealth advisor and they asked him directly about the gold and inflation trade. The advisor did say that his clients are concerned about inflation and the dollars weakness, which means they are buyers of the yellow metal.

I am by no means a “gold bug”, I find that name so insulting anyhow, they do not call stock fanatics, “stock bugs”, but I recognize the importance of gold in a portfolio and own it myself. I believe any well rounded investment portfolio needs to have exposure to precious metals and other inflation protection investments. To not have that exposure is crazy.

Either way you cut it CNBC definitely does not like gold and consistently “talk it down.” To clarify, I do not believe CNBC is holding the price down, someone accused me of that before, what I am saying is they dismiss gold as an investment which is inaccurate at best.

Disclaimer: I own the GLD, SLV.

Unintended Consequences: The Dollar’s continued Decline

Posted by Ray on August 5, 2009 under Main | Be the First to Comment

Whether it is really an intended consequence or not is up for debate, however what is clear is the dollars rapid rate of decent to the basement. The index has been lower in the past, but the economic crisis last year boosted the dollar’s strength against every major index until the early part of summer when the risk and inflation trade kicked into high gear.

The consequence of a weak dollar is of great concern to me as it has consequences that most Americans either do not know about or do not fully understand. A weak dollar is good for our exports, but it also has an inflation factor for us that can sneak up on people. Commodities are priced in dollars so when the currency declines everything we use on a day-to-day basis increases such as gas and food. While the government thinks that gas and food have no or limited inflationary effect on people, I have to disagree since most people like to eat everyday and occasionally fill up their gas tank.

There is no question between the correlation of a weak dollar and the upward momentum of the equity markets. There are various reasons why the market has gone up over the past few months, it was massively oversold, but clearly the weakness in the US Dollar was perhaps the largest contributor to equities gains. As you can see below, the correlation is obvious between the dollar’s weakness and rising equity prices. Although there seems to be a decoupling between the two over the last few days, the longer term correlation is still very evident.

Every time the dollar declines 1% we see about a 1% increase in equities which means there is no real gain in stocks as Americans buying power was simply reduced. The reason for the dollars decent, which has been years in the making I might add, is because of our loose monetary policy. That policy has become increasingly looser since the beginning of the financial crisis and the saving grace of the US dollar was its liquidity as investors bought up dollars at a record rate last fall.

There seems no sign from the Fed as to when interest rate tightening might happen although many think interest rate hikes are closer than we think. Tightening our interest rates is the best way to support the dollar along with fiscal responsible spending which would mean no more spending by our government at this point. However, personally, I do not think the Fed has the stomach to tighten rates anytime in the near future, perhaps in 2010, but the Fed has been influenced way too much by the markets. In my opinion the Fed has abandoned its original role

On top of a poor monetary policy we also have massive amounts of debt being issued by the Treasury which is diluting our dollar even more. At this stage, we are heavily dependent on foreign governments to buy our debt. We saw what could happen if foreign governments slow or stop their purchases during last week’s 2 year auction where the bid-to-cover was 1.92 and rates shot up. If foreign governments stop buying our debt we are in huge trouble and will have to do more “quantitative easing” than we currently do now.

If the dollar index continues to slip then we could be facing huge problems such as losing our status as the world’s reserve currency. The only thing preventing that now is the fact that there is no other market that can handle being the reserve currency. The Euro and Yen are contenders, but those markets still are not as deep and liquid as the treasury market.

However, if we do loose our reserve currency status or the dollar index slips into the 60 area it is possible that foreign bank’s start dumping the dollar which could start the beginning of a crisis in the US dollar. As of right now I see an orderly exit out of the dollar, but if the orderly exit turns into a run for the exit because someone smells a fire then that is when we will have a big problem. It could very easily turn into a dollar collapse and no one is really sure what would happen because it has been unfathomable at any other time in our history.

Not only have we never seen anything like that in our lifetime in America, but most people think it could never happen, presumably because we are America. Not only could it happen, but eventually it is more than likely a probability that it will happen. Clearly no one knows exactly when or how it will happen, if it happens at all,, but one thing is for sure it will be because of a lack of confidence in the US dollar.

I do not root for such a thing to happen and I hope it never does happen, but at the very least it looks as though that the greenback will have some tough times ahead. This is one of the reasons why I am bullish on international investments, gold, silver and other hard assets as they are a hedge against a weak dollar. Buying commodities is one of the best ways to protect your and preserve your buying power.