The Daily Gold » Expected Returns

Gold Shares Are Attractive

Expected Returns — Wed, 12 Oct 2011 01:45:47 +0000

As I expected from an oversold market, there was a sharp rally today, especially in gold and silver shares. I believe most sell-offs should be bought, especially because it is easier to buy and lighten up at perceived tops than to go short. This continues to be my strategy in this market environment.

Gold shares have essentially traded sideways the past year while gold has risen and oil prices have fallen. This is a great environment for gold companies in production, and I expect the precious metals sector to take the lead in raising dividends moving forward.

Gold Shares

Gold

A “panic” to the 200-day moving average in gold, or about $1530, is a scenario I would welcome with open arms. We haven’t seen a breach of the 200-day since the panic of 2008, but if it were to happen again, take advantage of it. If you recall, gold shares skyrocketed even when the rest of the market came under pressure. This kind of panic is possible with the amount of fear out there. Just remember that to have been a buyer in late 2008, you most likely had to suffer heavy losses before receiving spectacular gains.

I expect gold to continue to be volatile within a range. If you take a step back, all this volatility will look like one long period of consolidation. This is how you must think. Following the consolidation, gold will embark on a spectacular rally that will coincide with when the debt crisis hits our shores. It would be wise of gold bulls to accumulate on weakness.

Source: Gold Shares Are Attractive

A Replay of 2008?

Expected Returns — Wed, 28 Sep 2011 22:17:16 +0000

The current environment most resembles that of late 2008, but with one key difference: our leaders are now somewhat aware of the scale of this crisis and they are prepared to support markets. Heck even the Swiss are devaluing, which means a retest of new lows in stocks is unlikely in most markets. Competitive currency valuations are just one reason why I am just itching to be positioned long when the time is right.

Gold is still oversold, so we are going to see temporary spikes like we did earlier this week. However, be careful not to mistake these oversold bounces for a sustained rally; further weakness probably lies ahead. The mid $1500′s is one decent spot to add, and if we see the $1400′s, it will be time to get very aggressive.

I always considered the efficient market theory a load of garbage. Inefficiencies in markets always develop, and it is the job of the astute investor to profit from them. By believing in the efficient market theory, you allow yourself to fall victim to a lot of logical traps. For example, “Since gold is falling, we must be experiencing deflation, which means yields are going to fall, which means Treasuries are the safest investment around.” This kind of severely flawed thinking will get you crushed, if it hasn’t already.

Treasuries are a huge bubble, but I have only a very small short position because I know irrationality lasts longer than anyone expects. I’ll be adding on the next spike, and even if I incur short-term losses, it doesn’t bother me. I was able to catch the gold bull market because I was looking 3-5 years down the line. Do you think anyone who bought 3 years ago is complaining about buying at $800 instead of $725? In the short-term the losses seem insufferable; in the long-term, they are a fly on an elephant’s behind.

Treasury yields fell in 2008, but I think they are going to easily double from here. The debt crisis in the U.S. and Europe just goes from bad to worse, and it’s clear no viable solutions are on the table. The more talking heads on TV say Treasuries are the place to be, the more I am inclined to go short.

The markets are going to get volatile, but before this year is over, gold should be volatile to the upside.

Source:A Replay of 2008?

Is the Gold Correction Over?

Expected Returns — Sat, 27 Aug 2011 21:08:05 +0000

After the panic of a couple of days ago, gold has recovered nicely. As I was telling you, waterfall moves are the time to buy in a bull market. Spike moves are the time to sell, even in a bull market.

I think the odds favor a correction before $2000-$2100, but this was a nice trade for people with the discipline to buy. It takes discipline to sell when everyone is euphoric and it takes discipline to buy when everyone says the world is ending. The best traders do both consistently.

Gold equities remain extremely cheap and they are screaming buys on corrections. If gold stocks go down 20%, I buy. If they go down another 20%, I celebrate, then buy some more. This debt crisis was a long time in the making and the repercussions will therefore be very serious.

I’m so confident in this trade because I’m not trading against facts, I’m trading against human nature, self-imposed delusion, and government stupidity. Human nature is a constant. Government stupidity cycles, and we are in a clear bull market in government stupidity. These are the kind of trades that don’t come around often.

Even gold bugs are not believers, if this makes sense. These are the type of people that can see gold rise to $1000, but that’s it. Then $1200. Then $1500. Then $1800. At every point they were more bullish than the masses, yet they were dead wrong. They were not bullish enough. They did not grasp the full extent of the debt crisis.

For everyone who truly understands what lies ahead, I’m telling you that without a doubt the best thing that can happen right now is a monster correction. This is something I’m expecting. I expect a period of calm in markets where everyone thinks the worst is behind us. This is when you should be getting aggressive. Like a pendulum, gold will be building energy for the upside on any correction.

Source: Is the Gold Correction Over?

Looking for a Rally in Stocks

Expected Returns — Fri, 12 Aug 2011 03:45:06 +0000

The past few weeks have been interesting to say the least. Debt downgrades were met by more promises of accommodative Fed policy, as expected. Stocks are plunging and confidence around the world is collapsing. Gold is testing $1800 and people are running for cover. How will all of this be resolved?

Although the world appears to be ending, I would rather be long stocks than long gold right now. Stocks are extremely oversold even after yesterday’s rally and gold is getting overextended. Stocks are going to surprise to the upside once we get this correction out of the way, especially with Helicopter Ben providing support. Also, I am now short Treasuries; the rally in bonds is getting a little ridiculous.

Gold stocks are undervalued relative to the metal, so the long-term investor will do OK buying here even with a correction in gold. Perhaps we will see a situation where gold stocks underperform the stock market, but outperform the metal. This is completely reasonable. Gold will probably underperform silver on the next leg up as well. While I won’t go so far as to say the sentiment in gold is the same as the sentiment towards silver a couple of months back before the correction, it’s well on its way to getting there. Just be careful piling on longs here; at least do not be leveraged.

As long as you are not leveraged, view these corrections as gifts. Weakness in gold stocks can also be welcomed with open arms. Just when things appear bleakest, that’s when markets turn. This continues to be a very favorable setup for higher prices in the future. Maintain your balance because there will be an explosive rally from this correction in stocks.

Source

Wait for the Panic, Then Buy

Expected Returns — Wed, 03 Aug 2011 07:38:14 +0000

I think it’s nearing the time when everyone is going to be confused by markets. I’ve spoken about volatility rising, and this is what we’ve seen recently. People are turning bearish on the economy and this is leading to what I believe are false assumptions. I’m seeing the “90% stock market collapse” crowd come out of hiding, and this amuses me. Short-term they are right, long-term they are dead wrong.

Downside volatility excites me: I love being a buyer into a panic. You will want to be on the long side in stocks, particularly precious metals stocks. A 20% correction in stocks is very reasonable, which means a 30-50% correction in precious metal stocks (particularly silver stocks) is not out of the question. Just be patient and let the bears take center stage. Then fade them.

I’m long the dollar, bearish on precious metals (but trying to catch bounces), and bearish on stocks (but trying to catch bounces). I am very tempted to short Treasuries, but I am holding off for now. You’ll notice that most of these positions reflect thinking that is the opposite of my long-term outlook. As I’ve said before, it is never wise to get too attached to any trade. The market is going to give you trades that many times will go against your fundamental positions. Take them.

As an aside, remember that all this bearish news is increasing the impetus for the Fed to come in with more quantitative easing. If you understood how weak the economy was, you knew QE was inevitable. The only question now is how soon it will arrive.

Stand back and watch for blood on the streets, then go long against the crowd. Every basis point that bonds rally is more fuel for the eventual rally in stocks. Keep this in mind. This is just the setup for higher inflation down the road, which will benefit gold, silver, stocks, and yes, even real estate.

Wait for the Panic, Then Buy

Is Gold Flying Under the Radar?

Expected Returns — Tue, 21 Jun 2011 06:33:10 +0000

It’s hard for Americans to understand that gold is an asset that reflects global confidence, not just confidence in America. So arguments against gold that are focused just on America are not entirely valid to me. Even if we solved our debt problems, which is unlikely, there still would be huge sovereign debt crises in the Euro zone and Japan. Although gold would not rise as much as it would with a U.S. debt collapse, it would do just fine because these problems are global.

It is natural for people to think only in terms of their currency when pricing various assets. Because of this currency bias, Americans probably don’t realize that gold is approaching its highs in terms of Euros. Earlier today gold made new all-time highs in British pounds.

We think in terms of demand in the U.S. or inflation rates in the U.S. But are people rioting in Greece not allowed to buy gold? What about people in Spain who see a huge crisis coming? What about people retired in Japan who have been living through a 2 decade depression that is only getting worse? What about people living in nations in Africa and the Middle East that are experiencing social unrest? We must try to understand that it is not only about us.

For years all I’ve been hearing is that the global economy will get better and that the debt crisis is behind us. Instead civil unrest actually rises while the economy stagnates. I’ve previously written about how “bad” things tend to cluster together historically. Why is it that we are experiencing a sovereign debt crisis at the same time we have droughts around the world? I’m not sure, but this is what happened during the Great Depression too. These type of things cycle, and we must deal with it intelligently.

Rising food prices due to the falling dollar and extreme weather globally are creating serious civil unrest around the world. This is the kind of civil unrest that will eventually spread throughout Europe and the U.S. No one has jobs, prices are rising, and our governments are broke. It doesn’t take a genius to figure out this is a formula for serious problems down the line.

Although I presume most people who read this blog are gold bugs, I’m pretty sure most of you are not rushing out to buy gold at $1500. Gold equities look very attractive to me, but I’m also pretty sure most of you are not buying into weakness. So if even gold bugs are apathetic about gold right now, what do you think about everyone else? And are bull markets built on a foundation of apathy or excitement? I’m telling you that the price action in gold is extremely bullish and that this will be very apparent in hindsight.

I am just about pounding the table that you should be buying gold in this period of consolidation. Gold stocks have taken a beating with the stock market even though gold has held up pretty well the last couple of months. These are the kind of divergences you should try to capitalize on. I am loving it that people are just shrugging their shoulders even though gold is approaching its all-time highs; this suggests to me that we may be seeing a rocket launch move soon.

Source: Expected Returns

How Low Can Silver Go?

Expected Returns — Fri, 13 May 2011 02:51:46 +0000

The volatility in silver is something that a lot of people can’t handle. When I first invested in silver, I was focused on hour-to-hour and day-to-day movements. As such, the volatility in silver was the cause of a ton of stress, even if I traded the moves well. Now, with a little more experience, I am less concerned with day-to-day movements in silver. Believe me, there is logic to my change in perspective. Silver is prone to extreme moves, and in extreme moves, classic momentum indicators and technical tools are pretty useless. At overbought levels, common sense coupled with a longer term perspective is far more valuable.

At the top in silver I didn’t say things like “the 5 day RSI is overstretched and 7 out of 10 times this leads to a correction in silver”. My analysis was more along the lines of “silver has gone up 170% in 7 months” and “silver is trading 70% above its 200-day moving average.” These are longer term approaches to viewing markets. Sentiment also played a huge role for me, and the general consensus that silver couldn’t possibly correct was just icing on the cake.

If you are poised, volatility is your best friend. I have been patiently waiting for a correction in silver, and my focus is now finding entry points to buy back into this correction.

I wouldn’t be concerned at all about the long term prospects of silver unless we dipped below first $25, then $20. The major test for silver will be at the 200-day moving average. As of now, it appears the test will come at about $30. This is a pretty low risk entry point and I will be buying here to feel out the market. In my opinion, this could very well be the last great opportunity to buy silver at relatively cheap prices.

Silver bulls rest assured: this correction is the best thing that could have happened to silver. While silver was rising to the stratosphere, I said that silver needed to correct or consildate to keep this bull market going. Spike moves are the last thing I want to see in an asset I am bullish on. Now that silver has corrected, the investors should be focused on adding to their positions. As long as silver doesn’t collapse below $25, this correction should be read as a bullish signal.

Source: Expected Returns

Understanding the Short-Term Top in Silver

Expected Returns — Sat, 07 May 2011 02:01:23 +0000

Yesterday, silver experienced its biggest one-day dollar drop in 3 decades. In recent weeks, I’ve been warning that the downside risks in silver were huge, that silver rose too far, too fast, and that there was a frenzy developing in silver. I publicly stated I was lightening up above $46 dollars and that a minimum of a 30% decline in silver shares was very possible. I think enough of these things have come to pass that I can now speak from a position of strength about this recent craze in silver.

I don’t claim to have all the answers; I’m just trying to nudge you all to be objective and learn from your mistakes. If you unloaded silver near $50, great. If you went long instead, brush it off and try to figure out what you did wrong. Did you believe “this time is different”? Did you get caught up in the hoopla that there’s some kind of shortage in silver? Did you believe that the collapse of the dollar was imminent even though I noted that objective metrics like debt servicing costs as a percent of revenue were suggesting otherwise? If so, don’t continue believing in a flawed premise. That’s what the rookies do. That’s what the “professional” analysts do. We’re just trying to make smart decisions without any personal allegiance to any asset.

Everyone Has Two Choices

When I first started investing, I too got caught up in the hoopla surrounding whatever the popular asset was at the time. I suffered the hard way from not putting enough thought into my investments. In response to these errors, I did something absolutely shocking in this day and age: I learned from my mistakes. I actually got angry that I screwed up. I spent hours in the bookstore learning and honing in on what I did wrong. Perhaps this reflects my nerd-like nature, but this is honestly what I did. And guess what? I’ve become a far better investor because of it. If I didn’t learn from my mistakes, I believe I would have a small fraction of the profits I do now.

How many people out there can honestly reflect on their mistakes without justifying their every action? I’m sure you all know someone who never admits fault. These are the type of people you just roll your eyes at; their mental maturation stalled at about the age of 12. Even at my age (27), most people I know are just set in their ways. Even now, people listen to what I say not necessarily because they are open-minded, but because my investing track record has been so good over the years. They may do well in investing, but in every other aspect of life, they are as close-minded as everyone else.

While investing in general is hard, investing at extremes is pretty easy. I’m slightly overgeneralizing here, but if over 90% of people think something is going to happen, the opposite is likely to occur- at least in the short run. Now understand that this doesn’t necessarily have anything to do with the validity of an investment thesis; it basically comes down to a question of who is buying.

When 90% of people are on one side of a trade, then a significant percentage of those people are just lemmings who chased the popular investment. The smarter speculators who bought in the middle of a trend take profits, which forces the latecomers to panic and sell. Next thing you know, you have a trend reversal. Simple. The reason it is hard for most people to invest in extremes is that it is human nature to mimic the action of others, especially when it is a strong majority. In most aspects of life, this is the proper course of action; in investing, it is dead wrong.

Now back to silver. I believe the bare minimum requirements for a correction have been met. If I had to hazard a guess, I would say this correction has more room to run. I’m just taking this one day at a time and adjusting to whatever the market gives me. Stay nimble and get ready to pounce when the opportunity comes.

Source: Understanding the Short-Term Top in Silver

Can Gold Fly Under the Radar?

Expected Returns — Tue, 03 May 2011 08:16:14 +0000

Gold is currently brushing aside seemingly bearish gold news revolving around Bin Laden’s death and moving higher. This rally in gold has a lot more to do with the debt crisis than terrorism. Commentators predicting gold’s demise based on recent events are just proving how clueless they are.

Since silver’s huge run-up, gold has looked a lot more attractive to me on a relative basis. In recent weeks, gold has not surprisingly played “catchup” to silver. With the spike rally in gold this morning, it appear $1600 is coming very soon. While I still feel a lot more comfortable being long gold than silver right now, if gold continues to rise while silver consolidates, I will probably shift my allegiance to silver in the short to medium term.

As I said while silver was rising rapidly, consolidations are very constructive for bull markets. As a precious metals investor, I would much rather see consolidations than parabolic rallies; it is not even close. Take a look at gold’s latest rally- it came off the back of consolidation. Gold has been building up energy for this rally for 6 months. In my opinion, this rally still has legs.

Based on recent events, gold and silver may move in the background. This is a positive. I recall how much fanfare there was when gold first hit $1,000. At the time, I felt a nice good correction would do gold some good. The correction came and most people decided to forget gold while the smart money was building a position. The best thing for gold right now is if people ignore it even as it hits record highs. As I’ve said before, gold is very undervalued using objective metrics that are more sophisticated than the classic “gold went up $1,000 so it’s too expensive” arguments. There are still years left in this bull market in my humble opinion.

It appears as if we are entering a period of extreme volatility. The 2nd half of 2011 into 2012 should be very interesting. None of our debt problems have been solved and we are entering an election year. We shall see if the average person believes there is an economic recovery or not. Civil unrest should be a concern in America in 2012.

Source:Can Gold Fly Under the Radar?

How Overextended is Silver?

Expected Returns — Fri, 22 Apr 2011 03:00:19 +0000

With silver surpassing $46 dollars this morning, I believe it is time to take a step back and reevaluate this remarkable run. About a week ago, I wrote that silver’s rise has come too far and too fast. I stated that I would lean bearish if silver made a spike move to new highs. Well since I issued that statement, silver has risen nearly 15% in a week. I am now getting very concerned; we are in the middle of the spike move I was talking about.

Silver has risen 160% in 7 months. No matter how bullish you are on silver, you must admit that this move is a bit extreme. Silver is currently trading 70% above its 200-day moving average. If I saw a chart of silver without knowing what asset I was looking at, I would think it was a bubble. In fact, this rally in silver is more extreme than the rally in the Nasdaq in 2000 before the bubble burst. The Nasdaq “only” rose 100% in 7 months. This should make all investors in silver at least a little cautious.

I’ve been patiently riding silver this entire move higher, but it is time for me to lighten up a bit here. I am willing to miss out on a portion of this spike move higher for the sake of protecting my downside. I think the risks are heavily skewed to the downside at this point. Everyone is bearish on the dollar and this leads me to believe that a strong countertrend rally is coming. If the dollar rallies, it is going to drag silver lower. Make no mistake about it, there will be a trend reversal eventually.

There is no way to know exactly what lies ahead for silver. However, all investors should always be keen on protecting the profits they have attained. Huge rallies tend to lull you to sleep while making you believe that a correction will never arrive. I think a correction in silver stocks can easily be of the 30-50% variety. This has been quite a ride for silver, and I don’t think the highs in silver are in yet, but this particular cycle is probably nearing its end.

Source:How Overextended is Silver?