Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. ]]> http://thedailygold.com/commentaries/gold-stocks-and-the-euro-all-gain-in-risk-asset-recovery-as-positive-manufacturing-data-confirms-chinas-soft-landing/?p=12842/feed/ 0 http://thedailygold.com/commentaries/economic-and-gold-stock-2012-outlook/?p=12598/ http://thedailygold.com/commentaries/economic-and-gold-stock-2012-outlook/?p=12598/#comments Fri, 13 Jan 2012 00:38:38 +0000 Neil Charnock http://thedailygold.com/?p=12598
www.goldoz.com.au

Liquidity traps are characterised by:

• failure of stimulus (QE, Twist etc.) to create growth
• low interest rates failing to stimulate growth
• private and corporate savings rise in response to fear; money hoarding
• expansion of the money base fails to translate into inflation
• unlimited demand for money – in this case mostly in the Government sector for Public Sector payrolls, QE in various forms, debt servicing and debt roll overs

Some Australian and ASX listed gold and precious metal stocks appear to show signs of a turn around here.    A full run down of Larger Producers and the Mid-Tier Producers list now follows for subscribers…
Good trading / investing.
Neil Charnock
www.goldoz.com.au
GoldOz has now introduced a major point of difference to many services.  We offer a Newsletter, data base and gold stock comparison tools plus special interest files on gold companies and investment topics.  We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators.  GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.
Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance. ]]> http://thedailygold.com/commentaries/economic-and-gold-stock-2012-outlook/?p=12598/feed/ 1 http://thedailygold.com/commentaries/chart-of-the-day-gold-miners/?p=12483/ http://thedailygold.com/commentaries/chart-of-the-day-gold-miners/?p=12483/#comments Sun, 01 Jan 2012 07:06:07 +0000 Jordan Roy-Byrne, CMT http://thedailygold.com/?p=12483 This post comes from my friend Tiho at Short Side of Long:

You’ve probably heard it many times: “Gold is a good hedge against inflation”.

But IS it? That’s the question we will try to answer in this article.

Let’s have a look at a chart:

The chart above shows us the gold price (left hand scale, red line) since 1968, when the Gold Pool broke down. At that time, the gold price was no longer fixed, and was able to rise (substantially).
From February 1968 to February 1980, gold rose almost 25-fold, from $35,50 per ounce to as high as $875 per ounce.
From that point, gold started a multi-decade long decline towards $250 per ounce at the beginning of the 21^st century. In the same time period, CPI doubled from 78 to 175,60.
From then on, gold rose substantially, from about $250 to $1,920 earlier this year (x7.68), while the CPI rose from 175,60 to 226,42 (only 29%).
So for that matter, it seems there isn’t really a strong correlation between the gold price and the general price level.

I thus figured there had to be other forces at play that influence the price movement of Gold, and yes, I think there are…
Eddy Elfenbein from Crossingwallstreet wrote an article that really intrigued me. He had found a “model” to explain the movements in the Gold price.
He said:

• The first and perhaps the most significant key takeaway is that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation.
• The second point is that when real rates are low, the price of gold can rise very, very rapidly.
• The third is that when real rates are high, gold can fall very, very quickly.

Special thanks goes to Jake from EconompicData, who also wrote about this topic, and who has helped me a lot with solving formulas.

So mr. Elfenbein wrote that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation (high nominal rates can still lead to low real rates if inflation is also high).

That’s an interesting observation, as Ben Bernanke promised to keep rates at record low levels throughout 2013 in order to stimulate the economy.
When nominal rates are near zero, every bit of inflation we get will lead to negative real yields, causing the gold price to rise substantially over the next two years, according to the model.

I wanted to see it myself, and I was thinking if I could improve the “model”. I think I managed to do so, as my model “gold price” has a higher correlation with the gold price. With a lot of formulas in excel, I calculated the real short term rates, level of inflation, and “calculated” a model price for gold, based on the models of Jake and Eddy.
I didn’t calculate everything manually (I used about 2,000 combinations), but instead worked with a Macro in Excel, which makes my computer do all the work for me.
It took the Macro about 1 hour to calculate every combination of 100 leverage factors and 20 deflator factors.
I found out that a deflator of 2,15% and 2,20% gave the best results, with a leverage between 5.7 and 6.95, instead of the 2% Deflator and 8x leverage as Jake and Eddy found out.
Based on these combinations, I was able to reproduce a “model” price for gold.
The results were rather impressive to say the least. For example, the model price of gold based on a deflator of 2.15% and a leverage factor of 6.90, had a95.52% correlation with the actual gold price:

For those who prefer to look at logarithmic charts:

Now, what does this all mean? Does the model have the potential to “forecast” the gold price? Maybe. It depends on the nominal short term rates, and the level of inflation. The first one is pretty easy to “guesstimate”, as Bernanke promised to keep rates near zero for the next 2 years. The average annual (officially reported) rate of inflation over the last 43 years, has been 4.44%.
If we assume we would see a similar rate of inflation over the next 2 years, the Gold model “forecasts” a gold price of $4,380:

To put things in perspective, please have a look at the logarithmic chart if you think the chart above looks “bubbly”.

From the beginning of this bull market, it would “only” be a 17.5-fold increase, compared to the 25-fold increase from 1968 to 1980. A similar 25-fold increase would lead to a gold price of about $6,250.

We now have another reason to believe legendary gold experts Jim Sinclair, Alf Fields and plenty of other analysts who are fully confident of a parabolic rise in the price of gold with targets of $4,500 and above.

For more analyses, trading updates and interesting articles, please visitwww.profitimes.com!

Gold Nears Weekend 2% Down as UK Quits New European “Fiscal Compact”, Politicians “Expect ECB Action”

WHOLESALE MARKET gold prices fell back to this week’s low of $1705 per ounce Friday lunchtime in London, as Asian equities closed sharply lower but Eurozone and US equities rallied following news of the “fiscal discipline” being agreed by political leaders meeting in Brussels.

All 17 heads of state in the currency union have agreed to being bound by European Commission approval of their national budgets, with “automatic sanctions” hitting any member whose annual budget deficit exceeds 3% of GDP.

That same level was set by the pre-Euro Growth & Stability Pact in 1997, but has since breached by all but two members – Luxembourg and Finland.

A further €200 billion is being added to the Eurozone’s Stability Fund rescue package for weaker states, with the start date brought forward to January 2012.

A further 6 or perhaps 9 non-Euro states will also join the new fiscal agreement, according to various press reports, but British prime minister David Cameron quit the talks last night after making what French president Nicholas Sarkozy called “unacceptable demands” to stymie treaty change and block a Europe-wide tax on financial transactions.

Gold prices measured in the single currency held flat around €41,200 per kilo – down some 1.7% for the week – as the Euro ticked lower vs. the Dollar.

US investors saw the gold price open New York trade 2.1% lower from last Friday’s finish of $1745 per ounce.

The price of silver bullion crept higher towards $32 per ounce, some 1.9% down for the week.

“It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the Euro-area members,” said Mario Draghi – president of the European Central Bank since October – of the overnight negotiations in Brussels.

Draghi yesterday cut Eurozone interest rates but repeated that the ECB cannot provide direct financial aid to member states under the terms of its treaty.

Quoting anonymous central-bank sources, the Reuters news-wire says the ECB will continue cap its government bond-buying – now totaling €270 billion – at €20bn per week. But last week’s move to provide unlimited funds to commercial banks “means that each state can turn to its banks, which will have liquidity at their disposal,” said France’s Sarkozy today.

Ireland’s minister for Europe Lucinda Creighton says she “and many other member states” expect the ECB to become more “pro-active…in the weeks ahead,” according to Reuters.

Greek, Italian and Portuguese government bonds meantime slipped in price Friday, pushing interest rates higher despite Germany’s Angela Merkel ceding her call for private-sector bondholders to “share the cost” of aiding over-indebted Euro states by suffering a write-down on their value.

“To put it bluntly, our first approach to [private-sector involvement], which had a very negative effect on debt markets, is now officially over,” said the European Union’s president Herman Van Rompuy this morning.

The Moody’s rating agency today cut the credit status of France’s biggest banks, saying that “Liquidity and funding conditions have deteriorated significantly.”

France’s own national credit rating is at risk, the Standard & Poor’s agency said this week, because of the weakness in its banking sector.

“Gold prices are still holding fairly well supported,” reckons VTB Capital’s Andrey Kryuchenkov in  note, “and any negative reaction to the summit today would only see limited losses in gold as opposed to other…more volatile precious metals, also suffering from growth concerns.

“On the downside [however] a break below $1700 would see losses to our key support at $1680 and the longer term January uptrend.”

Beijing is meantime planning to launch an aggressive investment fund to run $300 billion of China’s $3 trillion foreign exchange reserves, reports Reuters.

Part of the State Administration of Foreign Exchange (SAFE) – which acted to buy gold for China’s national hoard according to its last reserves update of 1054 tonnes in 2009 – an un-named official says the fund will target US and European assets.

Now the world’s second-largest private gold consumer, China saw consumer price inflation and industrial output both slip in October, under-shooting analyst forecasts at 4.2% and 12.4% respectively.

“Inflation is not a policy constraint [for the People's Bank of China] anymore,” believes Tao Wang, an economist at UBS in Hong Kong.

Future PBoC policy “is more a function of the economy slowing and foreign exchange inflows drying up,” says Wang.

Adrian Ash
BullionVault

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Based on the December 9th, 2011 Premium Update. Visit our archives for more gold & silver analysis.

Today’s EU summit has been billed as the best– perhaps the last– opportunity to save the euro. As we publish today’s essay, we still don’t know the results, and gold, like most asset classes, will react to headlines coming out of Europe. Will “Merkozy,” (ladies first), the leaders of Germany and France, be able to pull a rabbit out of the hat and save the day? On Monday the two issued an ultimatum demanding that all 17 nations in the eurozone agree to a change in European treaties that would compel them to balance budgets or face sanctions. German officials insist that budget discipline will restore investor confidence. However, the Franco-German plan could exacerbate Europe’s fundamental problem, which is a lack of growth.

On Wednesday Germany insisted that its European partners must undertake the politically charged process of changing European Union treaties, or at the very least, accept a binding new eurozone accord. It is likely that gold will rally in the event of a positive outcome from the summit since the yellow metal has been recently trading in correlation to risk assets. If in the longer term Europeans begin to get a whiff of a eurozone breakup that would also be bullish for gold since it is likely that investors will rush to diversity their euro exposure with gold.

If you recall what we wrote in our essay on the bullish outlook for gold and silver (December 7th), you’ll notice that the crisis enters a new phase now:

It may take some time for people to figure this out, but the problem in Europe is not liquidity. The problem in Europe is sovereign debt. If we are over our heads with debt because we have spent more than we make, giving us a line of credit will not get us out of the hole. One wonders if any amount of funding support and bailouts will be enough to restore confidence as long as there are lingering doubts about the solvency of Italy, Spain and some of the other eurozone economies.

It seems that the European leaders have finally noticed that the problem is not to be swept under the rug. The question is whether they will succeed in changing the crash course the euro zone is currently on.

For whatever it is worth, a new study commissioned by the World Gold Council shows that in periods of extraordinarily economic uncertainty such as those facing investors in the eurozone, an optimal strategic allocation to gold for euro-based investors ranges from 2-3% for the most diversified and lowest risk portfolios, to between 4-9% for portfolios split 50/50 between equities and bonds, and as high as 10%, for portfolios with the majority of assets in equities. As far as our views on portfolio structure are concerned, we believe that much more of one’s capital should be dedicated to precious metals. What WGC writes about is the allocation for an investor who doesn’t really believe in sector’s bull market and wants to invest in gold/silver to reap gains from diversification. Those who had only 2% in gold in 2008 and rest in stocks are not even close to matching the returns of those who used more than half of their capital for gold and silver.

For those who have not yet purchased gold, let’s see if it’s better late than never by turning to the technical portion of our essay. We will begin the technical part of this essay with the analysis of the S&P 500 Index and then we’ll move to the mining stocks sector. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

In the long-term S&P 500 Index chart, the index moved lower this week. Although daily moves have been quite volatile, the actual decline for the week has only amounted to about 0.8%. The current index level is still above the early 2010 highs which also coincide with the 38.2% Fibonacci retracement level. This retracement is based on the decline which began in late 2007 and lasted through early 2009. At this point, since the index is still above important support levels, the short-term outlook remains bullish.

In the medium-term S&P 500 Index chart, we see a different and in our opinion even more interesting development. The current period of consolidation saw early-week moves to the upside and declines on Thursday. The index is now close to the 50-week moving average and this is a situation which was also seen near the middle of 2010. The trading patterns seen at that time were also quite similar to the price action of the past few months.

The implications here are bullish for stocks in general. Last year, when a period of consolidation was followed by a breakout above the 50-week moving average, a significant rally materialized. This rally saw the S&P 500 Index level rise from around 1125 to the 1340 level or so, a 19% increase in less than six months! A similar move could be seen once again in the coming months.

In the short-term SPY ETF, an initial target level close to the previous 2011 highs is still valid. This target ellipse is about 7% above Thursday’s closing level and is obtained by extrapolating several resistance lines created from previous local tops seen earlier this year.

The recent consolidation period has not been too big relative to the previous rally. Whereas the recent rally spanned a $17 range in this ETF price, the subsequent decline has only amounted to about $3. Price levels are still visibly above the 38.2% Fibonacci retracement level, and for this reason, the short-term outlook continues to be bullish here.

Consequently, the overall picture for stocks is bullish. Can we say the same about mining stocks? Let’s take a look.

In the very-long term XAU gold and silver miners’ index chart, we see that the index has corrected after a very sharp rally but has not moved below the rising long-term trend channel. Since this level was touched but not broken, the long-term outlook remains bullish for the miners at this time.

In the long-term HUI Index chart, we see a sharp decline, but it was far less dramatic than the rally which preceded it. Examples of such corrections are quite common in gold stocks and are often followed by subsequent rallies. Investors should not worry about catching each and every move in this sector (it’s impossible). Since it appears that a rally from here is likely, betting on higher prices at this time seems like a good idea.

Summing up, numerous signals from analysis of charts indicate that the outlook is bullish for both the general stock market and for precious metals stocks.

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Editor
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First, we have to understand that gold mining is a very difficult business. The law of numbers makes it even more difficult for the largest producers. They have to operate multiple mines and then continuously acquire or find new resources to maintain reserves and maintain production levels into the future. It’s a difficult business regardless of where the Gold price is. Hence, mining stocks do not outperform Gold over time whether in a bull market or not. The following chart is from Steve Saville who is one of the first to understand this subject. The surge in the 1960s was due to the Gold price being fixed.

Also we must understand that Gold and gold stocks are entirely different markets that share different performance in a panic or crisis. Gold can be a safety hedge but gold stocks most certainly are not. They are the worst performers in any type of crisis. During the 1987 stock market crash, the gold stocks performed far worse than the market. The same happened in 2008 as the gold miners led the market crash.

During the present European sovereign debt crisis, the gold stocks have actually held up reasonably well relative to other stocks. From top to bottom, emerging markets and commodity shares have been hit the hardest while gold stocks declined in line with the S&P 500. Keep in mind we are referring to the gold stocks as in the large producers. The senior gold stocks are notoriously volatile but the hundreds of mid-tier and junior companies are far more volatile than the seniors. If the seniors fall 15-20% then others can fall 40% or more.

Moving along, one has to consider which is the best market index for tracking the gold stocks. We posit this as there are several indices but all are composed differently and therefore their performance is not always in line with each other. In the chart below we plot GDX, XGD.to, XAU and SIL. Note that GDX mirrors the HUI which is about 10% comprised of silver stocks. The XAU is comprised of 20% silver stocks and base metal stocks (FCX) while SIL, the silver stock ETF is 100% silver stocks. XGD is 100% in gold stocks and is priced in Canadian Dollars.

Judging from this we see that the weakness is almost entirely in silver stocks and not in gold stocks. XGD is holding up the best and is little threat to break its summer lows while XAU and SIL are in downtrends that began in April and printed new lows in October. Though the gold stocks have underperformed Gold, note that XGD and GDX did make new, albeit marginal highs in September. The reality is during a tough year gold stocks have held up relatively well while silver stocks and smaller mining stocks have trended down.

The gold stocks (GDX & XGD) have actually been in a consolidation that shares similarities to the consolidation from 2004-2005. See the chart below.

The consolidation in 2004-2005 lasted 18 months and broke to a new high 23 months after the peak at the end of 2003. The 2001-2003 advance lasted 36 months and gained nearly 350%. The 2009-2010 advance gained 313% in 25 months. Based on time, the current consolidation would bottom this month and then break to a new high in March 2012. We should also note that the first consolidation bottomed at the 38% retracement and the lower 400-day band. The lower 400-day band is currently at $48 and should touch $51 by the end of January while the 38% retracement is at $47.

The similarities between this consolidation and the 2004-2005 consolidation indicate that the gold stocks are in a consolidation and digesting the rapid rebound gains from 2009-2010. This along with the aforementioned reasons explains why the gold stocks have not broken out to new highs. Moreover, while not as strong as it was this year, Gold did make a new high in 2004 while the gold stocks lagged as they were stuck in a consolidation having to digest the massive gains from 2001-2003. That is another key similarity between the two periods.

There is plenty of evidence that confirms we are likely in the latter stages of this consolidation.

Here is a chart posted by my friend Sean Brodrick. It shows the HUI index along with the price earnings ratio of the index. The PE ratio is currently at its lowest point in nearly nine years.

The next chart is from sentimentrader.com. It plots the Rydex Precious Metals Fund in line with the assets in the fund and the assets as a percentage relative to other sectors. As we can see, the assets in the fund are near an absolute low while relative to other sectors the assets are much closer to a low than a high.

To conclude, the gold stocks have underperformed for a variety of reasons. Historically, it is what they tend to do- underperform. Secondly, the gold stocks have been stuck in a consolidation, digesting the rapid gains the post 2008 recovery. Third, the consolidation came about at a time when the first major aftershock from 2008 came to the forefront. The European sovereign debt crisis took equities and commodities lower and historically, the gold stocks are never spared from a panic or crisis.

The good news is the gold equities are coming to the end of the consolidation and a resolution within months is likely. Sentiment is bullish from a contrary perspective. The consolidation has weeded out the week and impatient as earnings and cash flows for gold companies have improved and stock valuations have moved to multi-year lows. Even in Gold and Silver we see that speculative long positions are near multi-year lows. This setup combined with the forthcoming monetization in Europe, stimulus in China and more monetization from Bernanke could produce quite the launch pad for the gold shares in early 2012. If you’d like professional guidance in navigating what lies ahead, while managing risk, consider learning more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

November 30th, 2011 at 8:57 pm

November 27th, 2011 at 2:52 pm

As you can see, GDX was able to maintain its support while GDXJ broke support and made a new 52-week low. As a result, the ratio surged in favor of GDX.

Traders and investors need to remember that gold stocks are a risky bunch and that the non-producers are extremely risky. Yes, the sector is in a bull market but that by itself is not enough to drive the speculative plays higher. Until we reach the bubble phase, the non producers will rise on their own merits and not because “it’s a bull market.” Though we are likely at least two to three years from the birth of a bubble, does it mean the non-producers will continue to underperform in the meantime?

Hardly. Remember, the large caps (GDX) have been in a consolidation for a year and that has a negative effect on the speculative plays. The longer a consolidation lasts, the more weak hands jump ship. At the start of the consolidation, the non-producers held up better. Ultimately they are going to underperform in a weak market and outperform in a strong market. The good news is the large caps are close to a major breakout which is not only a catalyst for the large stocks but a catalyst for everything else in the sector.

A breakout in GDX, as we presume in the above chart, would certainly have a positive impact on junior developers and junior exploration plays which have underperformed badly in the last few months. After all, this is happened before. GDXJ performed better in Q3 and Q4 of 2010 when GDX broke out of an eight month consolidation. GDX also made a huge breakout in the second half of 2005 and junior stocks surged over the next 18 months.

This time, GDX is close to a very significant breakout as it could pull away from a one-year base as well as the 2008 highs and on some charts, the 1980 highs. Although the non-producers have lagged, they would ultimately find a huge bid in the immediate aftermath of a breakout in GDX. Traders and investors need to know when to play it safe and when to take risks. Heading into this potential breakout, it is wise to stick with producers who are finding a bid. However, when the breakout appears imminent, it would be wise to set your sights a bit lower on the food chain and find the developers and explorers ready for a major rise. If you’d like professional guidance in navigating this bull market and finding the best performing stocks, then we invite you to learn more about our service.   

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com