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Equity Markets, Forex and Precious Metals

by: Castrese Tipaldi September 04, 2008 | about stocks: GDX / GLD / NG / NXG / SLV / SLW / UDN / UUP    

Castrese Tipaldi

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Another month has passed by.

Markets have experienced the usual drama, just some variation on the script. We're gone from some people screaming oil at $250 to other people screaming it at $30; from people calling the near demise of our contemporary monetary system and advising you to bury yourself in a hole with a year or more supply of food, medicines, ammos and weapons, possibly not too far from the other hole where you before put all your wealth in the form of gold and silver, to people calling the end of the bull market in gold and silver and all the commodities.

Sometimes the same people said the first thing one month ago and are saying the second thing now. It will not takes too long to have people chattering away deflation again. It's incredible the effect that some uptick on the US Dollar Index have to a lot of people.

Obviously, some of them simply have no clue, looking like brains with thoughts guided by the changes in the markets' prices; the others have their agenda. It's frankly annoying to refute their flawed arguments every time; those same arguments will be anyway presented the next time, and again and again. A complete waste of time, time that could be employed much better searching for some good business to pick or a bad one to avoid.

All I had to say about economy and finance I've said in less than 10 pieces. Nothing to add because there's been nothing new. On a more practical note, I recommend to you the Grandfather wisdom; it will make you aware about many things you've experienced in your life, since you're born without maybe paying them the right consideration. Read it, and the next time you meet someone talking deflation, you'll know the place where to send him.

So this report will be very short, my friends, and you have to grow accustomed to ever more briefness. There's really no need to add to the tons of words wasted everyday in the world. What I think you'll know from my actions, the changes in our model portfolios, the alerts and their rational you can read on the website. I'll better serve you employing this time and efforts to research stocks and concrete ways to perform the current financial environment.

Just a few considerations about the equity markets, the Forex and the precious metals.

As I said in my last report, I want a test of the July low to consider deploying our dry powder. Just a successful test of that low can give us the necessary confidence in a tenable surge in the stock markets. Markets have instead used the middle of August and its low volume to go straight in the resistances; they failed as expected to clear them. I don't like this behavior, and keep on advising caution. Markets seems now searching for the next screaming to follow. I have noticed a good relative strenght of financials and housing related businesses. This would be a wonderful news for equity markets, but I have to point again to the low volumes. We are playing anyway a not distant bottom in those sectors with our last portfolio, Julians.

Other than a successful test of July lows, a convincing close (one week at least in these volatile times) above 3470 on the €urostoxx and 1325 on the S&P500 will be able to put more comfort in the markets, and we could consider to be more aggressive. But I doubt about that.

I'm out of the Forex, as you know, and I advise everyone to do the same. I am not buying the suggestion that the US Dollar Index has bottomed, at least I don't think this is the final bottom. Sure, it seems a good intermediate bottom: my target of 1.6 $/1 euro has been achieved some months ago and it's since January I have been warning that euro looked a bit stretched.

But a case could be made about one more high of the euroland currency against the US dollar, I'd dare to say 1.8 $/1 euro, even if it's probable that we'll see more euro weakness before that. I know it looks like a bold call, and it is, but even my call for 1.6 $/1 euro was considered crazy five years ago. Anyway, I'm gladly looking by the sideline at this time. I'd be a buyer if euro would test the neckline of the massive head and shoulder breached last year, around 1.35, with a tight stop.

About the precious metals arena, you know that I'm not impressed by the massacre occurred in August at the Comex paper market. Since 2003 this kind of things has happened a few times, every time with the same script (again, refer to my past essays and, for more details, to the good work of Ted Butler), and are as faked as a 3 dollar coin. As painful as it is we'll hold our course, looking for much higher prices for gold and silver.

I want to clear however what I consider a misunderstanding. Most of people refer to gold as an hedge against inflation, a protection against the ever increasing cost of life in the age of a (for the first time) global fiat-money regime. Well, I don't think so. If you look at the return an investment in gold would have delivered in the past decades, you'll find that it has not even tracked the mere change in the CPI. I think the reason for this is the fact that in the last century, the governments have finally realized their oldest and wildest dream: to permanently put the money out of the payments' system, everywhere on the globe, replacing It with their debt. They still call that money, but it's just an Orwellian speaking. Money as a good does not exist anymore in the contemporary payments' system, replaced by money as a concept (mere governments' debt, in substance).

Deprived of its monetary role, gold is not able to adjust its price for the increase in the cost of living. The real hedge against inflation in the long term is a good business with a tenable competitive edge, a decent management and a good dividend (possibly not worse than T-Note yield, or at least ever increasing).

Gold anyway retains its monetary role in the people's subconscious, a hidden knowledge inside everyone telling them that gold will stand still when everything is falling apart. It reaffirms its ancient nobility then, it claims its exclusive rights to that abused name, money; it makes clear once again that it's the only legitimate payment, the payment in full, not depending on the willingness of nobody else. Gold is the hedge against financial crisis, not inflation.

Now and then the world is assailed with doubts about the sustainibility of the current monetary regime, and gold come back on the monetary scene. When it happens, it's possible that its price will adjust tens of times higher until the crisis ends; it was the case in the 1971-80 and I think it could be the case this time too. It's enough clear that in 2001 started a decade full of those doubts, and so it's reasonable to expect the same outcome about gold price when it will end.

Even more compelling is the case for silver. Not only it has been the most circulated money, but even if we completely dismiss its hidden monetary role, silver is the most undervalued commodity on the planet. If you adjust its current price for inflation, you'll find that it hasn't been so cheap since the last Glacial Age. It's in very tight supply against demand, with no substantial stockpiles anymore, anywhere (but if you want paper-silver you can confidently turn to the Comex and its fair, fair, fair regulator), and could be scarcer than gold. In fact, all of the gold mined since the beginning is still around at this time (obviously, that does not mean it's available), while most of silver lately is consumed for industrial use; in any case, in nature gold is just 18 times scarcer than silver, but its price currently is 60 times more.

I advise to use the metals to play this call more than mining shares. Even if it's true you could get leverage with them, mining is a terrible business, very challenging and full of operational and management dangers, and you could very well end up looking at price of gold going bananas and your stock price in the dust. So, unless you can pick on the cheap tons of leverage with almost nil operational risk (i.e. Silver Wheaton (SLW)) or proved operational skill with reasonable reserves and very good cash flow (i.e. Northgate Minerals (NXG)) or enormous metals reserves unfairly priced (i.e. NovaGold (NG), here a different management would be a real plus, those guys are great geologist but have no clue how to operate a mine), you better avoid them or use a good proxy as the Gold Miners ETF (GDX), above all for trading purpose. We are near to a major buying opportunity in the sector, with a risk/reward ratio comparable to the fall of 2001.

Since a few months it's possible to sell option on streetTracks Gold ETF (GLD). So now gold can even pay you a "dividend". I hope it will soon be possible for iShares Silver Trust ETF (SLV), too.

Well, I conclude here. If you will not receive this report in the next months, don't worry: it will be just because I have nothing new to say, and it's vain to always repeat the same concepts

Many thanks for your attention.

Disclosure: Author owns physical gold and silver, and is long NXG, NG, GDX.

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This article has 6 comments:

  •  
    Sep 04 04:02 AM
    CEF, A canadian bullion depository trades on the Amex.
    A mix of Gold, Silver and Cash.
    Reply
  •  
    Sep 04 04:34 AM
    Good article .
    Will it go up,down,sideways ? Who knows ? All i can see is the past 60 years . Gold is now some 17 times more expensive in dollars . Did Gold go up or the Dollar down. I think dollar down is the reason and i think it will continue it's slide for the bottom which i think is zero at some point in the future.
    Reply
  •  
    Sep 04 06:08 AM
    Central banks in western countries have dishoarded several thousand tonnes of gold over the past 30 years. This has postponed the day of reckoning for the fiat currencies. It also effectively controlled the price for that time.

    Mining is increasingly more expensive and production is not keeping pace with demand. As the bank dishoarding slows, the price of gold will move inexorably higher.

    Central bank selling is not some vast conspiracy, it's a move away from a non-interest paying asset with storage costs to paper assets that pay interest. And the selling is controlled by treaty. The Eurosystem banks are agreed to sell up to 500 tonnes per year with weekly statements published.

    Last year and this, they have not reached the limit of 500 tonnes. More banks are either not holding any gold (BOE) or they don't want to sell (Germans).

    All of these factors are positive for gold over time.

    The negatives now are economic slowdown and de-leveraging among hedge funds. It's a calculus problem that won't be solved with tin foil hats.

    Reply
  •  
    Sep 04 10:15 AM
    JP Morgan once said, "gold is money; everything else is credit." He did not mention that credit comes with today's rediscovered danger of counter party risk. Only PMs are a value in itself and not the obligation of another entity.
    Reply
  •  
    Sep 04 12:15 PM
    If a national currency is not tied to a commodity such as gold or silver or etc., it becomes worthless. This is true in all cases in the world,s history.

    In the USA case, the dollar has become worthless as the 20th century has progressed. US national, state, and local governments have knighted themselves with unlimited US dollar spending authority.

    Other countries around the world have adopted the model of dropping all ties of their currencies to any real assets.

    Now, no one knows what anything is worth in any currency. Politicians and their well connected friends use local currencies and cartels and monopolies to amass huge relative personal fortunes while making unproductive invests. This could not be done with a real asset currency like gold. No one knows what anything is worth in any currency at any time with a fiat currency.

    The only very loose score card is gold. Of course, governments try to manipulate the gold supply that is free and in the market place to mess up that score cared.

    Whats hot' is hot. Whats not's not. Good luck,.

    Reply
  •  
    Sep 04 08:45 PM
    I agree with the writer, SLW is a brokerage firm, not a mine, but it plays like one. The Fed is using banks, per Butler, to short commodities as it prints more fiat to bail out what looks to be the Depression of 2009 caused by real estate, the dust bowl of the early 21st Century, the trigger point for world Depression. Lies about inflation first and second quarter make the economy appear to be expanding, it's contracting. There are 8400 foreclosures in Los Angeles alone, and housing has at minimum, another 17% to fall.

    If the Fed didn't cheat and keep a short lid on silver and gold, gold would already be $2000, silver $25. By manipulating the POS and POG via shorting miners, the govt keeps the illusion fiat is worth something.

    How long that will be possible to do? Hey. They are successful burdoning the future with unending debt, why shouldnt they be able to print fiat to support fiat indefinately, regardless. When Bunker Hunt cornered the silver market 1980, they went to jail.

    When the Fed does it using banks as a front 2008, they get away with it.

    For a while.
    Reply
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