A Golden Wall of Worry
Mike Swanson
This past Wednesday also marked the launch of the much
anticipated StreetTracks Gold Shares (NYSE: GLD).
The World Gold Council is the sponsor of the Gold Shares, an exchange traded
fund that allows American investors to make a play on gold in much the same
way they use QQQ's to trade the entire Nasdaq.
Barclay Global Investors also has a gold exchange traded fund in the works,
the Ishares COMEX Gold Trust, which is expected to trade on the AMEX before
the end of the year.
Both funds are expected to attract over $2 billion in cash from investors
over the next 6 months. That's a large enough figure to provide ample fuel
to the gold bull market, just like mutual fund investors helped turn
technology stocks into momentum vehicles in the 1990's.
Going forward, I see any dips in gold as temporary. I am convinced that gold
is beginning wave 2 of its bull market and should continue to rise
appreciably higher as the year goes on. However, it is clear that gold and
gold stocks are climbing a steep wall of worry right now.
I'm getting this sense from reading other newsletter
writers and from emails that I am receiving from subscribers and
non-subscribers alike. Here are excerpts from two insightful emails I
received:
"Hi
Mike. It is looking like you and Dave were correct on your break out
call. I read a fair bit of stuff during the day and especially in the
evening. It is astonishing to me that when I got into gold last year the
price was in the $375 range and people were so bullish! At $400 it was
excitement and at $430 it was flat our euphoric. To me it was incredible
that when gold hit $430 and closed over it, bearish commentators were
calling for tops and the gold community was still in the doldrums. Even
at the Toronto gold show with gold well over $400 there was little
excitement and positive sentiment among the attendees. Even now at $440
I would venture to guess that excitement was greater last year at $370!
Incredible."
"I have an
opinion why gold is not taking off much faster. The Dow is also climbing
and while we have guys like Kudlow and Crammer pounding the table on
CNBC that we have a renewed Bull Market in general equities, gold will
still be flying in under most peoples radar. It is in stealth mode. When
this Dow and Nasdaq rally fails it could get even more exciting." WL
You are right the masses are certainly ignorant of
the gold trend. But I am confident that will change over the course
of the year. As the dollar continues to break down and inflation
continues to grow people will recognize gold as a store of value. At
one time during the 1970's it wasn't unusual for an investment advisor
to recommend putting 5-10% of your assets into gold as protection
against inflation. You have to remember inflation was running on
average over 5% a year during the 1970's and at one point hit over 10%
a year. People in bonds and fixed income instruments without exposure
to precious metals suffered.
Bull markets climb walls of worry. As they go
up people are skeptical and weak hands get shaken out. It takes
continual buying to fuel a market higher and some people simply have
to buy at higher prices than others. When you reach a point though
when everyone is in who can be, that's when a bull run comes to an
end. Consequently that is also the moment at which bullish sentiment
is at a peak.
Understanding how sentiment works is important,
but reading it is more of an art than a science.
I believe we aren't near the top of the wall of
worry for gold. I don't even know if we can even see the top from
here.
"Dear Mike,
The gold/gold shares markets didn't really
go down yesterday...operators were just chumming for shorts.
Your piece yesterday was timely. I think,
over the passage of time, it has become amateur hour for technical
analysts: everybody who trades now watches the marginal indicators
(obscure ratios, MACD's, stochastics, etc.), which are good in
trading-range markets and can alert you concerning possible
exhaustion, but really only tend to confuse you when you are in the
middle of a strong trend. Hence, there are WAY too many bulls on the
sidelines, waiting for the "perfect" correction, allowing them to buy
while all of us other "buy-and-hold" idiots get what's coming to us.
It seldom happens, this "perfect" reentry point, and the sideliners
end up buying the tops just like everyone else." - GC
Being someone who makes most of his investment
decisions based on charts I'm well aware of the limitations of technical
analysis and indicators. Ratios and stochastics are some of the tools I
use. I think you are correct in your analysis of the situation. I think
there are two things going on that is contributing to a powerful wall of
worry in the gold market.
First the nature of technical indicators is that
none of them work 100% of the time and there are so many indicators that
you can always find one that will tell you what you want to hear at any
given time. You have to really know what you are doing, and that probably
takes the experience gained by learning from mistakes.
Most indicators only work in certain market
conditions. For instance stochastics only give accurate buy and sell
signals when a market is going sideways. When a market is bullish and
trending up the stochastics will repeatedly give you false sell signals.
I know, because between 2000 and 2003 I used them with repeated success to
short tech stocks when they gave me sell signals on the Nasdaq. But since
March of 2003, they're no longer giving reliable short selling signals.
One of the most reliable patterns in the gold market
is the relative strength of the gold stocks to gold. When gold stocks act
stronger than gold both tend to go higher. However, if both have been
going up and the stocks falter while gold continues to go higher a major
reversal has always been imminent. This happened last year and in July of
2002 before large corrections in gold stocks took place.
Over the past few weeks I have seen several
technical analysts, who I have a lot of respect for and don't consider to
be amateurs, say that there is no way gold can keep going higher because
the stocks are lagging. These people believe that a big gold correction
is right around the corner. I heard one of them say that gold should go
through the lows of May and totally crash.
I think they are seeing things wrong.
What these people are doing is noticing that gold
broke out to a new 52-week high last week while the XAU and HUI have
failed to do that and then are concluding that gold is leading the stocks
- which is bearish if that were correct.
In reality the gold stocks have been leading gold
since August. They have been rising at a much faster pace. In fact some
stocks rose 15-20% earlier this week when gold broke above $440.
The reason why the XAU and HUI did not make a new
52-week high while gold did is because they fell so much more when gold
had its correction in the first quarter. The XAU made a high of 113.41 in
January and a low of 81.21 in May. That was a loss over 29% while gold
fell only 14%. In order to just get back to par the stocks had to go up
much more than gold did.
The price ratio between the XAU and gold is actually
bullish and as long as the stocks continue to go up at a faster pace than
gold I will remain bullish and hold the gold shares that I have.
The second big wall of worry is the simple volatile
price action in the gold stocks themselves. In the past two weeks they
have had a pattern of going up over 10% in just a few days and then
falling 5-7% in one day. Those down days simply put the worry into people
who hold gold stocks - often forcing them to sell in fear of losing
profits - and has caused people to stay on the sidelines and remain
skeptical while even baiting some short sellers into the market.
I believe this volatile price action is going to
continue for some time and will prevent many people from getting into the
gold market. The action should not be a surprise. Although the stocks
and the metal have been breaking out, neither of them broke out of long
bases. They bottomed earlier this year and rose straight up to their
highs. They only paused for a short period of time in October and
November before beginning wave 2 of the gold market.
This is important. Back in the winter of 2002 when
gold stocks broke out and began a big bull run - and last year too - they
did so by coming out of a long base. A long consolidation phase has the
effect of transferring stock from weak hands to strong hands. The fact
that we have not seen such a long consolidation process near the highs
this year means that there are a lot of weak hands in gold stocks - who
will sell on dips out of fear and help create the volatility in the gold
market.
They are an important component of the wall of
worry.
To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm
November 22, 2004
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