Cheap Gold
Fresh 4 year
highs (nearly) in the price of wheat pushed CRB futures to new 52-week
highs, as wheat bulls continued to try and complete a rounding bottom
on the long term charts Monday. The nearest wheat contract gained almost
2 percent, while the other grains were up from 2 to 3 percent for the
day.
It
was enough to signal a primary bull market for wheat, as well as an intermediate
bull market for the CRB, but not enough for the Goldman Sachs commodity
index to follow suit. Several of the commodities were up more than one
percentage point on Monday, but the Goldman Sachs index sports a heavy
weighting in Oil, which was up only marginally today (up in Europe, down
on NYMEX).
Cocoa prices extended their string of highs,
and although coffee prices didn't, they were up 2.5% at the time of writing.
Helping the CRB up besides the grain complex was a 4% gain in world sugar
prices (a bounce from the recent drubbing), and like gains in some of
the Livestock prices.
Gold bounced around between support at
$310 and resistance at $315 after a Friday late day sell off where the
bears took out "some" support (June's low), but hardly the meaningful
type. There are several factors affecting gold trade (for most of the
last decade almost no factors affected gold prices except on the downside).
However, it is our opinion that the most dominant, until recent weeks,
has been the slide in stock prices and the US dollar. Speculating on war
is a tough thing to do, and even if one could do it, the bulk of the evidence
supports the best correlation between the dollar, stock prices, and gold
(inverse correlations) over the medium to long term.
The short term is always filled with noise
that'll promise to take investors eyes off of the correct ball in terms
of gold market valuation - the question of dollar valuation. We suspect
in hindsight, gold's lag in confirming last week's dollar break will be
seen as its last buying opportunity perhaps for a long time.
We are of the opinion that gold's weakness
in recent days is related to expectations the bulls will be able to lift
US share averages. The averages were largely flat last week, but the broader
markets were up a little bit compared with the prior week. A bounce in
stocks would I believe offer support for the dollar.
Another factor driving gold lower recently
has been renewed weakness in the South African Rand and the Australian
dollar, which could explain why the weakest of the gold stocks happen
to be the hedgers with exposure to hedges in those currencies, such as
Newmont, Placer Dome, Anglogold, and Barrick.
It is those stocks that have taken out
their June lows. The unhedged gold stocks, as measured by the Amex Gold
Bugs index, "technically" fared better, which I think is bullish
for our near term outlook - that the recently weak Aussie and Rand are
keeping the price of gold from confirming a primary bull market ($339)
even as the US dollar just signaled a primary bear. The HUI was up on
Monday.
Also
supporting our near term outlook is the fresh high in the CRB index, the
breadth of that participation, and the rising prices paid component of
the string of reports in the monthly US ISM (a national manufacturing)
index, indicating a recovery of some pricing power for the commodity producers.
Nonetheless, there was another wave of
gold selling at the close Monday on COMEX, but it only managed to shave
one point off the market's best for the day. The Rand was firmer Monday,
but the Aussie was off half a percent against the dollar matching the
bulk of the action in Forex trading up to midday. The US dollar index
(trade weighted average) backed up(ward) by ½ percent by midsession.
All eyes were focused on Wall Street, whose
bulls were struggling to hold their heads above water for most of Monday.
The broad market was under pressure, but was buoyed by the averages until
we neared the end of the trading day when bulls closed up shop early.
My gut, for one, has been a little
confused. It's been telling me that equities could bounce one minute but
that they could collapse the next. Certainly they're due for a bounce
in the short term, but they're also due for that collapse we have been
waiting on, ever since last year. You know, the one to Dow 6000!
The US dollar ended back down, and the
Dow finished down better than 125 points by the time the bell rang. This
also supports our view on gold as the price of gold popped in overnight
ACCESS trading that begins shortly before the Wall Street close, obviously
in reaction to the late session Dow and Nasdaq sell off.
The sentiment data is sending us mixed
signals, but that data is driven as much by news as it is by price. Moreover,
we're approaching a heavy news season guided by second quarter profit
reports. What's more is that it is about that time when belated profit
warnings might roll out, particularly from any of the companies that have
bad news but have been putting off telling us about it.
The third quarter promises to have a more
favorable comparison year over year, but in many cases analysts may have
postponed reducing their forecasts for the quarter, which are probably
dependent on second quarter results to some extent.
So if one were to ask us whether we'd place
greater weight on the sentiment data or the technical data, we'd vote
for the latter, which has been forecasting a poor second quarter, and
perhaps even worsening sentiment as a result.
Bugos Wisdom (or not... read on at your
own risk)
In a bull market we buy the dips. In a
bear market we sell the rallies. I think this is the mistake many investors
still haven't corrected to this day. Buying the dips in a bear market
could become a costly strategy, since during a typical bear market the
dips invariably give way to greater declines.
I'm not sure how well the lay investor
may know it, but in the investment business I think we generally agree
on the existence of market trends even if we differ on their interpretation,
criteria, or method of evaluation. In the case of the beginning trader,
for instance, the criteria may consist of nothing more than arbitrary
lines on a price and volume chart.
In my experience this is usually done wherever
those lines (conveniently) support an already preconceived outlook.
Without giving away our trade secrets,
largely because they're not really secrets (it is only by looking at
chart after chart, year after year, the investor will eventually know
what not to conclude, or what the data does 'not' mean), suffice it
to say that investors' progress in deriving a use from the data on a
chart will depend on the extent that they become aware of their own
biases.
In fact, as we continue on, learning our
trade (as investors, speculators, or traders), we become more and more
aware of our internal biases, specifically how they affect our own analysis
of the market environment - micro or macro - and consequently, how they
affect our decisions.
This is the trader's biggest challenge,
I believe. As Ed Seykota said, in J. Schwager's Market Wizards, "everybody
gets what they (really) want." Parentheses are mine.
RBC Controversy, Rambles, & Mainstreet
Bashing
Mainstreet has finally written
about GATA's claims of gold market suppression. The amusing thing is that
hardly a word was written when Reg Howe announced litigation against the
BIS, Treasury, and the Fed. And only a few words were written when the
case was thrown out of court (before it got there). But now, virtually
every business paper we've picked up is running the story written by John
Embry, the Royal Bank of Canada's gold fund manager - the only gold
fund manager to outperform the HUI (Amex Gold Bugs index) over the past
six months or so - endorsing GATA's claims as well as stating that
gold market suppression is nothing new in the annals of history.
What has changed to make this argument
worthwhile for publishing? Only that gold prices and gold shares have
outperformed any other investment class for the better part of a year.
Otherwise Mr. Embry might have held back. Already, the Royal Bank denounced
it as the independent opinion of one of its employees, and nothing more,
which makes it a controversy now. For Mr. Embry isn't the bank's janitor
after all.
Without getting into all the reasons for
our own bullish position on gold, and risk redundancy, I'll say this:
by the time the (gold) bull market is over, we fully expect the media
to be making up its own conspiracies altogether. And we fully expect to
be shooting them down as we had their nonsense about tech stock valuations.
Mainstream has always lagged the truth, a little, but in the Internet
age it is puzzling and implies interesting things. No, no, don't go there.
We're not talking about conspiracies. We don't need that label to know
that mainstreet's monopoly over information and the publishing of it is
threatened by the golden age of the Net.
At any rate, bull and bear markets produce
nonsense. The chief difference is that in one case the nonsense is optimistic,
while in the other, the nonsense is pessimistic.
The longer that a particular trend continues,
the more religious the nonsense is likely to become.
At the late stages of any trend, the opposite
arguments tend to be the most cogent. Only, the hard part is identifying
the late stages. But that's why it is important for investors to understand
the contrarian argument, particularly at the times they least want to.
So if we're at the late stages of a bear
market in gold, any media reports thumping Mr. Embry's and GATA's claims
are probably still nonsense. The headline of a report by the Globe & Mail,
for instance, recently states:
"RBC Manager Endorses
Gold Conspiracy Theory"
Using the word "conspiracy" reveals to
us that the bullish argument is still embraced only hesitantly despite
its cogency. For, there is no conspiracy. It's always been the job of
a central bank to replace gold's monetary role in an economy, as Mr. Embry
is aware apparently. Would even Greenspan deny that? I doubt it, for he's
as much as admitted it in the past. Gold price suppression should not
be news. What is news is the discovery by the media that it exists.
The covert mandate of any central bank
that intends on surviving the long term is to sustain the inflation and
persuade the market that its currency is better than the one it (the market)
might otherwise choose. It is those words which the central bank will
refuse to use (I think). But to not acknowledge this means to refuse to
accept the economic fact that the Fed's notes (US dollar) compete with
gold for the prestigious role that money plays in any economy - to facilitate
the free exchange of goods and services.
To call it a conspiracy, however, helps
the central banker's cause. It helps because it makes the thinking unpopular,
despite its verity. Personally, when I hear that word, I become quickly
convinced the person using it doesn't know the first thing about money,
capitalism, or history at that.
To believe that central bankers are really
willing to sell the rest of their gold reserves is what requires religion,
for it is their only ammunition. Though they've been robbing us with a
blank gun for years, it is paramount that people believe the gun is loaded.
Until the day the press stops calling it
a conspiracy, a common understanding of the forces unfolding right under
their noses will continue to elude its readership, and in that way will
keep the bull market alive because the faster investors awaken to the
monetary implications of the past decade's inflation, the sooner the gold
bull market is likely to conclude - for in our view that's what it is
largely about. Perhaps unwittingly mainstreet will carry on as the Fed's
preacher, religiously preaching yesterday's trend as tomorrows' because
productivity now determines all values bullishly regardless of the extent
of government intervention and resultant market dislocations.
You see, it isn't the gold bulls that are
religious, folks. It's the paper preachers that are. They are the ones
constantly preaching falsities to solicit our full faith & credit.
Buy and hold; Buy the dips; Stocks
are not expensive over the long term; the dollar is money; money supply
has to grow with the economy; inflation is measured by price indexes;
aggregate computing power determines productivity; Greenspan is a capitalist.
These things are largely false but can
work to an extent if we believe they will. They can all be made true by
the economic participant's willingness to offer his or her faith. Isn't
that Larry Kudlow's favorite line? Have faith?
But if you don't, just buy gold. 'Cause
it's still really cheap.
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
July 2, 2002
The
Goldenbar Report: is not a registered
advisory service and does not give investment advice. Our comments are an
expression of opinion only and should not be construed in any manner whatsoever
as recommendations to buy or sell a stock, option, future, bond, commodity
or any other financial instrument at any time. While we believe our statements
to be true, they always depend on the reliability of our own credible sources.
Of course, we recommend that you consult with a qualified investment advisor,
one licensed by appropriate regulatory agencies in your legal jurisdiction,
before making any investment decisions, and barring that, we encourage you
to confirm the facts on your own before making important investment commitments.
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