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Weekly Gold Market Outlook Rational Exuberance… But Exuberance No Less (Excerpts from the full report)
For now, I am scaling back the quantity (not quality) of updates in order to free up the time necessary to devote to the change - but this is only a "transitory" phenomenon. While I have no plans to reinstate the subscription service, I do plan on re-formatting and issuing a new formal weekly report - once my ducks are lined up. Thank you in advance for your patience. Please send any questions to: mailto: gold@goldenbar.com ----------------------------------------- As gold screamed through US$700 last week, it felt like a point of vindication of sorts… if an overdue one. The metals charts have all gone parabolic over the past nine months, stoked by last Tuesday's news of a formal Chinese state plan to accumulate large reserves of key metals and energy products over a period of five years which presumably equates to some calculation of the country's future needs (recommendations by the nation's top economists, that the country should triple or quadruple its official holdings of gold, were also announced). The only thing missing from the bullish scene is the picture of gold bugs dancing in the streets… maybe they're just waiting for the market to breach its old 1980 highs! True vindication, of course, lies somewhere further in the future as gold inevitably encroaches upon our long term targets, and eventually outperforms all other commodities. The price of copper is up almost tenfold in less than four years; the price of silver is up four-fold from its lows; the price of gold and platinum is up three-fold since 2001. The base metals and some of the precious metals have outperformed my most bullish expectations for this phase of the bull market. The gains are so big now that the news has even reached the underclass - it has become lucrative to steal things, like copper wiring stored at the local hardware store for instance, which just a few years ago might have been worthless on the stolen goods market. Energy costs are up more than 400% these past several years alone. But the commodity boom is not limited to the energies as the government would have you believe, nor is it limited to the energies and metals. The price of sugar is up three-fold in less than four years, for instance, and many of the other softs, and even the grains are up significantly in that time period. The new Fed chair is looking more like a patsy by the day. The car companies and airlines began complaining at levels for many of these commodities that were half of what they are today. I don't think one should underestimate the effects of these developments on costs (hence profits), interest rates, and PE ratios in the months (and years) ahead. They promise to shock and awe many investors… right up to the oval office. Moreover, I would not be surprised to see the whole thing give rise to a new demand for commodities as businesses figure out that their best means of survival is to hedge their costs through the futures markets, knowing that if they are too big to fail the Fed will come to their rescue anyway. Imagine if the big Dow companies announced a plan to accumulate strategic reserves of raw materials for their long term needs, similar to the plan that China has, and if only because China has. Well, it's just an idea. The Federal Reserve raised rates by another 25 blips (basis points) last week, and in a flurry of a newfound spirit of transparency left markets even more confused than ever about its next objective step. The commodity markets didn't even flinch, of course, though the Dow did - even the price of wheat catapulted to new three year highs (and looks set to break up and out of a large four year bottom). The silver market took the news of Buffett's rumored silver disposal in stride while the metals complex generally brushed aside news of an interest rate hike by the Chinese central bank last month. The London Metals Exchange responded to the upside volatility by announcing higher margins, which caused some turbulence this week that could be a healthy development in terms of the intermediate trend. Needless to say the news continues to be wonderful. There is no apparent reason (yet) to bet against gold, save volatility. The fundamentals and technicals are both still bullish. But, as sure as night follows day, a correction will follow this rally, and gold can't escape that fact of market life. Of course, one could argue that in some parts of the world, many months can go by without a hint of nightfall (and vice versa). So you see… there's always a caveat. Still, it can no longer be said that the animal spirits are asleep; they have awoken, and their hosts are outspoken - some even claimed that gold would never ever correct again, and that those contemplating taking profits here are going to be sorry! In fact, unless you agree, you are not welcome in this golden circle of bullshit. Yes, it has unfortunately again become unpopular to call a correction of any magnitude. It never fails at times like this. But I didn't sign up for a popularity contest - the right decision is often the one most people will detest making. The spotlight becomes an intense competition among bulls; the most bullish will always get it. So for those who want to monopolize the spotlight it pays to be increasingly bullish… even the most bullish of the group; for when the correction does arrive the spotlight leaves the sector anyway! This is great as far as subscriptions go, but it does not serve investors anymore than Glassman's book about the Dow making it to 30,000 (it will eventually, but it will be the product of a monetary debasement and not a three-fold increase in actual or real wealth). Three years ago many people, including some gold bulls themselves, thought it was inappropriate to use the 1970's as a model for the current cycle. To be fair, I think that the gold bulls who did not adopt the seventies model were simply trying to be conservative as it was hard enough selling the public on Gold US$500, never mind Gold US$1000, or Gold US$1300-1800 as the seventies charts would imply in terms of percentage gains. I remember Pimco authoring a piece a few years back where they argued that it was better to compare the current situation to the early nineties than to the seventies - in terms of the monetary dynamics at any rate. But now, charts of gold prices in the seventies are plastered all over the Internet. The reason: simply because there has not been a commodity rally like this one since the last big bull market that dominated the seventies. There's no denying it now - it is a bull market! However, I do believe we are seeing a type of buying climax, whose arrival I have been expecting for two years as one of the necessary prerequisites to a meaningful correction in my outlook - i.e. its absence up until now was the main factor that kept me bullish on the sequence that started in 2001, and confident that the market was not capable of a gold price correction that would exceed 15%. Hence I also argued that the first wave of this bull market was not complete until we got a mini-buying panic, like the one that appears to be unfolding now. There's little doubt about it in my mind. The only uncertainty in my outlook is how high we'll go first. [Note: some people are still talking about a contraction in the total open interest figures as indicating a short squeeze, but, excluding last week's COT's, this trend generally ended at the end of March and has retraced to near last September's highs… moreover, the commercial net short position, which usually consists of bullion banks and gold producers, has increased - since the end of March the "commercials" have added to their shorts and liquidated over half of the longs that they acquired between January and March - while the short covering is mostly occurring in the non-commercials component of this statistic, or large speculators (typically funds)… still, it is a fact that total COMEX open interest has not expanded throughout the last 200 point rally in gold prices.] Anyway, while I cannot know whether the market will achieve full valuation on this leg, or where this leg will ultimately peak in the current primary sequence, I'll do my best to make the call if I see the distinctive signs in time. In order to compensate for this uncertainty it is sensible to take out some insurance via some modest profits here if one hasn't already - the cash buffer and crystallization of some profits tends to help one stay objective about the rest of their position. [In January I reduced our gold bullion long by 10% and our gold stock long by 15%; in April I reduced our gold stock allocation by a further 10 percent - leaving the total exposure to the sector still at just under 70 percent of my total portfolio as of last week's levels]. I don't believe the correction which started Friday is going to be either an intermediate or primary move. I'm still looking for another higher high in the short term. Support for this scenario lies above US$633 in gold and 300 for the HUI (AMEX) gold stock average. In other words, this scenario gets tossed if the market plunges through those levels on this correction, and the prospect of an intermediate correction becomes a reality. As it stands, however, I am still bullish on this leg, but not as bullish as I was below my targets. The bottom line is that even though most investors are probably still underweight the gold sector the bulls that are long no longer are as silent as they were between US$400 and US$500. Now that the market is up 50% they are confident. It is but a red flag at this moment - stupidity can have stamina after all. Yet as confident as I am, and as confidently as I told you early last year that eventually this market would shoot past my targets (recall it fell short four years in a row), I am sure that at some point during the correction phase, probably near its end, I will still regret not selling more than I did in January and April. The reason I'm so confident about that is because that has usually been my experience. It is the nature of the beast that during the rallies people minimize the impact of the potential correction or underestimate its depth and duration. As far as my current outlook goes, my general conclusions are:
Ed Bugos May 17, 2006 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. |
17-May-06: Let me take this opportunity to briefly thank you for the many kind replies to my notice of terminating the subscription service to GoldenBar, and your interest in my future endeavors. I will keep you posted.