Gold Investment Fundamentals and the Transfer of Capital

The Secular Bull Market in Gold Investments corresponds directly to the Secular Bear Market in Financials. We explain why this trend will continue and why a short-term buying opportunity in Gold presents itself.
Central Banks are in all sorts of a pickle.

With overwhelming evidence that the global economy is slumping badly:
* UK Retail Sales see Worst Slump in 20 Years
* Business confidence in Germany is at lowest level in 2 years
* New Zealand’s central bank cutting interest rates saying slowing economic growth will curb inflation.
* Japanese exports decreasing YoY, and imports climbing on record Oil prices.
* US unemployment at 4-year highs

The knee jerk reaction by central banks is to man the printing presses and hit the accelerator. And whilst this medicine has worked well over the last 25 years, Central Banks are now hitting a brick wall that they haven’t encountered since pre-Keynesian 1930s.
Freshly minted fiat currency is falling into the hands of a crippled banking sector with little capital, ability or desire to carry out the multiplier effect and make loans to real people in the real economy. In a debt laden global economy with no reverse gear this headwind is possibly the biggest threat the Federal Reserve and its ilk aka the establishment have ever faced in carrying out monetary policy

Point #1 – Gold investors are well aware of the risks inherent in the current financial system.

The beauty of capitalism and the associated free movement of capital is that smaller more focused entities aka Hedge & Private Equity funds can and are rapidly moving into long held banking preserves.
* Direct lending to mid and small cap entities is now a well worn hedge fund territory.
* Extracting value through Shareholder activism.
* A much larger pool of capital available for short selling.
* Private Equity funds increase investment time horizons.
Highly secretive and operating out of non-transparent domiciles these entities are by and large out of the reach of the central banking system.

Point #2 – Hedge Funds and Private Equity Funds do not benefit from Fed handouts and would be better served by a currency that acts as a stable store of wealth – Gold !

The transfer of the financial system is akin to the explosion of information on the internet. The players that used to have a monopoly on information become less effective. There will be winners and there will be losers. But right now a bet on Gold Investments like Gold Stocks and Gold ETFs is a bet against the Establishment and the out-dated mega-banking system.
Slower growth will continue to cause problems for financials as bad debts soar, and as a result Gold investments will continue to propel higher in its multi-year Secular trend.

Gold Investment Chart

Gold Investment Chart

Figure 1 – Gold Bull Market (GLD) accelerating as Financial Fears grow bottom (Gold ETF – GDX outperforming Financial etf -XLD)

Short-Term Opportunity

The above trend stretched too far technically over the last 3-months and there has had a rapid reversal over the last 2 weeks. This is a technical pullback only and the above fundamentals have not changed. There’s more to come in this fundamental story and Gold investments (we use GLD gold Exchange Traded Fund) and we could be getting close to another buying point for gold soon

Gold Chart For Investments

Gold Chart For Investments

Gold Investment GLD – $85 is strong support as a confluence of lateral support (green) and the 50-week Moving Average converge. Its just a matter of time before we have another entry point to add to our positions and or make another profitable gold investment.

By Chris Vermeulen
chris (AT) thegoldandoilguy.com

Chris Vermeulen is Founder of the popular trading site TheGoldAndOilGuy.com. There he shares his highly successful, low-risk trading method. For 6 years Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets. Subscribers to his service depend on Chris’ uniquely consistent investment opportunities that carry exceptionally low risk and high return.
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

The Gold ETF Experience

Gold ETF Trading – Taking advantage of the gold market using the GLD ETF to generate consistent profits in any market condition.

Gold’s price action in the past 5 months has frustrated many traders. Especially those who have difficulty making money during consolidation periods which are in. The past couple months are consistently the weaker months for gold prices year after year. That being said August through year end have been consistently strong for trading gold and gold ETF’s.

Chart 1 – Gold Spot Price, you will see that gold found support at the 50 exponential moving average and also found major support at the 200 EMA. August is just around the corner when gold generally picks up steam, which you can see in the chart below in 2007.

Gold Spot Price Chart

Gold Spot Price Chart

Gold at support levels and entering August

Chart 2 – The Collapsing Dollar looks to be struggling at resistance and making a lower high and lower low (bear Trend). If the USD breaks down it should slide to the 67 cent level and send gold soaring for 2-3 months.

Gold Price vs the UD Dollar

Gold Price vs the UD Dollar

US Dollar at resistance making lower highs and lower lows.

Chart 3 – A close up chart of the USD, you can see its currently at the top of its Bollinger Bands and just made a lower low 2 weeks ago. Head and Shoulders anyone….

Gold ETF Analysis with the Dollar

Gold ETF Analysis with the Dollar

Weak dollar at top or range with head and shoulders pattern

Chart 4 – GLD Gold ETF is my trading vehicle of choice and is currently at support making higher highs and higher lows (bull trend). While this does not provide a buy signal with my daily trading model, it does provide an excellent trading opportunity for an intraday trade as we should see prices make a move much higher or much lower within the next couple days.

GLD Gold ETF Trading Analysis

GLD Gold ETF Trading Analysis

GLD Gold ETF is poised for a move, does not matter which way at this point thought.

Chart 5 – Recent Gold ETF trade. My focus for short term trading is simple. Wait for a breakout which satisfies my trading model, enter the trade and then exit 50% of position on the first sign of weakness. Exit second half on a trend line break. My goal for GLD ETF is 2-5% and we are in trades for 2-10 days unless prices continue to run. I generally have 10-20 trades per year with gold.

GLD Gold ETF Trading Charts

GLD Gold ETF Trading Charts

My recent Gold ETF trade which profited 3.4% with very little down side risk during a sideways market.

GLD trading for me is the most accurate trading vehicle I have come across. I have been using my proven trading model which avoids the price gaps and keeps risk for each traded under 3%.

Gold ETF funds makes it simple to profit from the markets using a proven trading model for trading long, and short term gold setups.

Chris Vermeulen
http://www.TheGoldAndOilGuy.com

Junior Gold Stocks

Junior Gold Stocks – With the Stock Market Panic behind us – for now – we are settling in for a range bound, relatively calm, second half of ’08. Junior Gold Stocks should finally start to benefit as the wet blanket smothering equity markets lift.

The New York Stock Exchange indicator for new lows reached an extreme of 1304 on Tuesday the 15th of July. That was even worse than the 1100 new lows reached on the 22nd of January. Such extremes spell one thing P-A-N-I-C.

Whilst it’s difficult to infer any far reaching conclusions about one day sell-offs, even panics, the odds now favour a bounce in very oversold equity markets. As for how high and how long the stock market will bounce is anyone’s guess, but here again, probabilities favour the market to move higher and longer than anyone expects so that sentiment indicators return to their old complacent Bullish state!

What will work during this period of ‘relative’ calm?

We had noticed a very definite flight to safety since market volatility began in October ’07.
Firstly, a flight away from common Dow stocks to Gold Stocks:

(The following charts show relative performance of asset classes to each other. That is, when the chart is falling the first asset class (DOW) is underperforming against the second (Gold Stocks).

Junior Gold Stocks

Junior Gold Stocks

Chart 1 – Large Cap Gold Stocks (GDX ETF) have outperformed the Dow (DJIA) since August 2007

Within the Gold market this has manifested itself as a flight to bullion and away from Junior Gold Stocks:

Junior Gold Stocks Analysis

Junior Gold Stocks Analysis

Chart 2 – Gold Stock ETF has underperformed against Gold Bullion ETF since August 2007
And a shift from smaller more speculative junior Gold mining companies to their large caps cousins:

Junior Gold Stock Investing

Junior Gold Stock Investing

Chart 3 – Minefinders (for example) has under-performed against the large cap Gold Stock ETF
Now that there is a good chance equity markets will stabilize, the above trends will moderate and reverse. This means Junior Gold stocks prices should begin closing the valuation gap and discounting higher earnings based on $900+ Gold.

The remainder of 2008 looks set to be very bullish for Gold Stocks and Gold Stock Juniors in particular!

More commentary and stock picks follow for subscribers…

Gold Stocks – The Next Winners

Gold Stocks – A contrarian view on where the next Gold Stock winners will emerge.

Searching for the Golden Goose?

For years we have been speaking and writing about the massive bind the Fed now finds itself in. With price inflation rising – read as food and energy skyrocketing — and little hope for nominal interest rate increases – read as housing too weak for higher rates – negative Real Interest Rates (nominal rates less inflation) looks set to persist for some time.

Now why is that important?

Firstly, not only do negative real interest rates make holding non-income producing assets such as Gold attractive, but an environment where inflation is allowed to have its way and economic growth is sick (stagflation), is tantamount to the perfect storm for Gold Stocks and other Precious Metals!

So what do you do?

You load up on assets leveraged to the price of Gold – namely Gold stocks.

Wrong!

As Old Gold Bulls we have seen this situation before. A low growth high inflationary environment is poisonous for equities – Gold stocks included. And whilst the storm persist in the equity markets it will either drag gold stocks lower or prevent them from fully expressing themselves to the upside! That’s why we encourage investors to have a portion of their portfolio exposed directly to the metal either through ETFs, Futures or Physical:

Investing in Gold Stock

Investing in Gold Stock

Chart 1 – Since July 2007 the S&P (red) has been moving lower and Gold the Metal
(green) has outperformed Gold Equitites (red and black)
Hunting Elephants

There is no doubt that an equity risk premium has weighed heavily on Precious Metal equities and that stabilization in equity markets would certainly benefit such stocks. But that’s old news.

What we consider interesting and downright fascinating is the nature of Gold Equities investors should be focusing on over the next year.

Conventional wisdom is that the juniors are where the investment gems lie. We don’t disagree – entirely.

Over the longer term (3-5 years) the fundamentals certainly favour late stage explorers and emerging producers, but an overlooked market dynamic causes us to lean rather towards their larger cousins.

As we have alluded to above, Gold Stocks and other Precious Metal equities are equities and more often than not subjected to the same forces as the general equity market. One such force is the veritable WALL of passive indexed money. By some accounts amounting to several TRILLIONS of Dollars.

And what’s the passive indexed money saying?

Trading Gold Stocks

Trading Gold Stocks

Chart 2 – large caps now outperforming small caps

Firstly it’s saying that the long period of outperformance by small caps versus large caps (chart 2 is falling) bottomed in 2006 and the trend has since been towards large caps.

Secondly…

Gold ETF Trading

Gold ETF Trading

Chart 3 – large cap growth has outperformed value since late 2006

The trend in large caps from value to growth (chart 3 is falling) also looks to have bottomed around late 2006. We define growth as earnings growth of +15% p.a. and/or PEG ratio of around 1.5.

These trends resonated well with us as large cap Gold producers beat out small cap miners over the last year leaving many a gold stock speculator highly frustrated.

Gold Stocks – Where to find such Elephants that will benefit from these trends? We would begin by looking at components of the Gold Stocks ETF (GDX) or the Amex Gold Bugs Index (HUI). Chris Vermeulen