Gold and Gold Stocks: Time To Increase Holdings?

by JDH on December 5, 2009

I sat down at my computer and began to write a long dissertation on Why The Government Can’t Create Jobs, and why the Obama Job Summit was a joke. Then I was going to talk about the silliness of sending more troops to fight the unwinable war in Afghanistan. I was then going to close with a Tiger Woods joke (something like: “what’s the difference between a Cadillac SUV and a pitching wedge? Tiger Woods can back up a wedge”).

But then I thought that it was not appropriate to waste a lot of digital ink on such matters; there are more important matters to discuss. So, let’s discuss them.

Two weeks ago I said the markets looked gassed. Last week I said I was still surviving; gold was trading just under $1,200, and the RSI was over 82, an historically high level. Last week I said:

My prediction is that gold has temporarily run out of steam, and will probably consolidate over the month of December. A drop back into the $1,050 range would not surprise in the least. (A drop much below $1,000 would surprise me).

Therefore my plan continues as stated previously: I will remain 85% in cash in anticipation of further market weakness, and in December, or January, or whenever I will deploy that cash on weak days, in the hopes of catching the next up wave. The risk, in my mind, is too high to be fully invested, or even half invested, at this time.

Well, guess what?


On Friday some of the air was released from the balloon, as gold peaked over $1,212, and fell as low as $1,149, before closing the day at $1,162 for a loss on the day of 3.74%. Well, you can’t say I didn’t warn you.

You might think a drop is bad news, but I disagree. I think it’s great news, and just the type of price action we’ve been waiting and hoping for. At the close on Friday the RSI was down to 56.38, which is a much better buying level. I believe some of the froth is now out of the market.

How much froth is gone?


Obviously the uptrend line that started at the end of October has now been violated, but clearly no long term damage has happened. A drop to the previous uptrend lines in the range of $1,075 or even $1,000 would not be unexpected, and would not in any way harm our current uptrend.

Again, check out the RSI levels at the top of the chart. They were very high, and now they aren’t, so in my mind that’s very good news.

Does this mean we should start buying gold?

I’ll answer that question shortly, but first, more charts:


Here’s a chart of the ratio of the Dow Jones Industrial Average to Gold, taken at the close on December 2, 2009. To play the home game and do the calculations yourself, divide the price of an ounce of gold into the Dow. If the Dow was at 1,000 and gold was at $1,000, the ratio would be 1. Obviously on December 2 with the Dow over 10,000 and gold over 1,100, the ratio was 8.6

Two points of interest: first, the Dow, priced not in fictional dollars but in actual gold, peaked on August 27, and has traded in a down channel ever since.

Yes, I know, CNBC and all of the newspapers keep talking about how the stock market is up X% this year, but that’s only if you measure in dollars. You aren’t one of those people who still measure things in dollars, are you?

A dollar is like a ruler of a constantly changing length. It’s not much use. Gold doesn’t change. An ounce is an ounce, so it’s a better measure of true worth. And, based on true worth, the Dow is in a downtrend, and has been since August 27.

The second point of interest is that, on December 2, the index was looking over sold, trading outside of the channel, and with a wacky RSI.


After Friday’s drop in gold, the index bounced back to the 9 level, and the RSI is once again heading back to the 50 level, which is a much better buy point for gold (or a sell point for the Dow, depending on your perspective).

While Mr. Dines may still be out of favor due to his spectacular misses of the last two years, it is worthwhile to point out that he has long predicted a return to a 1 to 1 ratio of the Dow to Gold (observed only twice before in the last 120 years). I don’t think it’s a stretch to predict 5,000 on the Dow and $5,000 on gold, so we may see that 1:1 ratio over the next few years.


You know the reasons. Government spending is at record levels, so governments around the world must dilute their paper currencies by printing more to cover their debts. They will keep running deficits, since although the talking heads on TV on Friday were quick to point out that the unemployment rate was not as bad as expected, there are still a huge number of part time workers, working temporary jobs because they can’t find a permanent job. Those are not the conditions for a recovery.

So, back to the question: will I be buying on Monday?


I am currently almost 90% in cash, waiting for a bit of a correction to get better entry points. I have no idea if Friday’s drop was it; I suspect more down side turbulence is ahead. But, with India and China and Russia buying gold by the ton, I find it hard to fathom a drop in gold much below the $1,000 level. It is much easier to envision a scenario where gold hits $1,500, or more, next year.

So, now is the time to start dipping our toes in the water.

(Yes, I know, the time to get back in was in April, and I didn’t, so I only have moderate gains this year, but my objective this year was to not lose money due to the uncertain economic environment. Some of that uncertainty has evaporated (ie. we are all screwed, so buy gold), so I will now inch back in).

My plan, over the balance of the month, will be to increase my stock holdings from 10% to 30%, perhaps more. If we have a big crash on Monday, I’ll be buying a lot more. Gold traditionally does well in the first quarter, so now is the time to build positions.


I will buy the blue chips, like G.TO – Goldcorp Inc., which corrected on Friday but remains in a solid up channel. The RSI at 47 is a nice entry point, so I will add to my holdings.

I will also, for the first time this year, start throwing some money at the juniors. They are obviously very high risk, but as we approach the mania phase of the gold bull market, they will also be the stocks with the potential for 1000% gains, so some risk capital must be deployed in the more speculative stocks.

Next week I will report back on what I actually bought.

Also, fair warning: it will soon be time for year end predictions. You can read our Predictions page to see how we did last year (I did very poorly). Start making your predictions, and I will post the e-mail address for your submissions at the end of this month.

Thanks for reading; see you next week.

{ 0 comments… add one now }