Nope, We’re Not There Yet

by JDH on May 4, 2013

Let me start by getting the bad joke out of the way first: May the Fourth be with you.

Now that we have that nonsense out of the way, let’s address the question on everyone’s minds: has gold bottomed, or is there more downside to come?

You’re asking me?  How would I know?  I’ve been invested in gold and precious metals shares all the way down.  If I knew what I was doing, and if I could see the future, I would have sold in the summer of 2011, and I would have switched all of my money to the stocks of the DOW, which hit the 15,000 level for the first time ever this past week.

At the risk of alienating my valued readers with this thought, a thought occurred to me this week: perhaps I’m a fundamentalist.

Not a fundamentalist in the sense of technical analysis vs. fundamental analysis, but a fundamentalist in the religious sense of the word, where no scientific proof or other evidence will cause you to change your belief in your deity, or your religious book, or whatever.

So am I a fundamentalist?  Do I have this belief that gold is a long term store of value because it can’t be created out of thin air by governments?  Yes, yes I do.  Is my belief irrational, and totally opposite to what the evidence would indicate?  On the surface, it would appear that the answer is yes, I am an irrational fundamentalist.

GoldMay3-2013Gold has dropped for almost two years, while the stock market has gone up during that same time period.  That’s pretty good evidence that gold is going down and the paper markets are going up.  Two years is a long time, after all.  Any logical person should conclude that the bull market in gold is over.

Sadly, I am not a logical person.  I look at the chart of gold over the last ten years, and even if gold drops to $900 the long term uptrend line remains intact.  The recent drop to around $1,300 didn’t violate the secondary trend line, drawn off the lows from 2005 and 2008.

Perhaps I am a fundamentalist, believing in gold regardless of the evidence, but it appears to me that the evidence is still clear: gold is down, but it’s not out yet.

Back to the question of the bottom: are we there yet?  My gut (spoken like a true fundamentalist, eh?) tells me that a final retest of these lows is necessary.  The weak hands have already been scared out of the market, but it may take one final shock to get rid of the true believers, like me, out of the market.  Another bounce down to $1,300, or even lower, is quite possible.

As mentioned last week, Jim Sinclair is of the view that the bounce would burn out by May 2nd or 3rd, with a pullback completing on May 10th or 11th.  Perhaps.  If so, the coming week will see a pullback in gold.  Or not.

I made two bets this week:

First, on Friday, I did some covered writes against the gold stocks I own.  I sold at the money or slightly out of the money May call options against my blue chip stocks.  If there is a pullback next week, the options will decline in value, so I will be able to buy them back for less than I sold them for, making a profit.  If the shares remain at the same level they will expire worthless, and I pocket the premium.  If gold goes way up in the next three weeks, which is unlikely, I lose some of the profit.

Since gold traded at $1,325 on April 15 and touched $1,487 on May 3, a slight pullback next week would not be at all surprising.  If so, I will be happy I sold the calls as insurance.

The second bet I made was to place a bunch of stink bids on some of my core holdings.  I place the bids at just above the low points the stocks hit on April 16.  If I’m correct and we have another retest of the lows, I will deploy more cash.  If we don’t have a retest my stink bids won’t get filled, but that’s fine, that means my stocks are increasing.

We aren’t there, at the bottom, yet, but I suspect we are closer to that destination, so that’s how I’m playing it.

The weather this weekend is gorgeous in southern Ontario this weekend, so I will be spending it going for a run, a long bike ride, and doing some gardening.  I won’t be paying attention to the economy, or the stock market.  I suggest we all take a break.

Thanks for reading; see you next week.