Is The Gold Rally Different This Time?

by JDH on February 22, 2014

Rick Ackerman wrote an interesting article this week, titled This Bullion Rally Feels Different, where he makes the comment that:

This rally feels different, no? We keep waiting for a vicious takedown like the ones that have occurred so regularly in the last two years, but gold just keeps climbing higher.

I agree.  Since the peak in 2011 the correct strategy with gold shares (other than to just sell them), was to do a lot of covered writes.  At the start of the month you cover, the shares fall, you collect the premium, and do it all over again.  Since New Year’s Eve, that has been the exactly wrong strategy, with gold, year to date, up 10.15%, and the TSX Venture Exchange, home of many junior gold miners, up 9.62%.

I’ve lost my shirt doing covered writes on RGL.TO – Royal Gold Inc..  (Well, not exactly “lost my shirt”, since the stock has gone from around $45 at Christmas to over $75 on Friday, so a 66% increase in seven weeks is great.  However, doing covered writes I have not realized all of that gain, so on the covered write portion I have done poorly).

For the last two and a half years every rally has inevitably lead to an even deeper correction, but since the start of the year it’s onward and upward.  So what’s changed?  I have many theories.

The first answer is “nothing”.  This could simply be a bear market rally, with the Big Boyz attempting to lure in some buyers so that they can crush it again.

The second answer is that there are no sellers left, with all but the most diehards exiting the gold market over the last year, so with no sellers, gold has no choice but to rise.

It could be that China, India, and other “in the know” investors see a great opportunity, and are buying gold at depressed prices.

Ultimately, does it matter?  Yes, because if a correction is imminent, you don’t want to be all in.

Currently I am 31% in cash, and I have placed “stink bid” orders on about a dozen stocks I want to buy, or on which I want to increase my holdings.  If we have a correction, I will deploy my excess cash.  If we have an upward spike this week, I’ll do more covered writes.  Gold can’t go up in a straight line forever, so some prudence is warranted

I must admit I am enjoying this respite from the bear market.  Having a portfolio that is up is a good feeling, but let’s not get cocky, and least not yet.

There are many miles left in this journey.

Thanks for reading; see you next week.