There are two obvious topics for discussion today: gold, and the on-going depression, as reflected in the performance of the stock market over the last two weeks. Where should we start? Let’s start with gold.
There are lots of theories explaining where gold will go from here. Looking at fundamentals, gold production peaked around the turn of the millennium, so with limited supply, the price will logically continue to increase.
The technicians will tell you that gold has broken out to new highs, so it’s headed higher. But then there are those who will argue that gold is in a bubble, and is due for a sharp correction.
Yesterday I developed my own theory, called the inverted trapezoid formation, which I called “arguably the most bullish formation possible”. (Go ahead and read about it; it will only take one minute to understand the power of the inverted trapezoid formation).
Are you back? If you never left, here’s the short version: I just made it up; there is no such technical indicator. But hey, it may catch on. It can’t be any crazier than some of the stuff you read on the interweb (like that story about the Return of the Deutsche Mark this weekend, in response to the crashing of the Euro; it’s a good story, but unlikely to be true). (If it turns out to be true: see, I told you so).
So what is true? Let’s start with a chart of gold (click on the chart to enlarge):
As the blue uptrend line indicates, since last July gold has experienced an unbroken uptrend, always recovering to keep the uptrend intact. All corrections have been buying opportunities. The double top between January and April of this year (the orange line) meant nothing; it was just a pause. The horizontal purple line indicates that the high from early December has been exceeded, so that’s bullish.
I call this blog “Buy High Sell Higher” (you can read why in the Investment Philosophy section) because a good strategy is to buy when a stock (or commodity) is breaking through to a new high for the first time, after a period of correction. That’s obviously what gold is doing now. Don’t take my word for it; just look at the chart.
Clearly gold could fall to $1,125 and we would still be in an uptrend. That’s good news.
The only potential concern is that gold has had a great run, and may be due for a breather. The Relative Strength Index (the RSI) is currently just over 71, and anything over 70 is in “overbought” territory. However, as you can see from the two vertical green lines going back to the period from mid November to early December, 2009, it is quite possible for gold to remain in overbought territory for many weeks before experiencing an inevitable correction.
So, it would appear to me, that gold could run for another week or three before pausing. Long term, there is nowhere to go but up. Why?
Because gold has become a currency of it’s own. Wise investors are fleeing fiat currencies for something more stable. Here’s gold, charted in Euro terms:
In U.S. dollars we just broke through to a new high; measured in Euros, gold has been making new highs almost daily for the last three months. (The RSI is 84, which is huge). See what I mean: gold is not just a commodity, it’s a currency; it’s a store of value. Over the last few months, would you have preferred to be holding Euros, or gold? The chart makes the answer obvious.
Here’s another spin on gold: The New York Times had an interesting article on A Case for Gold at $5,000 an Ounce. The salient points:
- Based on consumer price inflation, the peak of $875 an ounce in 1980 is equivalent to about $2,300 today, almost twice the current gold price;
- However, the world’s economic output has increased about sixfold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300;
- The money supply has increased dramatically; the amount of gold in existence has not increased that much; Scaling up by money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,700 an ounce today;
The point is that as fiat currencies are printed with drunken abandon, it’s easy to make the case for gold at $5,000 per ounce. I’m not predicting that for anytime soon, but the point, quite clearly, is that gold is by no means at the peak of a bubble today.
What am I doing?
As I reported back on May 6 in my special post on Agnico-Eagle, Goldcorp, Brett Resources and Cline Mining, I took the uptick in gold stocks as an opportunity to do a covered write on AEM.TO – Agnico-Eagle Mines Ltd. and G.TO – Goldcorp Inc. Gold stocks immediately dropped, but then of course were strong this week.
Here are the specifics, using Goldcorp as the example (the AEM trade actually worked out much better). On May 6 I sold the May 46 Goldcorp calls for $1.10. On Friday May 14 I bought them back for $1.60 cents, for a net loss of 50 cents before commissions. I then immediately covered again, by selling the May 48 calls for 54 cents, putting me back to about even.
So what was the point? Why buy and sell options for no net gain? Because on May 6 Goldcorp fell as low as $43.80, and closed the day at $45.75, and yesterday it closed at $47.14. I own the stock, so during that time period my shares increased by over $2 (depending on what time of day you want to take the quotes), so I’m ahead. Even better, had the shares fallen, I would have mitigated some of my losses with my covered writing strategy. Heads I win, tails I win. Low risk, so I like it.
Options expire in a week, so I may look to do more covering if the premiums are there this week.
Finally, some thoughts on CMK.TO – Cline Mining Corporation, covered most recently on March 26 in my Cline Mining: Time to Buy? posting. Since March 26 Cline has gone way up, and then pulled back.
So is it a buy at these levels? Yes. I have a stink bid in at $1.50 to increase my holdings. The RSI is low, and that’s a good indicator that the selling will soon be ending. Or not. I already have a position, so adding to it marginally makes sense at these levels.
In summary, there is little doubt in my mind that the general markets will continue to be volatile, and lower, so I will continue to hold gold and silver stocks, and to hold cash.
As for the general market, some will tell you that the 400 + point rally on the Dow on Monday is a sign that the bull market is continuing. Actually, no, it’s the exact opposite. I counted ted 400 point or greater rallies in the Dow in 2008, and as I recall 2008 was a lousy year. Snap-back rallies mean the market went down big, so they are a sign that we should be leaving the general market, not arriving after the party is over. I haven’t said it yet today, but I’ll say it again: Sell in May and Go Away.
Thanks for reading; see you next week, and feel free to agree or disagree on the Buy High Sell Higher Forum.
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