GOLD

GOLD, the stuff , and the XAU

Hamilton

Once again I acknowledge that I do not understand all the hoepla surrounding gold, nor do I have a clear EW count to lean on. Nevertheless it seems to me, once again, a good time to step aside. Here are a few charts, of the stuff and the stocks by way of the XAU.

Gold Nov 2010 XAU Nov 2010

Also Goldcorp G.

G Nov 2010

A few things are immediately clear. Goldcorp dropped like a stone just as the world as we know it, at least the financial part, supposedly came to an end. When subsequently Europe became unhinged with Greek , Portugees  and other PIG problems Goldcorp barely budged, in fact it flat-lined for almost two entire years as if oblivious to world events. Fortunes were lost on this stock as a result of predictions then by the pundits that gold would go to $3000 and above, now it is just double topping.

Looking at the XAU as a broader guage of gold stocks, it is readily apparent that there is a disconnect between the stuff and the stocks. The XAU has been triangulating for a year and a half and have only recently continued its trek upwards. Even so it is essentially just double topping and could potentially have completed (or nearly completed) its thrust. The next move should be back to the lowest point in the triangle. The disconnect between stocks and the stuff is probable due to the many ETF that have been created in this space creating the artificial demand for the stuff relative to the stocks. This disconnect or non-confirmation does not bode well.

Gold itself has managed an impressive gain over the past few years, but not more than many other commodities like coffee, wheat and a whole host of others. At this point it is approaching the upper parallel trend-line which has been in force for over two years now. It could go a further $100 or so but then will probable drop at least $250/$300 which it seems to do with the regularity of clockwork.

GOLD , the stuff , by way of GLD

Hamilton

gold.june 2010

I do not like making predictions with respect to gold as, in my mind , the stuff is schizophrenic by nature and consequently seldom behaves in a logical fashion. However, just watching BNN a few moments ago there was a gentlemen stating that gold is an excellent hedge against whatever and therefore should be owned. This is blatant nonsense and not at all supported by the facts. If you run a chart of gold against , say, the S&P, you will find that when stocks go up most of the time gold does so as well. In other words ,there is generally a positive correlation which puts the lie to the notion that in times of stress when life as we know it is imminently supposed to come to an end, gold would be a good hedge. As far as being an inflation hedge this too is complete nonsense. In 1984 I inherited a number of Kruger Rands that I immediately took to the bank, receiving US$ 540 a piece for a total of about $11000 Canadian which I then used to buy a swimming pool. Recently I needed to renew the liner and just for the fun of it inquired as to what the pool would cost today – about $40.000 + or nearly four times as much! Gold should be at $2160 or higher if it held inflation. Also as it yields nothing (whereas the pool was great for the kids) the real value should be more like $3000 to $4000, it is not!

    So much for that, now more to the point, gold yesterday had a key reversal day (first a new high followed by a lower low than the day before).  Usually a sign of exhaustion  so it is possible that this is one more signal to suggest that we are already in the 3d wave of the big C wave down! Notice that the RSI and the MACD are confirming the possibility that this may be a high (for  quite a while). Looking at the CRB , or any other commodity index, it is quite apparent that none are even near their peaks of a year or two ago so perhaps gold is just the last one to peak simple because, like Pavlov dogs, most advisors cannot accept that their understanding of gold is not based on fact! A quick look at ABX (Barrick) which is, for the umpteenth time trying and failing to break its glass ceiling, tells you that stocks are underperforming the stuff itself.

Which brings to mind that other great asset, your home. From Maulding’s letter I copied this fascinating chart;

Home prices vs income

I found this of particular interest as some 40 years or so ago, I had learned that since mankind lived in caves , there was a fairly static ratio between income, household income that is and the price of a house, which was supposed to be around  3x. Houses, after all, are primarily bought for shelter/comfort and have no other use, so it is not that unreasonable to assume that , over time, there was and is a fairly constant ratio between what one is willing to sacrifice against the utility derived from the house. Notice that the ratio in the US was 4.1 on average over the period in question after having been at 5.1 So far it has dropped back almost to that level but still has a way to go. Wages in the US have not moved for at least 10 years.

Recognizing that there are circumstances that can move this ratio (level of interest rates, tax deductability of interest, capital gains, real estate taxes etc etc. from one country to another it should still yield a little insight into our own Canadian housing market. In the GTA the average house price is presently around $435.000 and household income variously around $75.000/$100.000 depending on after-tax or disposable , putting the ratio between 4.35 to 5.8X.  I would not expect his situation to stay at these levels. At some point regression to the mean is bound to happen.

On a day that, not surprisingly, the Chinese Leading Economic Index for April was “miscalculated” by 1.4% (147.1 was revised to 145), causing a drop of about 4% in some Asian indexes the above mentioned regression to the mean may happen faster than most would expect.

GOLD, SILVER and the XAU

Hamilton

When gold reaches about $1000 for the second time in a couple of years it is hard not to take notice, all the more so as this area for investing is so confusing and full of mythology. There are the died in the wool gold bugs that see the world coming to an end and somehow the gold will comfort them. At the other end of the spectrum are those that see little more than an industrial commodity. Indeed it is impressive to see how at least silver, ever since the demise of Eastman Kodak and the traditional photo, has not even been able to regain  half of the value  it had when the Hunt bros. tried to corner the market, about $55. The truth is likely somewhere in the middle. Believing in the guideline that things alternate, my guess is that this time deflation will more likely be the problem so I am not (yet) inclined to believe that gold is going to $2000 and higher (where , by the way, it should already be given what is happening lately) Here is what we do know.

Gold Feb 24

Gold clearly double topped or should proceed onwards and upwards immediately. It never corrected to the level that it “should” have at about $580 which begs the question will it. Looking at gold stocks the XAU is probable the best  to go by.

XAU Feb24

Notice that while the metal went up 5-fold, the 13 stocks in the XAU have barely moved from the arbitrary red line I put in the chart as an average for the past 20+ years. Given the non-correlation why would you own stock?

Concerning the stuff itself, the US government in the early 1900s confiscated all gold in the country at about $24 /ounce and then revaluated it to $35 while  prohibiting ownership and commerce in the metal. Not a great prospect either.