Saturday, October 31, 2009

Gold Continues to Outperform Stocks and Bonds

As suggested here earlier this month, the volatility index VIX was indeed at a turning point as suggested by a chart with a positive "second derivative" (slowing rate of descent), soaring on limited news during the week to levels of much earlier this year, when the stock averages were much lower. I have reviewed prior post-recession periods (assuming the "banana" has ended) where the VIX has turned up suddenly. The best info I can find is that it has been unwise to buy the dips on the theory that the bottoming process in the VIX will be orderly. Certainly, nimble traders will look at short-term "oversold" numbers and step in to buy the steep drops such as we saw Friday. If over coming weeks truly awful news appears, I'd be careful. If the news is merely disappointing, such as occurred in 2003 with some weakish establishment employment numbers, while stocks succumb to profit-taking, that would be a different matter.

Meanwhile, the DoctoRx approach is to be out of almost all common stocks except those that are income plays or ETFs in precious metals. This decision occurred last week when the VIX started confirming the pattern described 2 weeks ago.

The gold chart is orderly and structurally is much stronger than the stock averages. Gold has begun to go mainstream, but for now the articles I have seen are as much about sellers as about buyers. If there is a sell-off of more major proportions in the stock market, the prior pattern during th bear market is for gold to fall only when there is panic selling/liquidation. The all-gold ETF GTU has a strong chart that is just now breaking out. It trades at a lower premium to net asset value than the much better-known CEF (Central Fund of Canada). CEF is basically Silver Bullion Trust, which trades near NAV, plus GTU in a certain ratio. In other words, there is no speculation in a physically-backed gold ETF located in Canada. If and when gold embarks on a wild bull market, rest assured that GTU will trade well over NAV, and CEF will trade more than its current 9% or so over NAV.

Meanwhile,'s hiring/not hiring numbers have shown a minimal bump up lately, but today fell back to zero -- workers seeing the same number of firms that are hiring vs. those that are laying off. Of course, it is possible that layoffs per "not hiring" firms is smaller and hires per "hiring" firms is greater than before. However, the current 1:1 ratio is horrible.

Historically, major surges off an oversold bear market-recession bottom such as has occurred this year pause and trend down for some months. In 1975, the downturn was sharp and severe, but the rally into 1976 was to new nominal highs in the stock averages, but inflation was so high that the inflation-adjusted Dow did not come close to its 1965 high; and, 1977-8 were very poor ones even for nominal stock prices.

So far, nothing has occurred to change the central case that expectations are low, which is somewhat bullish, but asset bulls have gotten too jiggy too soon. Again, historical precedent suggests a strong possibility of all sorts of whipsawing and trend reversals. The failure of stocks with improving fundamentals, reasonable valuations, good dividend yields and the like to make any progress suggests that stocks continue in a secular bear market. Long-term holdings should provide dividends and be financially very strong. Under those circumstances, returns better than Treasuries appear likely, but that may not be apparent for many years.

There are no easy places to hide. GTU and SIVR may be amongst the safest.

Copyright (C) Long Lake LLC 2009

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