Wednesday, November 11, 2009

Gold Price Chart Reminiscent of NASDAQ Circa Late 1990s.

A few days ago I pointed out in Gold May Be Making a Short-term Top that gold is being sold in Harrod's in London and in vending machines in Germany, that long-term retail "investors" who are not needy are turning in gold for paper currency, and that the entire concept of the "little guy" trading his capital for an electronic blip with the symbol "GLD" might in the fullness of time be seen as silly as trading his capital for a share of a real company with the symbol CSCO at 100 times earnings. (Meanwhile, CSCO went on to about 150 times rising earnings if memory serves me well.) Perhaps there's really "enough" or even "too much" gold around. After all, if governments are going to revalue gold, almost any amount will do, correct? They can buy GLD's gold for whatever they want and then revalue the gold upward. (That's assuming GLD has the gold it says it has.) Or governments can mark the gold in their vaults with an identifier and say that only that gold has the premium price.

An alternative and probably better title that I considered for the post was: "Is It 1999 for Gold?", which I have modified in this post's title. The idea was to recall the 1990s and the rise of the NASDAQ. It kept going up year after year and ended with the blow-off period of late 1998 to early 2000. The key decision was to be long or not long the NAZ. Whether one sold into strength or not, the mistake that ruined many sensible value investors was shorting it, or ignoring it.

So long as the fundamentals of the dot.coms looked good, the bubble continued. The same looks to be true of gold. I have pointed out the virtues of gold all year, from much lower price levels, and noted the breakout to all-time price highs of the 50-day and 200-day moving averages in late summer, before the price rose.

Every time this decade that gold has broken out from a lengthy base, two things have happened. Gold has gone much further than expected, and it has corrected down after the strong rise, if only briefly, to the break-out point. (*Addendum: the exception is July 2006-July 2007. Sorry. No guarantees in any case!) In supply and demand terms, the speculators are long gold and the commercials are short some of their physical gold. It looks as though the specs have more staying power than the commercials lately. Gold is acting lately like a more sedate version of a hot NASDAQ stock today. It is up today on the good news that Japan's machinery sector grew faster than expected, that China grew faster than expected, and the bad news that the Bank of England is still so concerned about the British economy that it continues to have an "open mind" about more "stimulus" (not that I believe that most Governmental debt stimulates anything except the sector that gets to sell and trade that debt).

Gold is rising because it is rising. The cover story is the miserable financial situation of governments and their printing press technology and Ben Bernanke's famous fleet of helicopters and so on. Peter Costa said on CNBC a day or two ago that hey, the U. S. Government is going to be bankrupt in a year and a half. We all get it. Things stink. Banks are crooked and will never make a good loan again.

Now, I have no idea whether there is any gold in Fort Knox, or whether what is there is all that is supposed to be there. I have no idea whether the U. S. Government is as fiscally imprudent as I fear it is and will be. But everything I know and don't know is in the market price.

If as I did you over-loaded up on gold this summer when the moving averages quietly showed that the commodity had already broken out (was under accumulation) and that the spot price would likely follow, it is a reasonable strategy to sell into strength.

If you are "most people" and own little or no gold, that's a different story.

I ignore gold mining stocks.

The most bullish sign for me about gold besides having great sponsorship from Louise Yamada, Carter Worth, David Einhorn etc., is that the gold-only ETF Central GoldTrust (symbol GTU), trades at a very small premium to NAV. It has not been discovered the way that its sister fund Central Fund of Canada (CEF) has been discovered. CEF trades at an 8% premium to NAV though it holds gold and silver; and the same fund family has a silver-only ETF that actually trades at a slight discount to the value of the silver it holds (trades on Toronto's exchange only as of yet). If and when gold gets truly silly, one would expect GTU to be discovered.

Outside of physical metal, I have exited all my GLD. GTU appears to me to be all bullion, all the time, no derivatives, well-audited, and currently is my preferred way to own gold. Matters can change rapidly, but a look at the recent price action of GLD and GTU will see that GTU's premium to NAV has shrunk recently and thus the stock has underperformed. GTU has a larger bid-ask spread than does GLD, but GTU's spread is not large, though it is not suitable for day traders.

To summarize, gold is reminiscent technically not of the way it traded in the 1970s, when it had down years as well as up years, but of NASDAQ in the 1990s, which also went up every year and finally just went vertical after a scary correction. Under that analogy, which implies no comparison of gold's uses vs. those of tech companies, it is unknowable if a 1999-type year will occur and if so, whether it will occur. If that sort of year does occur, let us hope that the headlines that provide the impetus to buyers to buy gold at rising prices will not be as grim as many fear.

Copyright (C) Long Lake LLC 2009

1 comment:

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