Friday, August 19, 2011

Gone Fishin’, We Stand Pat for Now

Silver chart a convincing indicator - for now.  

We had scheduled a hiatus for this next little while and we are about to head out for the first leg of it, but before we hit the road… 

From the Chart Book.  In 2001 it took over 40 ounces of gold metal to “buy” the Dow Index.  In just one decade the Dow:Gold Ratio has plummeted to about 6 ounces of gold.  Darn if it doesn’t look like Rob McEwen’s prediction of the ratio falling to 1 or 2 ounces before this gold bull is done is on Rob’s glide path.   

20110819DowgoldRatio

Dow:Gold Ratio since 1992. Gold buys about 6.7 times as much of the Dow companies as it did a decade ago, a testament to the loss of purchasing power of fiat currencies.  If any of the images are too small click on them for a larger version.  

Continued … 

Troubling and ominous, the Philly Bank Index retests the lows from last week, even moving below them a bit.  This is our most troubling indicator, by far.  

20110819BKX

Philly Bank Index, 5-year, weekly.  

News out of Europe is distressing, with little clarity and an abundance of uncertainty. Gold is a beneficiary of the fearful tenor of the day, hurtling dangerously higher into uncharted waters, currently near $1,850.  Confidence is precious, and seemingly getting harder and harder to muster, but two signals have held our hand, preventing us from getting smaller in our positioning in the smaller, less liquid and more speculative resource companies.  (Well, in most of them anyway.)  That’s for the small portion of our overall speculating ammunition that we devote to the riskiest, but potentially the most profitable companies we know of when confidence returns (and it will return).   

The first signal that has held our hand is the Market Vectors Junior Miner Index (GDXJ) itself.  Have a quick look below.

20110819GDXJ

GDXJ, weekly.  If the image is too small click on it for a larger version.  The one message in this carnage-filled battlefield today is that the GDXJ is holding its position.  In a market like this one, we see that as one and the same as latent strength.  There must be a reason that the Little Guys are not being cast overboard with abandon during the crisis of confidence, mustn't there?   

We recently communicated to the Vulture membership that if it looked to us like the world was about to plunge off Sovereign Debt Cliff and into Chaos Abyss, then we would be compelled to consider reducing our positioning in some of our Faves by half.  (We also mentioned a few that we felt compelled to hold onto no matter the news.)  

What makes our conjuring along these lines so doubly difficult is that there really isn’t any good way to hedge our positioning in most of these promising, but very volatile issues.  We can layer in a hedge using the GDXJ puts as a poor substitute, but it is an unsatisfactory, too-thinly traded vehicle, except for a catastrophic, but expensive hedge at the moment.  A December $32 GDXJ put costs about $3.30 as we write this Friday afternoon.  The index would have to fall 10% plus for the insurance to kick in at a cost of more than 10%. That’s “protection” we would rather sell than buy, but the open interest is a meager 202 contracts.  No thanks.  A hedge using the GDX (including larger companies) isn’t as good for protection for the Little Guys we like to game, and the price of “insurance” there isn’t any better.  

Since we waited for pretty cheap prices before entering our positions, the best of the best “insurance” in the event of a calamity is to reduce exposure then.    

We focus on a number of key indicators for guidance and in so doing we are listening to the collective “wisdom” of countless thousands of investors, money managers and traders worldwide.  

We look, for example, at the HUI for clues.  We study the action in the VXO volatility index, in Copper and other industrial materials, in energy prices and the OIH for signs … and in the Philly Bank index noted above, among others.  

The picture that emerges is one of controlled chaos and heightened fear, but we cannot yet say that we are convinced that our Little Guy market SUV has reached the point of no return at the edge of the chasm … and the action of this next indicator is the second of the two hand-stopping barometers that have convinced us to stand pat.  Remember, that’s as we are about to embark on a hiatus away from the computers, phones and civilization for a spell.  

The second indicator is silver.  Just below is a chart of SLV as a proxy for the second most popular precious metal. 

20110819SLV

SLV, 1-year, daily.  Note that SLV is close to challenging its most recent turning high, which is likely also a short-covering trigger.  

With gold sending shorts to the wall, surging up to and through all known resistance.  With Venezuela calling in its 200 tonnes of bullion from banks in London and the U.S.; with so much capital trying to hide anywhere it feels safer than in sick and/or dying fiat currencies and zero-paying government debt, but with a sure-enough bank run trying to get underway in Europe, notice please that silver is not, repeat not, selling off.  

Instead it is, as we write Friday afternoon, attempting to challenge its most recent highs and threatening instead to force another short-covering surge. 

Really, would silver be doing anything but selling off if our equities SUV was about to plunge into Chaos Abyss?  That’s certainly what it did in the summer and fall of 2008, wasn’t it?  

You know, silver really is close, very close to a short-murdering rocket launch again. 

20110819rocket

That's it.  We've seen enough.  Right, wrong, win or lose, we are standing pat with most of our Little Guy positioning as we hit the road for points west.

Aren't you glad you hold physical gold and silver in these troubling times?  

We will be checking in from time to time, of course, so don’t be a stranger.    

Until next time, keep watching the most important indexes and as always MIND YOUR STOPS.  


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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter


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