Wednesday, September 07, 2011

Gold Clocked, Big Markets Relieved

SOUTH TEXAS -- As we prepare to make our way back to our Houston-area HQ, we thought we would share a few of the charts we are focused on during this pretty uncertain period.  We won’t go on and on about them, but we will give the gist of what has our attention with them this morning.

First up, the Big Markets, represented below by the S&P 500.


(S&P 500, 3-year weekly. If any of the images are too small click on them for a larger version.) 


So far it looks to us that despite all the worry, confusion and angst in the world today the S&P 500 has yet to cut a new low since the low three and four weeks prior. 

Darn if it doesn’t look like the S&P is doing an “echo” to what it did last summer.  Notice, please, that even though momentum on this chart is decidedly negative, that the lows being made are actually rising.  Our view is that if the world was about to plunge off the rails again, we would likely have already seen new, lower lows on this giant-cap index.  Perhaps Dr. Bernanke’s making it unattractive to hold bonds for the next two years has helped to put some support under equities?

Next up, the AMEX Gold Bugs Index attempted breakout out of a wide consolidation since about December may have been given a body blow by this morning’s smash-down of gold.

(HUI, 1-year daily.)

The only point we wish to make this morning is that the big-cap mining stocks don’t really need gold to be $1,900 the ounce to have a pretty good time.  Our view is that they are likely to be very profitable and throw off strong to enormous cash flow at any gold price above about $1,500 the ounce.  Another way of saying that is if the large cap miners cannot be very, very profitable at $1,500 the ounce, they would have to be sabotaging their business. 

We believe that up to now there has been a general disbelief among portfolio managers and large funds that the gold price could be sustained at “high levels.”  Thus, mining shares have lagged the gold price.  We believe that we are about to enter a period of convergence, where higher, sustained gold prices and higher cash flows/profits do the money manager convincing.

It wouldn’t be all that surprising to see one false breakout before the “real deal,” kind of like we saw in November of 2009.  Let’s hope we don’t have to wait nine months for the “real deal” breakout to surface as we did then.  We rather doubt we will be waiting that long for it.   We’ll see on that one too. 

Finally, as we get back on the road to the ranch and our HQ near Houston, we would just like to remind everyone that this has been the longest period without a significant correction for gold (on a weekly close basis) since the Great Gold Bull began.  Would it be all that surprising to see a period where a negative bias will be ‘profitable’ for a short period just ahead?

(Gold LT bias chart here please.)

Throughout this entire gold bull move the periods of time that a bearish bias was profitable have been brief.  They are loosely represented by the pink zones on the chart above.  The clear message of the chart above is that a bullish bias has been much more likely to be profitable than the opposite since about 2001.  Is that about to change and for a long period of time?  We are very skeptical that such a change is in the offing.  How about you?   

We will leave it there, except to say that in each case where a negative bias worked in the past it was ephemeral and a little bit like running a rattlesnake farm.  Sooner or later one is going to get snake bit running a snake farm.  Sooner or later one is going to get hurt by betting on the short side of gold.  The chart above ... and we think the odds ... still favor a long bias for the most popular precious metal.

Of course the obvious other conclusion of that chart above is that up to now, it sure has paid, and paid handsomely to buy the heck out of the very harsh dips for gold.

If we do get a decent correction going here in September/October we can bet there will be legions of people trying to do just that. 

That is all for now but there is more to come.


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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