The Leverage Of Gold Stocks Over Gold Keeps Failing
Tuesday, 22. July 2008, 16:49:24
Early morning stock market report
I have consistently warned investors both in this blog and on Financialsense.com, that the gold stocks are disconnecting from the price of gold.
Up until the Citigroup CDO bust of October 8, 2007, the HUI idexed precious metal mining shares, HUI, like the energy service shares, OIH, have been the investors gold mine, because they leveraged the price of gold.
Prior to that fateful event, stock jockeys with margin credit and yen carry traders, that is those with access to 0.5% interest from the Bank of Japan, would ride the HUI wave up and down, to great financial benefit: going long on the way up, and short on the way down.
But when financialization failed, and easy money failed, the leverage principle started to unravel; this can be seen in the weekly chart of the HUI indexed precious metal mining shares relative to gold, GDX:GLD.
The six month Yahoo Finance chart of gold, GLD, relative to the HUI indexed precious metal mining shares, GDX, which is seen here, documents that on March 18, 2008, when Ben Bernanke, Chairman of the Federal Reserve, announced the lending facilities of TAF, TSLF, and PDCF, as well as assistance for the JP Morgan buyout of Bear Stearns, the stock market rallied for nine weeks until May 19, 2008.
As gold turned sharply lower, so did the gold stocks -- they disconnected sharply from the price of gold.
Then on May 19, 2008, when the TAF, TSLF, and PDCF rally ended, the glory days of the HUI indexed precious metal mining shares, faded away, as investors traded out of gold stocks for the real thing.
Since June 23, 2008, the yen carry traders, have been the major impetus behind a rising investment demand for gold. Risk aversion to all types of stock investing has been rising: disinvestment in stocks of all types, even gold mining shares, has been on the rise, while invesment in physical gold has been strong.
On Wednesday July 16, 2008 through Friday July 18, 2008, the yen carry traders sold their position in oil, USO, and bought the bank shares, KBE, to take profit, as option week ended; this rallied the stock market, with the S&P, SPY rising and gold, GLD, falling.
Now today with the danger of a tropical storm passing, oil, USO, has sold off, causing gold, GLD, to sell off as well: oil is off 4% and gold is off only 1%. Gold is holding up relatively well, reversing a recent past trend of falling more than oil, as is seen in the chart of gold, reltive to oil, GLD:USO, this indicates the resilient and strong nature of the current investment demand for gold.
Oil's, USO, 4% fall today is propelling the metal mining shares, XME, 4.5% lower, and the HUI indexed mining shares, GDX, 2.5% lower from yesterday: the gold mining shares are once again strong disconnecting from the price of gold, GLD, which fell only 1%.
Clearly, charts show that gold mining shares, such as Barrick Gold, ABX, trading today at 47.94, cannot be relied up as a means of garnering and preserving wealth.
I appreciate Peter Degraaf writing in Safehaven.com article Gold and Silver Stocks of the HUI Index for the facts: "The HUI index for 2006 bottomed in June at 272, then rose until September where it topped out at 366 for a gain of 35%. The HUI index for 2007 bottomed at its seasonal bottom in August of 2007 at 300, then rose until November, where it topped out at 448, for a gain of 49%". (Current weekly chart of the HUI is shown here)
It was in November, 2007, and December 2007, that the stock market entered an Elliott Wave 3 of 3 Decline. The Elliot Wave 3 is the most sweeping of all economic waves. It creates wealth on the way up; and destroys wealth on the way down. Chartist Alf Field documents that we are in an Elliott Wave 3 up in gold, while stocks and bonds are headed into the abyss.
However, I do disagree with Peter Degraff's projection on gold stocks: "Featured is the HUI index for 2008. The seasonal low occurred late April at 390 (blue arrow). Already the index has risen 20%, but the trend is decidedly ‘up’ (dashed blue lines), and the average rise for the past 9 years from cycle low to follow-up peak, has been +40%. Thus if the HUI simply matches the average rise, the target for this cycle move will be at 545. The possibility exists (due to very bullish fundamentals that did not exist in prior years), that the HUI will rise above the 9 year average. If it matches the performance of 2003, then the target between now and the end of the year will be 700 (almost doubling its starting point). If it should better the 2003 performance, then ‘the sky will be the limit’."
He has it right when he says: "My Gold Direction Indicator is flashing a BUY SIGNAL today, July 21st!" A large part of the reason is investor alarm over Ben Bernanke's Federal Reserve announcement of a Resuce Plan for Freddie Mac, FRE, and Fannie Mae, FNM, by extending them a lending facility and possible capitalization. The bond market place reacted strongly to Bernanke's actions and effectively ended the AAA rating on US Treasury bonds by calling interest rates higher on the 30 Year US Treasuries, $TYX, and by calling credit default swaps higher on Treasuries as well.
As debt and credit goes, so goes the HUI indexed precious metal mining shares. Now that the US Treasuries, $USB, are turning lower, the HUI shares, $HUI, are turning lower as well. Said another way, the gold stocks pivot at market turns with US Treasuries: this can be seen in the chart of the gold shares relative to debt, $HUI:$USB, which turned lower with the failure of the TAF, TSLF and PDCF rally in March 2008. And now with risk aversion rising, the lending facility of the Bank of Japan, that is the credit window of 0.5% interest loans for gold stocks is closing, as is seen in last two weeks of down in $HUI:$USB.
Mr. Degraff's presents the underlying factor for the investment demand for gold, its one of the wisest of all investment statement ever made: "While we should not expect price to go straight up, it is nevertheless a reasonable expectation that gold will continue to rise within this channel, (currently rising at a rate of 2.8% per month). The main driving force for a rising gold price is not the banking crisis, nor the high oil price (although they help); the main force is ‘negative real interest rates’, (T-bill rate less C.P.I.). The Fed admits to real rates at -2%, but the actual real rate is probably around -6% or even lower. Historically, whenever real rates are negative (as now) - gold will rise. Price inflation is now virtually a world-wide phenomenon, and shows no signs of abating anytime soon. This guarantees that real rates will stay negative for many months, even years, as interest rates will play ‘catch-up’ (while central banks tighten the screws), but are not likely to move ahead of the curve."
And he adds an interesting fact: "For gold bulls there is yet a pleasant surprise waiting in the wings. The commercial traders and the bullion banks that are ‘net short’, totally missed out on lightening their exposure during the recent bottom. According to MIDAS (www.gata.org) one bank, Goldman Sachs, operating on the TOCOM exchange in Tokyo is currently short 5,900 gold contracts, and this financial institution hardly made any changes in its exposure during the opportunity offered up in June. The commercial traders, including bullion banks, are net short over 220,000 contracts. At some point these shorts will have to be covered. The majority of these short positions are losing money!"
Oil, USO, is getting volatile now; and may be showing a temporary high.
I believe that gold and gold alone is the means now of garnering and accumulating wealth.
All I can say is "Got gold"?
I have consistently warned investors both in this blog and on Financialsense.com, that the gold stocks are disconnecting from the price of gold.
Up until the Citigroup CDO bust of October 8, 2007, the HUI idexed precious metal mining shares, HUI, like the energy service shares, OIH, have been the investors gold mine, because they leveraged the price of gold.
Prior to that fateful event, stock jockeys with margin credit and yen carry traders, that is those with access to 0.5% interest from the Bank of Japan, would ride the HUI wave up and down, to great financial benefit: going long on the way up, and short on the way down.
But when financialization failed, and easy money failed, the leverage principle started to unravel; this can be seen in the weekly chart of the HUI indexed precious metal mining shares relative to gold, GDX:GLD.
The six month Yahoo Finance chart of gold, GLD, relative to the HUI indexed precious metal mining shares, GDX, which is seen here, documents that on March 18, 2008, when Ben Bernanke, Chairman of the Federal Reserve, announced the lending facilities of TAF, TSLF, and PDCF, as well as assistance for the JP Morgan buyout of Bear Stearns, the stock market rallied for nine weeks until May 19, 2008.
As gold turned sharply lower, so did the gold stocks -- they disconnected sharply from the price of gold.
Then on May 19, 2008, when the TAF, TSLF, and PDCF rally ended, the glory days of the HUI indexed precious metal mining shares, faded away, as investors traded out of gold stocks for the real thing.
Since June 23, 2008, the yen carry traders, have been the major impetus behind a rising investment demand for gold. Risk aversion to all types of stock investing has been rising: disinvestment in stocks of all types, even gold mining shares, has been on the rise, while invesment in physical gold has been strong.
On Wednesday July 16, 2008 through Friday July 18, 2008, the yen carry traders sold their position in oil, USO, and bought the bank shares, KBE, to take profit, as option week ended; this rallied the stock market, with the S&P, SPY rising and gold, GLD, falling.
Now today with the danger of a tropical storm passing, oil, USO, has sold off, causing gold, GLD, to sell off as well: oil is off 4% and gold is off only 1%. Gold is holding up relatively well, reversing a recent past trend of falling more than oil, as is seen in the chart of gold, reltive to oil, GLD:USO, this indicates the resilient and strong nature of the current investment demand for gold.
Oil's, USO, 4% fall today is propelling the metal mining shares, XME, 4.5% lower, and the HUI indexed mining shares, GDX, 2.5% lower from yesterday: the gold mining shares are once again strong disconnecting from the price of gold, GLD, which fell only 1%.
Clearly, charts show that gold mining shares, such as Barrick Gold, ABX, trading today at 47.94, cannot be relied up as a means of garnering and preserving wealth.
I appreciate Peter Degraaf writing in Safehaven.com article Gold and Silver Stocks of the HUI Index for the facts: "The HUI index for 2006 bottomed in June at 272, then rose until September where it topped out at 366 for a gain of 35%. The HUI index for 2007 bottomed at its seasonal bottom in August of 2007 at 300, then rose until November, where it topped out at 448, for a gain of 49%". (Current weekly chart of the HUI is shown here)
It was in November, 2007, and December 2007, that the stock market entered an Elliott Wave 3 of 3 Decline. The Elliot Wave 3 is the most sweeping of all economic waves. It creates wealth on the way up; and destroys wealth on the way down. Chartist Alf Field documents that we are in an Elliott Wave 3 up in gold, while stocks and bonds are headed into the abyss.
However, I do disagree with Peter Degraff's projection on gold stocks: "Featured is the HUI index for 2008. The seasonal low occurred late April at 390 (blue arrow). Already the index has risen 20%, but the trend is decidedly ‘up’ (dashed blue lines), and the average rise for the past 9 years from cycle low to follow-up peak, has been +40%. Thus if the HUI simply matches the average rise, the target for this cycle move will be at 545. The possibility exists (due to very bullish fundamentals that did not exist in prior years), that the HUI will rise above the 9 year average. If it matches the performance of 2003, then the target between now and the end of the year will be 700 (almost doubling its starting point). If it should better the 2003 performance, then ‘the sky will be the limit’."
He has it right when he says: "My Gold Direction Indicator is flashing a BUY SIGNAL today, July 21st!" A large part of the reason is investor alarm over Ben Bernanke's Federal Reserve announcement of a Resuce Plan for Freddie Mac, FRE, and Fannie Mae, FNM, by extending them a lending facility and possible capitalization. The bond market place reacted strongly to Bernanke's actions and effectively ended the AAA rating on US Treasury bonds by calling interest rates higher on the 30 Year US Treasuries, $TYX, and by calling credit default swaps higher on Treasuries as well.
As debt and credit goes, so goes the HUI indexed precious metal mining shares. Now that the US Treasuries, $USB, are turning lower, the HUI shares, $HUI, are turning lower as well. Said another way, the gold stocks pivot at market turns with US Treasuries: this can be seen in the chart of the gold shares relative to debt, $HUI:$USB, which turned lower with the failure of the TAF, TSLF and PDCF rally in March 2008. And now with risk aversion rising, the lending facility of the Bank of Japan, that is the credit window of 0.5% interest loans for gold stocks is closing, as is seen in last two weeks of down in $HUI:$USB.
Mr. Degraff's presents the underlying factor for the investment demand for gold, its one of the wisest of all investment statement ever made: "While we should not expect price to go straight up, it is nevertheless a reasonable expectation that gold will continue to rise within this channel, (currently rising at a rate of 2.8% per month). The main driving force for a rising gold price is not the banking crisis, nor the high oil price (although they help); the main force is ‘negative real interest rates’, (T-bill rate less C.P.I.). The Fed admits to real rates at -2%, but the actual real rate is probably around -6% or even lower. Historically, whenever real rates are negative (as now) - gold will rise. Price inflation is now virtually a world-wide phenomenon, and shows no signs of abating anytime soon. This guarantees that real rates will stay negative for many months, even years, as interest rates will play ‘catch-up’ (while central banks tighten the screws), but are not likely to move ahead of the curve."
And he adds an interesting fact: "For gold bulls there is yet a pleasant surprise waiting in the wings. The commercial traders and the bullion banks that are ‘net short’, totally missed out on lightening their exposure during the recent bottom. According to MIDAS (www.gata.org) one bank, Goldman Sachs, operating on the TOCOM exchange in Tokyo is currently short 5,900 gold contracts, and this financial institution hardly made any changes in its exposure during the opportunity offered up in June. The commercial traders, including bullion banks, are net short over 220,000 contracts. At some point these shorts will have to be covered. The majority of these short positions are losing money!"
Oil, USO, is getting volatile now; and may be showing a temporary high.
I believe that gold and gold alone is the means now of garnering and accumulating wealth.
All I can say is "Got gold"?
