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Wednesday
Mar062013

The Dow vs. Gold vs. XAU Update: March 6th

What Gold Bubble?

The current gold bull market that has been going on for well over 10 years has never entered a mania bubble phase, especially when you compare it to pervious bubbles of the past. If we compare today’s gold price rise to that of the 1970s gold bull market, or the 1990s tech bubble and the 2000s oil run, we can clearly see that this gold bull market has underperformed on a percentage basis. The three other bubbles took about nine years to go from the start of the bubble before it hit the mania exponential rise in the last 2 years. It seems like starting in year 7 after a small correction, the bubble making process starts to go exponential and can clearly gain several hundred percent in the final phase.

The current bull market for gold has risen steadily for about 9 years, but on a percentage basis we still haven’t seen the exponential rise in a 1 to 2 year period that would clearly mark it as a bubble mania phase. In fact, after making solid gains and rising for 9 years, the gold market has essentially gone sideways over the last eighteen months. The good thing is that in the previous bubbles, after it burst the asset class had given back several hundred percent in the 1-2 years following the peak. Luckily we haven’t seen that in this bull run for gold, not yet anyways, but we could see the cycle bottom later this year. The recent correction has given back about 20% from the peak of just over $1900 to just below $1550.

Can the correction continue and steepen to the downside? Sure, anything is possible, especially in a market that can easily be manipulated. But looking at the charts below, gold never went into a mania exponential rise and has been consolidating sideways for 18 months. This gold bull market run is definitely not like previous bubbles and the further this correction at these prices goes out in time, the more likely we will still see one more mania phase push higher with a several hundred percent rise before we can state that gold is truly in a bubble.

 

Graph courtesy of Macrotrends.org - This chart tracks the performance of gold since July of 2002 against the three largest bubbles of the last 40 years. Past bubbles have shown strong but steady growth for the first 7-8 years before moving into a hyper-growth phase for the last 18-24 months. Each series is adjusted for inflation and is smoothed with a 3-month moving average. 

Dow vs. Gold Over the Last 100 Years and in the Current Bull Market

When we look at the Dow to Gold ratio for the last 100 years we see that the Dow has traded between less than 5 times the price of gold on several different occasions. Most of this time was between 1915 and 1940s, with the exception of the roaring 20s when the stock markets outperformed gold significantly. The only other time we saw gold become over valued compared to the Dow was during the 60s and 70s, this was the last time when gold was in a bull market and it lasted less than 20 years. From the early 1980s to about 2000, the Dow has clearly outperformed gold going from one extreme to another. In fact, at the peak of the Dow to gold ratio in 1999, you could buy the Dow 45 times over gold, but ever since then gold has been outperforming the Dow up until recently. What we haven’t seen during this bull market for gold is a Dow to Gold ratio below 5 which could easily mark gold as way over valued compared to the Dow. In order for gold to be considered in a bubble territory, history has shown us that we need the ratio to be clearly below 5 to 1 on a spike low.

 

Graph courtesy of Macrotrends.org

Now let’s take a look at the recent chart for Dow to Gold over the last 12 years shown below. Starting in 1999, the Dow was priced 45 times gold and since then has given up a significant portion of that ratio. In 2011, the ratio did go as low as 5.7 to 1 when the gold price peaked at about $1900 and ever since then the Dow has been advancing while gold has still been correcting. Today the Dow to Gold ratio is about 9 to 1 and the Dow just made all time highs at 14,286 while gold is sitting at about $1580.

 

While the ratio is working in favour of the Dow for the moment, it would clearly need to break above 10 to 1 on a strong advance before we can say that gold is in trouble and that the bull market may be over. The 10 to 1 Dow to Gold ratio can be considered the line in the sand; this is where a period of great consolidation will take place before any judgement can be made. Assuming gold stays at about $1600, the Dow can easily move to all time new highs and towards 16,000, it will probably do so by May. At that time, the Dow will most likely take a pause and possibly start a correction going into the summer.

The only question is what will gold do once we reach the 10 to 1. Does it enter a strong bear market and retreat further compared to the Dow as it goes on to make all time highs from Fed enduced printing? Or does the bull market in gold reassert itself and the Dow starts a correction as we move back towards a 5 to 1 ratio. Looking at the chart above, the Dow to Gold ratio is still in favour of gold but has started to move sideways. Maybe a new trading range of 5 to 1 and 10 to 1 between the Dow and Gold still holds for the remainder of the decade. If that is the case, we are much closer to the Dow being at a top and gold at a bottom if the 10 to 1 ratio holds.  At some point in the next decade we could see this ratio dip below 5 to 1 which would mean a strong rise in gold compared to the Dow at it enters bubble territory, but we are clearly not there yet.

One thing the charts above clearly show are that gold has never entered a strong parabolic rise into bubble territory. If that was the case, we would have seen a strong percentage gain of several hundred percent in gold within a very short period of time, of which it would be all given back in the same amount of time. Also, looking at the 100 year Dow to Gold ratio chart, the ratio never went below 5 to one which would mark that gold was way over valued compared to the Dow on a historical basis.

The Gold Miners Have Under Performed Everything

As for the gold miners, the XAU is a much broader index used to measure the performance of 30 mining companies. A chart courtesy of James Turk from Gold Money shows how the miners have done compared to gold since 1988. As we can clearly see, gold has outperformed the Dow and the miners during the current Bull Run we have been in. Following the melt down that started in 08, the miners have seriously underperformed and have gone on to historical lows compared to gold. During the 90s when there was technically no bull market in gold and you could buy the mining companies in the XAU index between 6 to 10 grams of gold. The range between 6 to 8 grams of gold for the XAU held between 2001 and 2008 when the bull market started. Since 2008, the miners have seriously underperformed versus gold and you can now buy the index for less than 3 grams of gold. The miners are extremely cheap compared to gold; in fact they probably have never been this cheap throughout history.

 

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Cheers,

 

Friday
Jan112013

Update on Gold and the HUI Gold Bugs Index

In spite of the recent down turn in the price of gold and silver, we still remain bullish on precious metals and its equities. Regardless of its paper manipulated price (if you believe this is currently happening), history has shown us that gold is money (not fiat currencies) and it is no one else’s liabilities. When it comes to gold, as always we suggest owning the physical metals outright fully paid for and stored safely where only you have access to it. If you have a significant holding in the physical, it may be wise to diversify your gold internationally in order to minimize country and political risk by reading Getting Your Gold out of Dodge (GYGOOD). Gold seems to be gaining strong support under $1650 which should most likely hold, so now is a great time to be adding to physical holdings.

We could be at transition period in this bull market where the paper gold price dictatorship comes into question and the democratic free market physical price will start ruling the golden kingdom. The dictatorship by Western central planners over the gold price is ready to be challenged and we may come to a point in history where only votes based on actual physical holdings will be counted. There will be no hanging chads counted on this financial election ballet, its either you own the gold legally and outright, or you have paper promises for imaginary gold (similar to government bond and fiat money) where the question around ownership will arise. Trust us; you don’t want to be one holding paper receipts in questionable gold backed investments engineered by most western financial institutions. Ask yourself, can you trust the source of gold dictatorship to protect your financial assets, especially when it comes to your gold holdings?

HUI and the Gold Miners

When it comes to owning the gold miners, we actually believe we hit the bottom of the market this past summer and then most recently this December. Back in the summer we suggested adding to positions and selling into a September rally for trading positions and then look to add back position in the November/December time frame.

Looking at the HUI chart below, it seems this past December low finished off the correction that started in October. If this does turn out to be the lows, then I see some really positive signs in the charts. Since the beginning of December, the RSI, and MACD have been turning up after being in negative territory and they both look like they have room and momentum on their side to move higher. This means the HUI has a good chance at starting an intermediate uptrend which should last at least a month to two and go towards an initial target of 475 before taking a pause.

What is most encouraging is seeing HUI start to make a new trend upward from May 2012 in a series of higher highs and higher lows, this is a positive development especially if the December lows of 425 hold. What would be more encouraging would be to see the HUI start a new uptrend right now, go to 475 and then blow past it to test the resistance seen at 525 in September. If the gold miners do catch a strong bid and can get past the 525 hurdle that is in front of us, then we can be confident that we really do have a strong rally in the miners and that the uptrend will continue to make higher highs and higher lows moving forward. Eventually it may blow past the old highs of 625 which may come sometime towards the end of this year, but most likely in early 2014.

If you plan on trading these markets, pay attention to the above mentioned numbers on the HUI for places to lighten up on positions and then buy back in on any pull backs in a series of higher highs and higher lows. If we are right on this pattern and uptrend, then the next wave up should take out the September high of 525 and more likely run to 575 (hopefully by spring) before we see a significant correction going into the summer doldrums maybe back towards the 450-475 level. Then I suspect we could see a strong yearend rally that goes well into the early part of 2014 and at that time I expect the HUI to be back close to all time highs. This is what I see happening technically on the charts and hopefully the fundamentals will allow this to play out over the coming year and a half; of course this is based on normal market activity and no market manipulations. This is the strategy we have been planning for TDV Golden Trader subscriber and how to play this new uptrend that could be emerging over the next year.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Cheers,

Monday
Nov262012

Gold Convertibility and Reserve Currencies

Lately we have seen many articles about China and many other central banks continuing to buy and increase their holdings of gold as part of their effort to continue diversifying out of foreign paper currencies. Who can blame them? Would you want to hold paper promises to pay off financial obligations from countries that are essentially bankrupt as a part of your currency reserve? China is doing what is the right thing and in the best interest of China, buying more gold to hold as a part of your reserves in order to make your currency more marketable. They want to make the yuan a competing currency to the other major currencies around the world and they will succeed and owning gold is part of their strategy.

There is some speculation that China is increasing its gold holding to make the yuan a gold-backed currency in an effort to make it a world currency reserve. While it is an interesting concept, it will most likely never happen. In order to back a currency, their gold holdings must increase or decrease alongside the increase or decrease in the number of currency units in the system. A gold backed currency would entail having a fixed rate of convertibility for each ounce of gold to a specific number currency units issued by that country. There is probably no country in the world that will honour convertibility on a fixed basis, it would be financial suicide and is part of the reason why Nixon closed the gold window. Also having a gold backed currency would mean the country would be continually increasing gold purchases to match the inflation of currency units issued. Tracking the amount of gold that is backing currency would also be next to impossible since there is a complete lack of transparency around the amount of currency units being issued by central banks and the amount of gold held by them. Currently currencies can be converted to gold on a floating basis at market price, but going to a gold backed currency would likely never happen.

China is making its currency more readily available for trade, thus bypassing the US dollar and making its currency the payment of choice for its export. Currently the yuan is fixed to the US dollar, but over time it will most likely have to adopt a floating currency like the rest of the world. Until then, expect China to continue adding to its gold reserve in an effort to make the yuan a competing currency for international trade. The US will lose its reserve currency status over time (most likely some time this decade) but it most likely will never go away completely and the yuan will not take over completely. We will most likely just have bi-lateral trade agreements with several national currencies being used for payments. The yuan is just the new kid on the block but there is still the Euro, British pound, Japanese yen, the US$ and probably the IMFs SDR that will also be used. Even the Canadian dollar has been strengthening lately, as the IMF said it’s considering classifying the Canuck buck and the Australian dollar as reserves currencies.

While gold may not be convertible at a fixed rate any time soon, VTB Group is Russia’s first lender to sell perpetual bonds and debt linked to the country’s benchmark equity index and is now selling the nation’s debut notes tied to the price of gold (see Bloomberg article). VTB is offering 1 billion rubles ($32 million) of securities that will be redeemed in December 2013 that will pay a rate on returns based on the gold price up to a limit of 20 percent. Being a pioneer in the Russian market, VTB is the 2nd largest bank and will provide pension funds an alternative to invest in gold without the limits placed on commodity holding by regulators. The article even talks about how even Western financial institutions such as JP Morgan, Barclays, and Credit Suisse are issuing notes tied to gold this month. This is just another example of how gold is becoming an important financial asset. The need to diversify and protect wealth becomes more apparent in an era of currency wars which will destroy the value of fiat money. Financial institutions realize that central banks will continue down the path of printing money, inflation and currency devaluation, there is no other choice. They see the writing on the wall and are now capitalizing on a new markets by providing financial assets tied to the price of gold price.

All these currencies will continue to inflate and I doubt the bankers will allow gold to become a competing currency for everyday transactions. However its role as a store of value will continue to appreciate as long as fiat money continues to exits. So we should be happy that government and central bankers will continue to use and expand fiat currency, it makes their currency worth less and gold will continue to benefit in the long run.

What we are seeing now, with short term fluctuations in the price of gold is just market noise and short term trading opportunities created by the gold market high frequency traders and bullion banks. This will come to pass as the price of gold gets smoothed out and then slowly advances higher with a two steps forward one step back dance along a rising trend. All this talk about gold by mainstream media is just market noise to try and explain very short term movements in price. They have very little understanding of gold and the role it will play in the future as a store of value. Being the good slaves and puppets for the central bankers, MSM is only good at misdirecting the public and they are paid very well for doing so. Once gold finishes this consolidation, the price should continue to advance to all time highs in 2013 and 2014 with a possibility of doubling from the current price to reach a minimum target of $3500 in the next few years.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Regards,

Wednesday
Oct242012

Technical Charts For Gold, HUI Index And The US Dollar

Gold Analysis

Looking at the gold chart below, we can see that gold has been correcting over the last two weeks. When applying some technical analysis to the gold chart, we can clearly see that there would have been overhead resistance at $1800 since most of the year gold has traded between $1550 and $1800. A few weeks ago, we also noticed a big build in the short position on the Comex’s Commitment of Traders report COT by the commercial and bullion banks. The effort to stop gold’s advance at a key resistance level was successful in part because of the huge increase in the short position at that level, which is why we knew to take some profits and that would be an ideal place for a correction to start.

Now that the correction has started and gold is giving back some of its gains from the summer, the question now remains: How much of a retracement will we see on the price of gold? While the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold.

With gold at $1701, it is currently (noon on Tuesday Oct. 24) sitting below the 50 dma at $1720 which is above the 200 dma at $1662. The first line of support for this coming week was at $1720 and if it holds above the 50 dma the correction in gold could be over. If we continue to see weakness in gold over the next week or two, we can expect the correction will continue later this month and going into elections. This is something I suspect could happen if the overall markets continue to remain week.

Looking at the chart we suspect that buying will come in at the new support price range at about $1650 (+ or - $20) if the 50 dma at $1720 doesn’t hold this coming week. One thing to note is that the 50 dma crossed above the 200 dma around the end of September, which is an over good sign. However it needs to remain above the 200 dma for this advance higher in gold to hold before it can go on to make new highs. We remain optimistic that gold will either bounce here at the 50 dma of $1720 or at a retest of the 200 dma of $1662, which would still be bullish over all. If you are looking to add to your physical gold holdings and diversifying them internationally, scaling in now and at the $1650 price range would be a good place to start adding to current or new positions. Keep in mind that the support at the 200 dma may not hold, which means the price of gold can retrace right back to longer term support at $1550 which has been in place all year. However, I give it a small probability that we will correct back to that price range as we are entering a seasonally strong part of the gold cycle in November and December.

While I hate making predictions on what the gold price will do short term, I suspect it could consolidate between $1650 - $1750 for the remainder of the year. While we are entering a stronger part of the gold season and the fundamentals are lined up to suggest higher prices, we have conflicting events such as a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling to deal with for the remainder of the year. With 2 strong opposing forces acting on one another, the price of the metal may consolidate around $1650 - $1750 for some time until either the bulls or bears clearly take this market in one direction or another. Until then, all we can do is sit around and wait for a clear break outside the trading range that has been established over the last year.

HUI Gold Miners Index Analysis

Just like gold, the HUI index is also correcting since September. Earlier last month, we thought index would trade to 520 before meeting resistance, which we can clearly see it has done and it is now in the process of correcting. It would not be unusual for the index to give back up to 50% of its recent gains from the summer lows. Back in July, it looks like a low of 385 was made on the index and a recent high of 525 was achieved back in September; this is a 140 point gain. So if the market was to give back 50% of this gain or 70 points, we can expect the HUI to retrace back to about 455, which would be the next best time to add to positions.

Currently the HUI is at 495 which is still above the 50 dma at 482 and the 200 dma at 465, which is a positive alignment if the index can hold these gains. One thing to pay attention to from the chart below is the price action on the HUI from April this past year to the end of August, a period called the summer doldrums. During this period support came around 385 and was tested 2 different times, while overhead resistance was at 450 which also was tested a couple of times. Back then 450 was overhead resistance which was finally broken with a strong move higher during September; we suspect this will now become the new support level while 520 will act as resistance.

While we still remain cautiously optimistic that a new uptrend has started longer term, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance as a new trading range will be set. In general, support around 465 (the 200 dma) is where we would look to initiate new positions in some of the senior producers and hold them going into the New Year. At some point, I do expect overhead resistance at 520 will be breached to the upside at which point the HUI index could run to 580 and higher, but that would mean gold would have to be on fire and trading above its overhead resistance at $1800 on a holding basis. Until then, the miners will probably trade in a range where the HUI fluctuates between 460 and 520 as long as gold stays above $1650.

US Dollar Analysis

While the US dollar is looking good at the moment and getting a nice little bounce higher lately, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past August.

All we are seeing is a current bounce from oversold levels on the RSI and MACD and it already seem to be stalling out. The US dollar could move slightly higher to test the 50dma of 80.38 or the top of the new down channel at 81, but the rally should stop there. One thing to note is that the 50 dma just crossed below the 200 dma in the last few days, that is not a good sign. Once this relief rally is over, the dollar should continue downward and possibly to the bottom end of this downward channel. This could mean a definitive move below recent support around 78 on the index, if this happens and support is broken, it could lead to a cascading move downwards towards 75 or possibly 73.75 as the next major support level. If the dollar does break down, gold and silver will shoot much higher.

The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed.  If the dollar goes sideways, G and S will also trade in a sideways channel. More than likely we will get some clear direction once the election are done.

 

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.   Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Wednesday
Sep192012

Project Funding in the Mining Sector  

Over the past summer we suggested that we would see more money become available to quality mining projects from banks sitting on tons of cash ready to loan out on credit worthy projects in their ever increasing need for higher yield. In our September 11th, 2012 blog post we stated that “Project funding will become available via bank loans on favourable projects; we can expect alot of money coming into the resource space and new projects will move towards production”.

Here is an exerpt from the TDV Golden Trader newsletter sent out to subscribers on July 23, 2012: 

I suspect alot of that money will come into the commodities market and especially into the mining sector. There are many great projects which show great preliminary economic studies with today's current prices of commodities. Banks can provide the funds necessary to help put projects into production by way of corporate bonds or loans with higher interest rates. Even with a 7-10 % rate, many of these projects are very economical, provide a positive IRR and have short payback period (3-5 years). Potential producers should really look at this option for funding their projects, the interest rates are reasonable and this would eliminate the need for further dilution.

It is also in the bankers’ best interest in making these loans to the various development projects for many reasons. First, they will be making a much higher positive yield over the next 3-5 years than most other fixed income investments. They can probably become first in line as a creditor guaranteeing their investment and using the company assets and reserves to help determine valuations as possible collateral. Also, their funds are probably safer at a cash flow positive producing mine versus buying bonds of a pig country that can only make interest payment by robbing Peter to pay Paul. In their need to make secure investments, banks can also guarantee their payments will not be interrupted by keeping a floor under the commodities prices. This floor price can be achieved by forcing the producer to hedge part of their production at current prices, thus guaranteeing a predictable minimum future cash flow. 

Lately we have seen more debt offerings, issuance of debentures and credit being given to mining companies who can prove strong economics on new projects or expansion to current mining operations. Here are few examples from the last few months: 

Stornoway Diamond Corp. (TSX:SWY) has entered into a mandate letter with seven financial institutions concerning debt financing for the company’s Renard diamond project in northern Quebec. The mandated lead arrangers are Bank of Montreal, Caterpillar Financial, Export Development Canada, Investissement Quebec, Nedbank Capital Limited (London Branch), Societe Generale (Canada Branch) and The Bank of Nova Scotia which will arrange senior loans of up to $475 million, the company says.

Lake Shore Gold Corp. ("Lake Shore Gold" or the "Company") (TSX:LSG)(NYSE MKT:LSG)  announced today that the Company has completed the previously announced public offering (the "Offering"), on a "bought deal" basis, of C$90 million principal amount of 6.25% convertible senior unsecured debentures (the "Debentures") maturing on September 30, 2017.

Kirkland Lake Gold Announces $50 Million Private Placement of Convertible Debentures - The Debentures will mature on June 30, 2017 (the "Maturity Date"), unless earlier redeemed, and will bear interest, accruing, calculated and payable semi-annually in arrears on June 30 and December 31 of each year, at a rate of 6.0%. 

While the quality juniors have been able to raise capital in the last year, most are still finding it difficult to raise funds. In the past, small producers and exploration companies relied on the capital markets to raise funds by way of private placement and issuing shares which have been highly dilutive and overall negative for investors in these companies. We have a feeling that many juniors will be able to raise capital in this market, but they will have to be creative in their approach to getting funding deals done without diluting shareholders.

Private Sector Enters the Gold Mining Industry

However, the nature and investing climate for the mining sector has changed recently. We are now seeing investment funding and credit becoming available to mining companies from the private sector. Cluff Gold (TSX:CFG) a West Africa focused gold mining company recently announced a strategic alliance with Samsung C&T Corporation where Samsung will provide an unhedged US$20M facility to Cluff Gold in a Memorandum of Understanding (MOU). The MOU also provides a framework for the potential long term funding of Cluff’s Baomahun project and other development opportunities.

In my opinion, Samsung, being a visionary in the electronics industry, has realized it needs to make strategic investments with its cash in order to protect purchasing power and secure availability of gold and silver to be used in its products. This is a game changer and as fiat paper currencies get destroyed by the central banks and governments, the smart money will continue to gravitate towards gold, the true store of wealth. This could be the start of a new trend where private sector corporations start paying attention to gold as currency and hedge against paper assets. I would expect this trend to continue as more private companies and fund manager will find a need to diversify out of paper money and into the currency of last resort: gold. While it may be difficult for these companies and institution to buy the physical metal on the open market, the smart money will go right to the source and get invested where profits can be maximised, which means going to the miners.

We are in next phase of this bull market in precious metals, and gold and silver will continue to move higher now that printing money to infinity has become official policy. It will be the miners who are still undervalued and have growth potential that will really benefit from this next round of QE and rising gold prices. Expect to hear more stories about investments coming to the mining sector and as this trend grows, so will the attention being paid to the minors. While the ETFs may be a good way to trade the price of metals rising, the leverage and exponential gains will be made with selecting the right mining company. The next leg of this bull market will benefit the miners and they could easily outperform the gold price over the next few years, this is where we see the real gains to be made.

I will be speaking at the Cambridge House Toronto Resource Investment Conference on September 27 and 28, 2012. You may register here to attend the show. I will be presenting a 30 minute workshop on Friday the 28th at 4:00 pm on "Trading Opportunities: Looking for Catalysts and Developing Strategies to Trade Precious Metals Shares". On Thursday morning I will also be a panel speaker alongside Bill Murphy, Chris Powell, and Jay Taylor discussing gold’s diminishing supply and increasing demand.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.