The move in gold since late October cannot be maintained. Is there a rest or reaction ahead? Let's see what the indicators say.
ONLY FOR LOSERS
I read an interesting article in one of the daily newspapers about investing in gold (bullion). The author made the case that investing in gold is a losing proposition and inferred anyone investing in gold must be nuts. His basic point was that if you had invested in gold "at the top" in 1980 when it was above $800 and held on to it you would have lost your shirt in the next couple of decades as gold dropped below the $300 mark. Now, do you see the fallacy in this kind of argument? There are a couple.
First, no one with any amount of technical knowledge invests his capital and then forgets about it for years. A fundamentalist might but even there they should check their investments occasionally and act accordingly. Why would anyone hang on to a losing bet?
The biggest fallacy here is "investing" in gold in the first place. Yes, I know. It's what people are supposed to do if they think that the U.S. Dollar is going to become worthless. But let's face it. The dollar may lose its value over time but it is not going to become worthless overnight. If you are right then there will be plenty of time to protect yourself from catastrophe.
So, what should one do if they think that the dollar is going to decline and become worthless? Let's perform a little experiment. Suppose, in 2000/2001, you guessed that the dollar was about to undergo a serious drop (correct assumption). Now, let's suppose that you guessed that gold was therefore going to increase in value (another good assumption). What to do?
Well, you could have converted your dollars into gold bullion and held it. Gold advanced by about 340% versus the dollar since the 2000 period so you would have not only maintained your capital value versus the dollar but improved it significantly.
Now, let's suppose that the world's greatest intellectual ever to hold the Presidency of the U.S. should come up with some kind of policy that results in the dollar regaining its previous value. Remember, this is just an experiment not reality. Gold would therefore be expected to drop back to where it started from. The "investor" in gold would break even (versus the dollar) after years and years of missed investment opportunities. Was there a better option?
Well, one could use his technical knowledge and sell his gold holdings sometimes after the top based upon the indicators yelling SELL, SELL, SELL (there are many technical techniques to provide that signal). You could then sit back, relax and watch as the gold "investor" is yelling, screaming and jumping up and down as gold declined. You are now sitting there with $440 U.S. dollars for every $100 initially invested and are now seeing it gain in value as gold drops. BUT was there an even better original option?
Suppose you had "invested" in gold stocks instead of gold. Using the Merv's Indices for the experiment as they are based upon the AVERAGE weekly performance of all Index component stocks, what would have happened?
If you had invested in a basket of the highest quality gold stocks (Merv's Qual-Gold Index) your gain would have been 770%.
If you had invested in a basket of secondary, or second tier, stocks (Merv's Spec-Gold Index) your gain would have been 4300%.
If you had invested in a basket of very speculative stocks (Merv's Gamb-Gold Index) your gain would have been 5800%.
So, why would one "invest" in gold rather than gold stocks? You can't eat gold. Sooner or later you will have to convert back into dollars to use for purchases and the like. BUT you can do the same with the stocks.
Leave gold bullion to the short and intermediate term speculators and traders who use a variety of techniques (such as margin) to enhance their speculation efforts.
You will note that I did not mention the use of margin in the bullion purchase. Using margin is a speculating not an "investing" technique and has no place in long term investing.
The moral of this story is that market timing IS POSSIBLE by the use of a variety of technical techniques. USE IT. Buy and hold IS for losers.
GOLD
LONG TERM
The past year has been a pretty good one for gold. With only a couple of rest periods gold has been in a steady climb well into new all time high territory. It has now met most of my long term projections. The primary projections not yet met are the ones to the $1575 and then to the $2050 levels (although there is a projection to $1375 also).
Looking back from a long term perspective the momentum indicator is still giving me somewhat of a concern. It is nowhere near its previous high from March of 2008. From a shorter term standpoint this is not much of a concern as the momentum is rising but from a long term standpoint it gives us a negative divergence that needs to be watched. The momentum peak in May of 2006 was at an even higher level for a greater concern. However, caution is one thing, what's happening is another. What's happening is what is important at any given time.
The price of gold remains well above its long term positive sloping moving average line. The momentum indicator is continuing to make new highs during this new one year bull move and remains above its positive trigger line. The volume indicator continues to roar into new all time high territory. As far as the long term rating is concerned, BULLISH is about the only rating possible.
INTERMEDIATE TERM
Unlike the long term the intermediate term momentum indicator is very close to the high mark it was at during the previous march 2008 high. It is also not that far below its 2006 highs. The intermediate term strength seems to be almost on the same order as its previous upside moves. A little concern here but not much.
The price continues to move higher above its positive sloping moving average line. As mentioned, the momentum indicator continues to move higher inside its positive zone and above its positive trigger line. The momentum indicator does seem like it might be topping out but needs more time to make it obvious. The volume indicator is positive and well above its positive trigger line. All in all the intermediate term rating can only be BULLISH at this time.
SHORT TERM
Things are still humming along just fine from the short term but the trend is getting a little long and ripe for a reaction. There is no significant warning of a reversal ahead from the short term although on the very short term the Stochastic Oscillator has given us a negative divergence and some sort of reversal may be expected. From the indicator standpoint the price continues to move above the short term positive moving average line and the momentum indicator remains in its positive zone above a positive trigger line. The short term rating remains BULLISH for now.
As for the immediate direction of least resistance, with a Stochastic Oscillator in a topping mode already dropping below its overbought line one must become cautious here. It looks like the downside is the direction we are heading towards but there might be another day or two of lateral action.
SILVER
Looks like silver is back on track out performing gold. It has now reached the second of my 4 projections leaving the ones to the $24.00 and $32.50 yet to come. As shown, it looks like silver is acting very well from the P&F standpoint. The chart has been right on since silver bottomed out and started this latest bull move.
There is a concern for the continuation of the bull trend in silver, at least from the intermediate and short term. Since the high in the respective momentum indicator reached in mid-Sept the momentum indicators have been showing a reduction of strength during the new price high in mid-Oct and even a further reduction of strength during the recent move into new price highs. This continuing weakness in momentum too often results in a reversal of trend by the price as the continued upside price movement cannot continue without strength. It does look like we are in a topping pattern (not yet confirmed) and this just may be the start of an intermediate term reaction. Something to watch out for and to be prepared should the topping be confirmed.
PRECIOUS METAL STOCKS
Overall it was another good week for gold and silver stocks. Although the major North American Indices advanced by less than 3% the Merv's Indices, in general, were considerably better than that. The average price of gold and silver stocks in various categories increased by up to 8.0% (Merv's Qual-Silver Index). The average price of the 160 stocks in the Merv's universe advanced by 3.7% while the top 100 stocks traded on the North American markets (by market value) gained 4.7% on the week. The Merv's Penny Arcade continued to move higher although at a somewhat restrained rate. It gained only 2.8% on the week.
Although the general sector moved higher there was no real excitement in the moves. One way I like to gauge the excitement level of the trading activity in the stocks is to see how many stocks gained (or lost) more than 30% on the week. Looking through the universe there were no 30% plus movers this week despite the general healthy upside moves overall. Only the Penny Arcade showed stocks with 30% plus moves. There were 3 out of the 30 component stocks with such action. I guess there still is some excitement in the pennies although this is tempered by many that were in the negative side. There was one stock in the universe with more than a 30% move. That was Canplats Res. with a 38% move this week. That was, however, due to the release of information that it was being taken over by Goldcorp.
As we have seen recently the Merv's Penny Arcade Index is roaring well into new all time highs. The Merv's Gold & Silver 160 Index (my universe), the Merv's Gold & Silver 100, the Merv's Qual-Gold Index and the Merv's Spec-Gold Index are all in new all time high territory. The major North American Indices are still not there yet and have a little more to go before they reach all time highs. The overall Merv's Composite Index of Precious Metal Indices is also in new all time highs. What this means is that the largest gold companies, those that are heavily weighted in calculating the major Indices, are slightly under performing the general mass of gold stocks. This is normal as the general mass are of a lower quality and therefore inclined to move faster and farther on the up side and presumably on the down side.
The universe is still not showing any danger ahead for the stocks, long term wise, however the Penny Arcade is showing a negative divergence from the intermediate term, so caution here.
MERV'S PRECIOUS METALS INDICES TABLE
Well, I think I'll call it a another week.
