True Contrarian
[Thanks to ILD for posting this first]
truecontrarian.com
INTERMEDIATE-TERM GOLD OUTLOOK: The fundamental and technical picture for gold and gold mining shares has changed considerably in recent weeks, given the sharp decline especially in gold mining share prices. My target price for HUI, which I predicted on February 1 would bottom at 168.38, actually touched an intraday low on Friday, May 7, 2004 at 168.37 (see "Fibonacci lives", below). It is true that the HUI/spot spread usually expands before a price drop, and contracts before a price rise. This spread, which had been 148 in early December 2003, reached 211 late Friday afternoon, and is now slightly above 210. Therefore, the drop in HUI from 258.60 in early December to 168.37 late Friday afternoon, a total decline of 90.23 points, was due much more to the 63-point widening of the HUI/spot spread since early December, rather than to the modest 27-dollar fall in the gold price since that time. Normally a widening HUI/spot spread is bearish, but there have been many cases in the past in which double bottoms in share prices showed an initial spread of 210 at the first bottom, and then a spread of around 190 at the second bottom a few months later. One likely scenario, in my opinion, is that there is a short-term bounce in gold to the $390s or even above $400 by mid June, followed by a significantly lower gold price in July or August (perhaps $356 per ounce, assuming the sell stops near $360 are finally triggered). During this time, the HUI/spot spread may begin to steadily and progressively contract, indicating better times ahead. Perhaps if gold reaches $356 in late August (more on this calendar guess later), HUI will be at almost exactly the same price as today, in the mid- to upper 160s. Thus, while the media will be talking about how "gold is hopeless", "gold keeps going down", etc., gold mining shares will actually be making a double bottom, or at worst a tight head-and-shoulders bottom. One sign of a positive divergence will be if several leading gold mining seniors make higher lows in August than they are making in May, while the juniors show a mixed picture. Even in the unlikely event that gold goes below $350, I doubt that HUI will go more than a few points below 160. One reason is that 155 served as critical resistance for gold mining shares for a few years, and usually strong long-term resistance converts to even more powerful long-term support. Those who are short gold mining shares should seriously consider covering at this time. If gold does manage a sharp speculative bounce over the next several weeks, then one should short gold itself, rather than the shares, after such a bounce. It has often been the pattern that gold bottoms in August, for several reasons. One is the sparse lack of physical buying in the months of July and August, given a scarcity of important ritual festivals in those countries with the strongest physical gold buying, such as India, China, and the Middle East, and in recent years also from many African countries, less per capita, but actually more in proportion to their lower incomes. It should be mentioned, by the way, that if there does emerge evidence of serious physical gold buying at ANY point over the next several months, then one should immediately go long gold and/or its shares, since strong physical buying, especially from price-conscious, knowledgeable, mostly working-class third-world buyers, has long been a reliable sign of an intermediate-term bottom in gold. The worst time to buy gold is when dumb, emotional, mostly western, white-collar buyers purchase gold futures and gold mining shares on margin. Since these western buyers probably have ten or twenty times the annual income of their poorer Asian and African counterparts, maybe this is an equitable worldwide redistribution of wealth. Speaking of margin, no doubt the recent sharp price decline has been fueled at least in part by overeager gold share speculators betting their no-cap, adjustable-rate mortgages on $500 gold and being forced to liquidate due to margin calls. Another reason that gold often bottoms in August is that many speculative participants are on vacation (holiday) at that time, especially in Europe. They are required to put in stop-loss orders when they are not physically present, and it is therefore a simple game to wait until the maximum number of such participants is away, with the stops sitting their like ducks waiting to be slaughtered, which they then usually are. The last two weeks of August usually sees the greatest percentage of vacationers, and it is partially for that reason that gold itself has so frequently bottomed around that time. Sometimes gold bottoms instead in early August (as in 2002), so that possibility should also be kept open. I am not sure why gold so frequently peaks in mid-winter and bottoms in late summer, though that has been generally true for over three decades. I do not think it is possible that gold itself has bottomed yet, even though some gold mining shares perhaps already have. Silver is often a useful leading indicator for gold, so if silver begins to move steadily higher at some point over the next several weeks, while gold lags, then probably this will also be a good buying opportunity for the yellow metal.
OTHER FINANCIAL MARKETS: We are also seeing extremes in many other financial assets. U.S. Treasuries are probably going to perform well over the next few months, having completed or nearly completed a double bottom with their August 2003 lows. The price of oil, a few cents below $40 per barrel, and which practically every commentator has said will continue to rise, will in my opinion almost certainly fall below $30 per ounce within the next half year, so shorting crude oil is probably the safest futures play at this time (not on margin, of course). U.S. equities are seeing a serious deterioration in breadth, with small-caps and midcaps sharply underperforming after having led the way higher for several years, so I would anticipate a steep drop in U.S. equities over the next few months. In contrast to their behavior earlier this year, in which the most speculative shares held up well while their more conservative counterparts have suffered the steepest declines, I would expect those shares with the lowest dividends and the highest P/E ratios to see the most serious share price deterioration between now and August. It should also be remembered that the Democratic Presidential convention ends in early August, while the Republican one begins in late August. The buzz over the Democratic gathering will unnerve the markets, which psychologically always prefer the status quo (even though Democratic administrations actually see higher historic price gains), so that should lead to a mid-August low for the U.S. equity markets. As the late August convention is anticipated, confidence in the status quo and George W. Bush will be slowly regained, and then the usual pre-election bounce will probably be asserted. Perhaps the Nasdaq will bottom around 1500 in mid August and rebound to 1900 by late in 2004. Meanwhile, one likely big negative surprise for the U.S. financial markets will probably be a "sudden" "unexpected" "unpredictable" (take your pick) drop in U.S. housing prices. REITs have already discounted this event, but the general public still believes that housing prices are at all-time highs. The stock-market rebound was almost entirely liquidity driven by refinancing at record low mortgage rates with record high housing prices. Without both of these props, reality will eventually reassert itself. |
