"Gold: Truth, or Dare?"
Webster’s defines “truth” as – “being true, sincere, honest, conforming with fact, or reality… in actual existence, correctness, accuracy and that which is true.”
Hmmm?
Well, I don’t know about you…but, I haven’t seen a lot of honesty, conformity with fact, or even reality amongst the yellow faithful of late?
You disagree?
Well tonight’s rant is about something that your brokers, your newsletter writers, your favorite cheerleading pundits and everyone who is trying to sell you something – won’t tell you.
… the truth about gold.
Whether you want to hear it, or not… let’s get started.
I’ll be gentle… let’s start with this:
Monday will be – “Day 299” of the correction from last May’s speculative blow off top.
Yes, gold and gold stocks have been in a correction for nearly an entire year. And over the last year, gold stocks have had 4 corrections and 4 rallies – with the 5th correction presently underway.
Here’s a little technical truth serum:
”Day 299 – Gold Bugs held hostage…by the Truth.”
Since last May’s highs (ignoring the current correction underway) – the 4 HUI corrections have totaled 322 index points – averaging 80.5 index points per correction.
The 4 rallies have totaled 293 HUI index points – averaging 73.25 index points per rally.
Truth: the corrections have been 10% greater than the rallies on average.
One of the things I’ve pounded the table on - over the last 8+ years that I’ve been posting here on Silicon Investor is this:
”The Big, Fast and EASY Money is always made in the early part of the cycle.”
Don’t believe it?
Here’s another dose of technical truth serum:
Truth: every single rally in this cycle has produced smaller and smaller % returns – ie:
The first move was from HUI 35 to 80.
+ 45 index points for a +125% return.
The second move was from HUI 80 to 154.
+74 index points for a +92% return.
The third move was from HUI 154 to258.
+104 points for a +67% return.
The fourth move was from HUI 258 to 401.
+143 points for a +55% return.
And there’s an even more important truth found in that chart.
Truth: every single correction phase (the red circles on the chart) has grown significantly longer in time – before the next upward move in the gold stock index has begun.
As the cycle matures – the market requires longer and longer periods of time to digest changes in the underlying fundamentals and also for selling to exhaust itself – which should be plainly self-evident in the chart above.
…but, yet the pom-pom wavers jump upon their soap boxes to proclaim each bounce during each correction phase – as the next “Big One”… the one going to $1686, Gold $2176, or $2500+.
They have used mechanisms like the “Chinese ETF,” they’ve called for a massive dumping of Dollars and “Central Bank buying” by China, Russia and the OPEC Nations…and have even pleaded the case for angels and magnets -- yet, gold has remained in a two hundred and ninety nine day corrective phase.
Gold bugs have even resorted to voodoo economics in trying to re-price and inflation adjust the gold price back into 1980 dollars?!?!
But, more importantly than going back in time – they’ve lost track of “time”…as time is an integral element of all corrective phases that apparently seems to have been lost on bugdom.
Here’s another inconvenient truth – this one about cycles and time:
From December 2000 to May 2001 the HUI Gold Stock Index moved from a low of HUI 35 up to HUI 154. That early cycle 119 point move was an index 4+ bagger for those early value & contrarian investors in gold – who snagged a 400%+ return in just 5 months.
From that point forward -- from May 2001, the HUI went on a bumpy ride from HUI 258 in November 2003, collapsing down to HUI 166 in May 2004, then back up to HUI 248 in November 2004, collapsing once again back down to HUI 165 in May 2005, and then rallying back to HUI 258 last January of 2006.
That was a total move of 100 points (along with two near-100 point givebacks along the way), which resulted in a return of + 65% over four and one-half long, volatile years.
Trutht: the HUI index produced 4-bagger+ returns in just the first 5 months of the cycle versus…only +65% over the next 4 ½ years.
Here’s another “truth” perspective on the degree of risk vs. reward -- for early vs. later cycle returns:
Let’s set aside ROI percentage returns. Let’s just talk index points…
For the first 3 years of the HUI cycle: from the December 2000 bottom, to the first interim top of HUI 258 in November 2003…an early cycle investor would have caught the move from HUI 35 to 258 - for a total of 223 index points.
Over the next 3 ½ years from November 2003 until now – March 2007: The HUI has moved from 258 to Friday’s close of HUI 323: A return of 69 additional index points and a cumulative total of 289 HUI index points from the December 2000 bottom.
Truth: an early gold investor could have walked away from the sector over 3 ½ years ago in November 2003, and still have bagged 77% of the entire move of this cycle.
That’s the truth about the power of risk vs. reward from early to later cycle.
Yet another truth relative early vs. later cycle risk to reward is the fact of how not just all prior gold, or commodity cycles have ended – but, how virtually all speculations always end…. violently and badly.
Truth:Here’s how the last major cycle in gold played out:
This is the first half/early cycle period from 1974 thru 1979:
And here’s the second half/later cycle chart on how it ultimately ended:
You’re still not buying it – are you? Nope, still not convinced. You think that was an an aberration – an exception to how speculative commodity moves end – don’t you?
Whoa -- there I go again – using the “S” word – for speculation. You didn’t think gold was speculative last May - did you?
Well… here’s a post I made last May 7th, 2006 – just 3 days before the top in Gold regarding my thoughts on:
“All speculations end the same way – badly.”
Message 22425997
Oh and PS: in case you forgot how that speculation ended… here’s the chart that answered – “truth, or dare” on whether gold was run up on rampant speculation:
And here’s a few more “truths” on how speculative moves in commodities always end:
For the Oil Service & Drillers Index - the OSX:
OSX 135 to 45 -- May thru August 1998.
A collapse of 90 index points for a - 67% loss in only 3 months:
OSX 135 to 58 -- June thru Sept 2001
The now infamous “June Swoon” of 2001: A collapse of 77 index points for a loss of -57% with the majority of it in less than 30 days:
For Natural Gas & the XNG E&P Index:
XNG 260 to 160 – May thru Sept 2001
A collapse in the Natural Gas E&P stock index of 100 points for a -40% loss:
…but, that was just the first wave in the Nat Gas collapse --- here was the 2nd wave:
XNG 205 to 105 -- May thru July 2002
A collapse of another 100 index points for a 50% loss in just 7-8 weeks:
Then there was the “new paradigm” – “this time it’s different” Natural Gas Bubble of the Winter of 2005/2006 – a 40% collapse in less than 20 trading days :
”Can you say – FAST MONEY?”
But, it didn’t end there… it continued on to “unthinkable” levels here:
”Viva Gas Vegas and the Death of Amaranth”
And you wonder why I continually talk about the majority of gold bugs being “doomed by their own DNA”? Here’s why:
The 2004 HUI Death March:
The “Déjà vu all over again – 2005 HUI Death March:
Just as this past May and here of late – sentiment reaches a crescendo peak right at the highs…and sinks into the depths of depression at the lows… always has – always will.
Here’s another truth – you can believe it and trade upon it as if was the 11th commandment handed down by Moses on the mount:
The masses are literally – doomed by their own DNA.
They have been since the South Sea Bubble and Tulip Mania… all the way to the Tech & Internet Bubble of 2000.
They have no choice… it’s the way the human race is hard-wired.
Here of late – everyone…and I mean everyone – was bullish on gold.
I swear I saw a ladies retail apparel analyst pitching gold on CNBC for crying out loud (vbg)! And not only was everyone bullish… they were all pitching the same speculative stocks.
…let me let you in on something. The boys slinging the fast offshore money ain’t playing the “home game” kiddies. Every time someone comes on CNBC and plugs a speculative mo-mo POS like FRG… hedge fund traders salivate enough to fill up the great Salt Lake.
They keep giant walls of dry-erase whiteboards… and monitor price/volume action of stocks getting pumped by the pimps appearing on CNBC and all of the major newsletters. They also circle the dates of all the major gold & money shows and monitor lists of stocks pumped by the promoters.
Everyone was pushing AUY & FRG here. The same “names” get passed from the gold specialty fundies to the generalists, and then they go on CNBC and repeat the name that got whispered in their ear – because they wouldn’t know a gold stock from goldilocks.
To it’s credit – AUY didn’t suffer any more damage than the HUI index. While AUY is a little speculative and everyone is on it's bandwagon – it’s a solid company – unlike many of the other tout fav’s like FRG for example.
…and you wonder why FRG got a 20% intra-day whacking?
Come on…
Trader Law: “Know what you own …know who else owns it…and most importantly – know who’s pimping it.”
And when you see pundit after pundit, from the talking head guests, to the regulars on Fast Money, or the curse of all curses – Jimmy Cramer himself – pimping “gigi” or Euuuuuuuuuurrrrrrrrrro Ziiiiiiiiiinc” with his whoopee cushions and cow bells…. bend over and buckle up. It’s when – not if.
Here’s another truth:
While Armies march on their stomach’s…they’re only as good as their generals:
And the two “Institutional Fav’ Generals that matter in gold stocks are NEM & GG:
The health of a sector is always best judged by the health of it’s leaders…and it’s leaders aren’t looking so good – now are they?
Now you can believe in angels, or magnets if you want. Or, you can believe that someone – for some reason… is finally (after 30 years) going to “re-price” gold for inflation (in 1980 dollars) and gold is going to explode through $2,000… or, you can listen to what gold has been saying.
The markets listened…when you didn’t.
Central bankers even listened – when you didn’t.
Gold did it’s job here of late. It signaled excess money supply, inflation and speculation.
The Fed listened and hiked rates 17 consecutive times.
The BOJ listened – and last May withdrew a massive amount of liquidity – which led to gold and commodities collapsing and it just raised rates here to drain excess speculation out of the Yen carry trade.
The European Central Bank listened – and is raising rates.
Chinese officials listened – and warned investors of the speculative bubble in the Chinese market.
The final truth?
Gold did its job, but if you just got caught here holding the bag --- you didn’t do yours, because all the signs were there.
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