Through A Looking Glass Darkly

BEARISH ON GOLD?

If there is one question on the minds of every single investor or interested party in precious metals, it is “WHY are the stocks lagging bullion by so much, when they usually lead?” As a matter of fact, this has never happened before, so why now? After some long and serious thought, the only thing the comes to mind is that this time around, we have a plethora of Precious Metal ETF’s and if that were not enough, we also have a whole lot of other commodity ETF’s absorbing billions of dollars that, in the past, would have gone to Gold and Silver stocks of all stripes. Why GLD alone has amassed over $20 billion and that’s not counting, I do not know, how many billions of dollars that have found their way into the other ETF’s of similar vein around the world. 

When it comes to the stocks themselves, here too we have a overabundance of indices all over the world that people can invest in. Not only that, but there are options on these indices for the more speculative at heart and they don’t have to worry about any adverse political news on any one stock. Take for example what happened to I Am Gold. But this situation can only last so long. In my opinion, the big Gold companies are poised to take off. The impetus should come from tremendously improving profit margins which, lo and behold, we have begun to see in the quarterly reports now being released.

BUYOUTS AND MERGERS:  It is just a matter of time, if the stock prices stay this low when Gold resumes its upward trek, that a buyout (takeover) frenzy will soon ensue; unless prices rise substantially. If Gold goes high enough, it also won’t necessarily be just the Gold mining stocks that will be doing the buying.

GOLD MARKET’S SENTIMENT

Gold market timers are no different than any other kind of stock market timers and are so far behaving in a common textbook fashion for what happens during corrections in the middle of a major bull-market (another indicator signifying a major long term Bull Market). Accordingly, these kinds of corrections are characterized by most timers who missed the beginning of the move, who are now desperately trying to redeem themselves by trying to pick every minor turning points and have a tendency to turn bearish and run for the hills at the first sign of any weakness after any significant move. (I would call $400 a significant move, wouldn’t you?)

In contrast, declines that occur at the beginning of new major bear markets (after the blow-off stage of the Bull Market) are almost always characterized by a stubbornly-held bullishness accompanied by all time high records of exuberance and euphoria; similar to what we are witnessing today in the general markets. Even bad news is interpreted as being good news and almost everybody is engaged in bottoming fishing. Witness the rallies in the home builders and financials. Yet when it comes to the Gold markets, in no way can we describe what we have seen over the past few weeks as stubbornly-held bullishness. If there is any stubbornness, it is among the editors of some gold-timing newsletters who have chosen to remain bearish in the face of ever increasing stronger fundamentals for Gold and Silver. The peak period of the ARM’s re-set stage has not even started yet, nor has the down draft hit commercial real estate yet and no one is even talking about credit card and car loan defaults - yet.  It is my educated guess that the FED will have to inject as much as $2 trillion (With a T) in their efforts to salvage our financial system before this ball game is over. Can you even imagine what that will do to the Gold and Silver Markets?

There was a report last week that due to the high cost of Platinum and Palladium, they are considering switching to Silver to be used as a catalyst. So what did Silver do? It sold off.

Do I think that this Bull Market in Gold is over? Not by a long shot!

SENTIMENT

Consider the latest readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended Gold market exposure of Gold timing newsletters tracked by the Hulbert Financial Digest; it stood at minus 17.2%. This negative number means that the client of the average Gold timing newsletter was being advised to allocate 17.2% of his Gold portfolio to being short - does that sound like they are Bullish? 

The HGNSI's all-time low level is minus 31.3%, not that much lower than where it stands currently. In fact, over the last 10 years it has only been lower a measly 2% of the time. That's incredible, given that Gold bullion is only about 7% or so off its all-time high. Given how pessimistic the average Gold timer is, you'd have thought Gold has been was in a long-term bear market.

You all ought to know by now the importance I place on Sentiment as a Contrary Indicator. All this should be more than reason enough to conclude that Gold bullion is more likely still relatively early in its long term bull market. But there's more: Believe it or not, the HGNSI has fallen more than 20 percentage points since the beginning of April, even as Gold bullion has risen by more than $50 per ounce. It's rare for any kind of market timers to respond to a rising market by reducing their exposures, and is a hallmark of stubbornly-held bearishness. A strong indicator that the Bull Market  still has a long way to go.

In fact, the HGNSI is now lower than it has been at any time since October 13th, 2006. At that time, Gold bullion was trading for around $590 per ounce, consolidating its prior move and setting the stage for its explosion past $1,000.

NOTE: I warned you back then that although the 3 day $150 sell-off was probably all the sell-off we were going to get, time wise it was just not enough and that we probably had another year of sideways backing and filling before the stage was set for the next explosion to the upside. The same situation applies today: We had a 38% price consolidation which is probably sufficient, but time wise we require a little more time but a lot less than a year.

 Now, sentiment is not the only factor that you should hang your hat on. As a matter of fact, I have often warned you in the past that you should never rely on only one indicator. However, for me at least, it is one the most important factors and as you may recall, it was the lack of extreme bullish sentiment numbers that were missing at the December 2007 stock market top that I had called: What I said then and am still hoping to see now is much higher record bullish sentiment figures before calling for a 1929 type stock market crash to begin. SENTIMENT readings for the stock market are now in no man’s land and are not telling me anything. I am expecting a surge in the Bullish very shortly: While sentiment readings for Gold are still calling for a continuing bull market and a screaming buy for Junior Gold and Silver stocks.

GOLD AND SILVER STOCKS

Let me reiterate at this time my belief that we are all now getting an unheard of second chance to buy the Juniors as well as some quality medium-sized mining companies that are at or near their lows and that is after an $400 run in Gold that, after some consolidation, is not even half over.
Why is it that we all have a tendency to “LOOK A GIFT HORSE IN THE MOUTH?”

Continue to accumulate your favorite Juniors on weakness and/or be on the lookout for a breakout on volume to either establish your positions and/or to increase the positions you already have.

STOCKS THAT I OWN AND POSITIONS TAKEN

(SHORT-TERM  OPTION TRADES ARE OMITTED)

As you may recall I have been continually warning you about being Bucked off the GOLDEN BULL. So when I told you not to chase Gold above $930, I also told you not to sell. But that you could sell in the money May options to protect your positions and generate some always welcome Income.

AEM @ $39 Sold May 60 C @ $8                  ABX @ $31.50  sold  may 50 C  @ $5.30
  
GG     @ $29 sold may 40 c   @  $4.10           KGC @  $14.50 Sold  may $20 c   @  $4

RGLD @   $27 sold  may  30 c  @ $3

JUNIORS. gold and silvers;  CDE @ $3.50       ego  @ $7.00     GBD  @$3.25     gbu.to  @ $ 1.95

hl @ $11.10      FNV.to  @ $15    MRDDF  @ $0.58       NXG  @  $3.25      nsu  @  $1.82       vgz  @  $4.65

HIGHLY SPECULATIVE 10 BAGGER PLUS POTENTIALS

ENVI  $2.25    HYBR  $2.55   IVAN  $1.85  KOG  $1.55   NOG  $7.60 
NTAH  $0.70

EACH MARKET IS A MARKET UNTO ITS OWN

OIL IS EXPLODING TO NEW ALL TIME HIGHS PAST $120/bbl while Gold is just languishing between 8% to 12% below its highs. WHY? What is happening?

Firstly, you may recall that I have continually warned you that Gold and Oil are not related, it only seems that way because at times they do move together.

Secondly, two points that I have continued to stress: (1) The market and the economy do NOT always go in the same direction. The DOW bottomed in 1932 and increased into 1936 by almost 400% while the economy continued on into its Depression low in 1933-36 and the Depression did not end until 1946. Yet a thirty year Bull Market started in 1932.  (2) The Sentiment readings at their most bullish extremes were not high enough to give us a Major BEAR MARKET signal. That has always bothered me and is why I suspected that the rally might last into January and, after a sell-off, maybe into May. However, I repeat, you must never hang your hat on only one indicator no matter how well it served you in the past,
especially since as soon as any indicator becomes overly popular, it stops working. Witness the failure of one of the most reliable, “Sell in May and Go Away” that has failed miserably for the last few years. Perhaps its time has come back now that no one is talking about it anymore?  Thirdly, the extremely high Short positions have always bothered me. I do not like a great deal of company at major turning points, so I would not be surprised to see new all time highs. I could be wrong, but I attribute these record shorts throughout the Bull Markets to the reliance on OPTIONS as the preferred means of executive compensation and their shorting against the box to lock in and defer their profits.

OIL AND GOLD

They have been talking about Peak Oil for over 30 years. THERE is no oil shortage for the foreseeable future. The price of oil is behaving exactly the same, but opposite as the Price of Gold and for the same reason. The exchanges are NOT enforcing their position limit rules and are allowing a few big players to set and manipulate the price of both oil and Gold in the Futures Markets. But I predict that no one or group can manipulate that big a market indefinitely and they will both live to sadly regret their actions. The cartel trying to push Gold down have already lost back most, if not all the money they made between 1980 and 2001. Now with every $10 that Gold goes up, they lose $3 billion. Sooner or later, they will be forced to cover. Then watch the fireworks. When it comes to Oil the refiners are already losing money; just you wait and see what a recession does to the demand for oil and gas and you will all get a lesson in supply and demand. You can fool with the Laws of supply and demand for a time but in the end Natures Laws will always win out.

DANGER: If the exchanges do not wise up in a hurry, these guys could destroy the exchanges.

THE HIGHWAY TO RECESSION, DEPRESSION

The Great Economist Von Mises once postulated that “sound money protected the citizenry against the predatory inroads of Government.” Our founding fathers would certainly have agreed but I’m sure that none, not even Jefferson, could have envisioned the vast gulf that now exists between the principles of sound money and today’s Government.

THE RECESSION WILL BE A STAGFLATIONARY ONE AT BEST

There comes a time in the life of every extended Bubble when continued inflation of the money supply and easy credit can no longer work its magic and I think that the time has finally arrived. In 2007, it took $5.77 of credit expansion to create $1 of GDP growth. That’s up from $2 less than seven years ago.

I still do not see a bottom to the housing market for at least another 8 to 10 years at a minimum. No one is even estimating the losses that will occur due to write-offs stemming from A-1A and Prime Mortgage defaults which are bound to accelerate as the Recession takes hold and housing prices continue to crash. And what will happen to commercial real estate? Their average decline is 33% during a Recession. I could go on, but I think you get my point. No amount of rate cutting can reverse Wall Street’s ongoing financing problems whose world leadership was lost last year, let alone the banks’ credit collapse. Besides we are already down to 2.23% , the FED does not have much more room to cut.

NOTE: Like it or not, regardless how much money there is available to make loans CREDIT RISK is being re-priced upwards at ever increasing rates as are the Lending Standards. They always close the barn door after the horses have all escaped.

US DOLLAR COLLAPSE

The US DOLLAR has been rebounding recently (nothing evere goes in a straight line) and lo and behold a series of experts on TV are now calling for a 20% appreciation. It is my guess that the FED will have to pump upwards of $2 trillion to keep our financial system afloat and that’s not counting what the rest of the world’s central banks will have to do. They will all fight to their last worthless piece of paper before acceding to a Gold Standard. The USA is flooding the world to the tune of $5 trillion a year in new Debt and at some point in time, maybe later this year, one or more central banks will STOP accepting any more US paper and then what?
 
THE FINANCIAL SECTOR increased from 20% of the economy in 1980 to over 40% by 2007. I have pointed out in past letters that this was just not sustainable and with Government representing another 25%, that leaves only 35% for the productive sector of the economy. I think that the trend has now begun to reverse. The irony of it all will be that our politicians, media and intellectuals will, like they did during the 1930s, blame it all on the Failure of Capitalism. The amazing fact is how what a little (35%) that was left of our capitalism was able to support our out of control socialist spending for more than 63 years. But at some point we will kill the Goose (Capitalism) that lays the Golden Eggs. There are dozens of Bills being batted around in Congress to do just that: From refusing to pass trade bills to actually unilaterally overturning them with our two largest trading partners. If that weren’t enough, slapping a 27% tariff on Chinese imports to excess profit taxes on oil companies and export restrictions on commodity exports. Smooth Hawley move over, Bernanke Congress and especially the media and the public do not seem to realize that it was a trade war more than anything else that turned the 1930’s recession into a 17 year Depression. Can it happen again? You bet your Sweet A_S it can and will unless Congress and the new President wise up in a hurry (in my opinion that’s too much to wish for let alone ask).
 
CORPORATE EARNINGS: Not only are Wall Street and the financials rolling in red ink, but the earnings of the corporate sector will except for some notable exceptions, accelerate to the down side. Look to short Wall Street and the banks. If you are afraid to short, at least GET OUT! Bear Stearns was the first, but sooner rather than later there will be more Home Builders, Brokers and Banks that will fail.

HOW NOW DOW?

The DJII has recovered 1000 points (100 more than the 900 I called for) or 50%, a standard and normal Fibonacci  retracement. 62.% is possible and probable, which gives us a maximum upside target of 13,200. Look to “Sell In May and Go Away.”

How about some good news or at least relatively good news? As you know, I always try to give you a three to six months heads up as to what I think is about to happen. Should I make a forecast that turns out to be correct within a day or two and you did not have a chance to react; that is just as bad as being wrong. I take absolutely no pleasure in saying, I told you so. The stock market may not be ready to crash just yet, but it is living on borrowed time. Stocks may continue to rally, but for the most part they will not be following through especially as earnings disappoint and/or projections are adjusted downward. Watch the charts, short into resistance and if individual stocks break through resistance, make sure that it is not a fake breakout as there must be a strong follow through on high volume in order to confirm any and all breakouts to the upside. Whatever you do, do not get sucked into buying the Financials and Home Builders, their problems are not even half over.

MARKET DIRECTION REPRESENTS 80% of a stock’s move

So, if the market direction is down, don’t be a hero and try to trade against the trend; except for stocks that you can speculate that they will turn out to be at least a 10 bagger or maybe even a 100 bagger. In those cases, to hell with the market’s general direction. But whatever you do, don’t chase the stocks that are already up 20 to 100 times such as Garmin, Apple, Google and the Green Stocks like Solar and Ethanol. Remember, information that everybody already has is not worth having. Be careful!

LATE NOTE: Are any of you surprised by the latest New Home Sales figures  and sales price drops? For you long time readers, you can see how everything is unfolding exactly as has been expected. Just let me finish by an often repeated Warning: “You Ain’t Seen Nothing Yet.”

 

GOOD LUCK AND GOD BLESS                                            
May 5, 2008

 

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Aubie Baltin  CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL.  33418
[email protected]
561-840-9767