GOLD: Bullion vs. Shares
Is it time
to bail out of shares?
Alex Wallenwein
May 19, 2005
Many gold shares owners are
pulling their hairs out every morning in front of their computers.
"Those suckers just keep going down, and down, and down!"
Most shares and indexes haven't
seen new highs since late 2003, the XAU chart has just broken
through its October 2000 uptrend support line, and the XAU's
200 day moving average has just turned down.
So, is it time to bail?
No. And that's a "No!!!"
with a Capital "N" and a bunch of exclamation marks
behind it to boot.
Why not?
Several reasons, and the most
important one of them is that gold is still in its almost four
year old uptrend and there is no end in sight, realistically
speaking.
The first thing to remember
about gold shares is: they are by their very nature "derivatives"
of gold.
As much as gold investors may
hate the sound of this (after all, "derivatives" is
a dirty word in the gold world), it is still true. Gold shares
are paper-derivatives of gold due to the mere fact that they
are not gold itself. Period.
Is a derivative going to go
down while its underlying asset keeps climbing?
Very doubtful - and that's
an absolutely felonious understatement that should be punishable
by drawing and quartering me and and feeding my remains to a
horde of attention-craving, "deflation"-shrieking,
bulgy-eyed gold-bears.
Gold will keep going up for
the reasons outlined in What's
Bugging Gold Bugs?
But there's more. Just today,
we got additional evidence that this will happen: The TIC data
from March show that foreign purchases of US treasuries have
slowed dramatically, and that confirms the premise of The
G-7 Effect: Selling Into Dollar Strength. Better yet, the
Financial Times reports that foreign CBs were net sellers of
US treasuries in March, for the first time since 2002.
It is no coincidence then that,
as Ted Butler reports, the COTs for gold have never looked this
bullish. He estimates that there is "a 100,000 net contract
decline in the dealers' short position over the past three weeks
through today."
Then, there is the XAU chart
dating back to Gold's twenty-year low and double-bottom in 2001.
You can see that the gold chart (the red chart line, NOT the
red arrow) acts very much like a firm support line for the wildly
gyrating XAU:
- and that confirms that all
the wild emotions (of mainly Western gold investors) are being
played out in the XAU while the calmer heads (of the Chinese,
Muslims, and Indians) are reflected in what gold is doing. Every
single time the XAU has touched the gold line since 2002, it
has bounced off rather strongly.
This chart also demonstrates
something gold investors often get tripped up on: It shows demonstrably
that just because a chart breaks down, that emphatically doesn't
mean that the gold shares are "doomed" to suffer another
gut-wrenching pull-back.
Take a look at the first triangle
formation in 2002-2003 and how far the XAU "broke down"
from that one - right before making its big up-move (red arrow)
to its highest high since 1999.
Granted, the current breakout
to the bottom goes deeper than the one in 2003 - but so what?
The point is that it's
always fundamentals that drive charts. It's never charts that
drive fundamentals
-- and fundamentals are very bullish right now so relax, already!
But back to the apparent support
function of the gold chart to the XAU. Naturally, that chart
only acts as a quasi-support line if you take a performance comparison
dating from precisely the time of gold's lows in 2001 and using
that as the "zero" point from which both lines emerge.
That's the nature of a performance chart - its results change
depending on the time-point of reference. But it's very interesting
nevertheless, precisely because that relationship has held true
for almost four years now, ever since 2001 - without exception!
The other thing is that price
inflation is on the rise (today's "flat" reading notwithstanding),
and that's bad for stocks because the Fed will respond with higher
interest rates, which will crimp business budgets and profit
margins, and therefore stock valuations. It's also bad for bonds
(fixed income paper is worth less in a declining purchasing-power
environment).
When American and international
investors see both stocks and bonds go south - where will they
turn?
You got it.
Once the "safe haven"
debt papers are going down together with the "risky"
equities, especially now that derivative-crazed hedge funds are
looking more and more like something Muslim suicide bombers might
want to pad their vests with, and now that real estate is beginning
to look toppy (especially with soon to be strongly rising long
term rates), where are people going to spend their FRNs?
On gold and gold stocks - and
on silver, of course.
And then ... there's China.
China has blatantly been jerking
the U.S.' chain of late, throwing several head-fakes by
leaking unofficial indications of a coming revaluation - and
then denying the same from official sources. Once this flurry
of head-fakes has sufficiently confused and enraged the US-opponent
(and today's escalation of Bush's rhetoric shows that
it has), they will be followed by an agonizing groin shot at
precisely the most opportune moment. You can bet your life on
that. When that happens, the dollar will drop like a leaden balloon.
As to precisely when this will
happen, your guess is as good as mine -- but as an owner of bullion
you are not forced to time these events precisely in order to
come out ahead. That's why the real question is not whether
you should get out of stocks, but whether you should get into
real gold. And the answer to that one is a resounding "Yes."
Got gold?
Alex Wallenwein
Editor, Publisher
EURO
vs DOLLAR MONITOR
321gold Inc
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