Gold & Precious Metals
Higher Low in Place for Gold Stocks as 2013 Beckons
With all of the volatility of the past nine months, few market observers would think the gold equities have begun a series of higher lows or even a new bull market. However, this action is typical of this sector. GDX first formed a low in May followed by a double bottom low in July. From that point, GDX gained 35% in only two months! After three months and a pullback of 20%, the gold stocks are pushing higher once again and have a chance at a tremendous 2013.
There are two extremely important levels for 2013. The first is GDX 48 or HUI 460. The chart below shows $48 as the most important near-term pivot point. GDX has already made a series of higher lows but a weekly close above $48 would add stronger momentum and confirmation to the uptrend. Also note the positive divergences in the GDX vs. Gold ratio and the RSI indicator.
The weekly chart of GDX clearly illustrates our second important pivot point for 2013. Assuming, GDX closes above $48, the next important resistance is $55, the September high. Moreover, note that $55 was an extremely important level dating back to the end of 2007. It is obvious that $55 is far more important than the highs near the mid $60s. If GDX closes above $55, then every chartist will be ready to jump on the bullish bandwagon. (Note that they have not jumped on on yet. They have no clue now but will awaken after GDX is up another 20%).
It’s also important to note the prognosis of the weekly RSI. After surging to 65, the RSI corrected to 40 but its curling up once again. A reading of 40 at a bottom (check) is typical of a bullish trend. Keep an eye on the weekly RSI as a move above 70 would be the first such move in six years! This market is slowly positioning for a big move in 2013 and 2014.
We have not been this bullish since May and August. The technicals look great and sentiment remains very favorable for longs. Meanwhile, valuations continue to be very favorable. As we’ve discussed in the past months, the miners are trading near historical lows in terms of earnings, cash flow and sales. A breakout in Gold past $1900 would certainly raise the low valuations and at a time when stronger metals prices would thereby raise earnings. It is a tremendous one-two punch that could launch this sector in 2013.
The key for traders and investors is several fold. First, you always need to plan with each trade and every investment. Decide how much you want to risk and how you will risk it. Second, in this sector you must employ effective market timing and proper stock selection. In the past year many stock pickers got killed because they couldn’t pick the right stocks and they didn’t cut their losses. If 2013 is a return to the bull for gold stocks, which I believe it is, then its time to do your research if you want to beat the sector. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.
Good Luck!
Jordan Roy-Byrne, CMT
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In the classic 1964 movie Goldfinger, James Bond tries to prevent the main villain, Auric Goldfinger, from detonating a dirty nuclear bomb inside Fort Knox. While in Fort Knox, Bond says:
Well, if you explode it [the bomb] in Fort Knox, the… the entire gold supply of the United States would be radioactive for… fifty-seven years.
Goldfinger is only a work of fiction. Fort Knox wasn’t under the threat of a nuclear explosion (then again, who knows?). Nonetheless, it has been argued that it wouldn’t really make difference if the gold in the fort were radioactive – nobody has seen much of it since the 1950s. On December 4 and December 12, 2012 in our two-part story on gold and the U.S. dollar, we highlighted two possibilities: the dollar collapses, gold goes up like crazy or the dollar doesn’t collapse, gold still appreciates. In those commentaries, we analyzed the possibilities of gold appreciating and tied possible price levels with a number of factors, for instance with U.S. gold reserves as presented on the chart below.
On December 4, 2012, we wrote the following:
This chart presents the (…) relation of U.S. debt to Treasury gold reserves – the amount of debt per one ounce of gold – up to 2012. The red line represents U.S. Treasury gold reserves in metric tonnes, while the yellow line denotes the amount of U.S. debt in dollars per ounce of gold. The debt per ounce has visibly increased since 1971, accelerating around 2000 and even more around 2008. In 2012, there were $61,796.11 of debt per one ounce of gold owned by the U.S. government.
Now, if a new gold standard is introduced and the agreement works like the Bretton Woods system, the dollar (or whatever other currency) would be tied to gold. As noted earlier in this essay, at the introduction of the Bretton Woods agreement in 1944 the debt coverage for the U.S. stood at 10.9% (or $319.90 of debt per one troy ounce of gold). If the new system were based on similar assumptions with debt coverage at 10%, this would imply a fixed price of $6,179.61 per ounce of gold ($6,179.61 per ounce of gold divided by $61,796.11 of debt per one ounce of gold gives us coverage of 10%).
Since the publication of this essay, we have received a particularly interesting question about the assumptions we used:
Dear Mr. Radomski
Your December 4, 2012 article (…) is exceeding well-written and researched, and I gained a lot of knowledge from reading it. However there is one potential problem I see in all the logic you are applying to the current situation. It seems to me you are assuming the USA actually has gold at Fort Knox and West Point. But there is mounting, but unproven evidence, both places have no gold in them at all, and are rather storage places for nerve gas. (…) An audit of the US gold holdings has been demanded by some for years, but the government will not allow it. The gold belongs to the American people, so why won’t they let us see it? Many think it is because it is no longer there. If that is indeed the case, do we not face a “financial Armageddon?” Thanks for reading this and any response you might have. (I am not a conspiracy freak!) (…)
We always appreciate our readers’ feedback and would like to thank for it here. We also appreciate spot-on questions and see this particular one as intriguing, to say the least. Which brings us back to Fort Knox.
At first it may sound shocking, but the last audit of gold stored in Fort Knox took place in 1953. No typo here, 1953, just after U.S. President Dwight Eisenhower took office. Even though it is the last audit up to date, it can’t be described as satisfying. No outside experts were allowed and the audit team tested only about 5% of gold hoarded in the fort. So, there hasn’t been a comprehensive audit of Fort Knox in at least 60 (!!!) years. This is at least surprising, given the fact that large entities listed on stock exchanges are usually required to undergo an outside audit at least once a year. Of course, the U.S. Bullion Depository is no conventional company. Nonetheless, not auditing it independently for more than half of the century raises questions such as the one posted above.
This is no new topic. One of the first written accounts questioning the amount of gold really stored in Fort Knox appeared in 1974 in a tabloid, the National Tattler. An unnamed informant claimed that there was no gold left in Fort Knox. The sensational nature of the story, and of the newspaper, wouldn’t perhaps contribute to the credibility of the account but it was later revealed that the informant, Louise Auchincloss Boyer, secretary to Nelson Rockefeller, had fallen out of the window of her New York apartment and died three days after the publication in the Tattler. The tragic incident resulted in controversies over the possibility that the U.S. Bullion Depositary may have misstated the actual amount of gold held in Fort Knox. Congressman John R. Rarick demanded a Congressional investigation and, on September 23, 1974 six Congressmen, one Senator and the press were allowed to enter Fort Knox to see for themselves if the gold was there or not.
The tour showed that there was gold in Fort Knox but, all the same, it sparked even more controversies. Only a fraction of the gold reserves were available to see. A photo of one Congressman published by Associated Press suggested that gold bars held in the fort may have been less heavy than would be usually expected.
Quite obviously, this has resulted in even more doubt about the fineness of gold in Fort Knox. None of these doubts have been put aside by any of the audits carried out since 1974. When the reserves were audited, the amount of the gold examined was fractional and there has been no comprehensive bar count and weighting. The same goes for assaying – if a fraction of gold bars were examined at all, then a fraction of this fraction were assayed. The methods used in the assaying process were not conventional. Usually, during an assay, gold bars are examined by means of drilling, which is called the core boring method. But the bars in Fort Knox were examined merely by cutting of small chips of the metal from their surface. This method only proved that the outer layer of the bars examined was made of gold.
This difference in assaying methods is important if you consider that counterfeit “gold bars” have been showing up in New York recently and that fake gold bars turned up in LBMA Approved Vaults in Hong Kong. All these bars had one common characteristic: they were made of tungsten, which has similar density as gold, and covered with a gold veneer. The problem here is that such bars can go undetected if they are examined with X-ray fluorescence scans or by means of simply scraping of a bit of the metal from the surface. So, to properly assess the fineness of gold bars in Fort Knox, a full core boring method should be employed.
In 2012, the German federal court ordered that the German central bank, Bundesbank, conduct anaudit of German gold reserves stored abroad, particularly in the U.S., U.K. and in France. The German authorities have never before conducted a comprehensive audit of their foreign gold reserves and the last time they were able to see their gold stored in the New York Federal Reserve vaults was supposedly in 1979/80. The Bundesbank has expressed that it doesn’t doubt the trustworthiness of the U.S. authorities but demands stricter control over its gold reserves. Because of that 150 tons of gold will be shipped from the U.S. to Germany to assess the fineness of the bars.
All of this shows that the measures applied by the U.S. government to gold storage in Fort Knox and the Federal Reserve Bank of New York’s vaults are questionable and that this fact may have been recognized by German authorities. It’s hardly conceivable that there is no gold left in Fort Knox or the New York vaults. On the other hand, the lack of a comprehensive audit of either facility is unnerving. So are other irregularities associated with Fort Knox: missing shipments, audits acknowledging the existence of gold based on seals that were not broken, not on the actual count and examination of bars and so on.
Of course, a full audit of Fort Knox wouldn’t be an easy task because of the sheer amount of gold to be examined. But it’s feasible. The U.S. Mint estimated the cost of such an audit to stand at $60 million. The Treasury came up with a lower estimate – $15 million. Even if we take the higher value, and compare it to the value of gold stored in Fort Knox (as of December 31, 2012, $240.8 billion) it adds up to about 0.02% of these reserves. In this light the Treasury cannot really claim that this is too expensive.
So, what does all of this mean for the analysis we presented in our essay on gold and the dollar collapse? In short words, not much. Our price target for gold is to be treated as a general indication of where gold might go if the dollar collapses. If the value of the greenback is reduced to paper, we would expect gold to appreciate, but not exactly to $6,179.61. It could appreciate to $5,000 or to $10,000 (in today’s dollars). Nobody really knows that. The point is that if doubts about the amount of gold stored in Fort Knox are just that – unproven doubts – gold could be a lot more expensive (in dollar terms) than it is today. If, however, there’s any substance in these doubts and gold reserves in Fort Knox are lower than officially reported, gold could go even higher, and the price of $6,000 per ounce of gold could be viewed as the lower bound of where it might go.
The bottom line is that if the dollar collapses and the gold reported to be in Fort Knox is really there, gold could appreciate very strongly. If the dollar crashes and Fort Knox is (partially) empty, gold could go sky-high (in dollar terms).
For more information on how to structure your gold and silver portfolio to deal with both the possibility of the dollar collapsing and the possibility that it will endure in spite of the current U.S. debt levels, please consult our essay on gold and silver portfolio. For information on why we use past gold tops as reference points, check our essay on the 1980 top in gold.
Use the following link to sign up for a free, no-obligation trial of our Premium Service and read the complete version of this study that is over 10 times bigger. You’ll also receive Market Alerts on a daily basis and when the trial expires, you’ll start receiving our free newsletter. Additionally, you will also receive 12 best gold investment practice emails.
Thank you for reading.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website – SunshineProfits.com
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About Sunshine Profits
Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.
Disclaimer
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Long story short, gold looks fantastic.
I say often that people who moan over gold not rising daily are nuts!
You can clearly see in the first two bases how the consolidation led to a large build up of power and strength which in turn led to huge moves.
This is how stocks and markets work. They need time to digest gains and shed as many traders from their positions as possible before embarking on the next move.
$1,800 is the next breakout level that will see a hefty rise in gold so don’t sweat the small stuff. Accumulating gold on weakness has worked for a decade and will for a couple more years at least.
……7 more charts & read more HERE
Rising Euro, Falling Dollar and… Correlations Turned Upside Down
This week has brought in some calm after recent declines in the precious metals sector. Everybody seems to be waiting for some more decisive moves (both in the markets and on the part of the government, as the “fiscal cliff” issue has not been resolved yet), but these are not very likely before the beginning of the New Year.
Meanwhile, currency markets have been moving in the direction that makes precious metals investors happy – or should make them happy, were the situation “normal” – i.e. were the correlations between precious metals and the U.S. dollar strong and negative. Quite unfortunately, the situation is far from normal, but this is likely due to the abovementioned “fiscal cliff” problem and the uncertainty caused by the lack of final solution. Let us then move on to the technical part of today’s essay and see what we can figure out from the “gold silver charts” charts and correlations – we’ll start with the euro’s long-term chart (charts courtesy of http://stockcharts.com.)
Recall that “Free Gold, Silver, Precious Metals Articles” two weeks ago, we had discussed that if the index closed above 132, the breakout would be confirmed and higher values likely. A small decline was seen last Friday, but the Euro Index is once again above the 132 level. If it closes the week in this trading range, the breakout above the September high will be confirmed and a further move to the upside likely. The 138 level appears to be within reach if this holds true. All-in-all, the Euro Index picture this week has bearish implications for the dollar.
Now, let’s move on to the U.S. currency – we’ll start with the medium-term chart.
A consolidation has been ongoing for over a month, and the index now appears ready to move lower. The decline and consolidation here are a reflection of the upswing and consolidation seen recently in the Euro Index.
Let’s have a look at the short-term USD Index chart now.
In the chart, there is an interesting development. A small rally lasting a few days has been seen and this makes the current situation quite confusing. The cyclical turning point is upon us and if it wasn’t preceded by a pullback, higher values would be likely to follow. The very short-term trend however has already been to the upside, so we could see a reversal and lower index values. (The Euro Index could continue to rally without a pause as well, or more precisely, after a small pause that is not visible on the above chart that is created based on weekly candlesticks.) In short, it seems that lower values are more than likely to be seen in the USD Index. If the precious metals begin to respond positively to this weakness in the dollar, the short-term picture could quickly become bullish for gold, silver and mining stocks.
To put the above analysis into proper perspective, let’s check the current correlation values.
The “Correlation Matrix “ is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector.
The Correlation Matrix is quite confusing this week as it shows that the coefficients have truly turned upside down. They are pretty much neutral for silver when it comes to the 30-day period, but clearly upside down for the 10-day one, as well as for gold and the precious metals mining stocks.
The strangest picture here is between gold and the USD. Gold generally moves opposite of the USD Index but has been pretty much in tune with it for the last 30 days and has moved in the opposite direction of stocks. In short, the situation is far from normal. However, it seems that this situation will turn back to normal quite soon and the chart below explains why.
The decline in the above chart does quite a good job in representing the simultaneous slide in the dollar and the price of gold (the thing that made the correlations turn upside down in the past 30 trading days). On the above chart we see that the decline is excessive and likely to end or at least pause very soon, so the correlation might return to its normal state in a week or two.
The RSI levels are not much above 30, so further short-term strength is suggested here. If the breakdown is invalidated, the picture then would become clearly bullish.
Summing up, the situation in the Euro Index improved this week while it deteriorated in the USD Index. Since the cyclical turning point in the latter is quite close and a small rally was seen this week, the implications are bearish. If the precious metals sector begins to respond, then much more strength will likely be seen in gold, silver and mining stock prices.
We expect to see a return of the negative correlation between the USD Index and the precious metals very soon.
Use the following link to sign up for a free, no-obligation trial of our Premium Service and read the complete version of this study that is over 10 times bigger. You’ll also receive Market Alerts on a daily basis and when the trial expires, you’ll start receiving our free newsletter. Additionally, you will also receive 12 “best gold practices” gold best practice emails.
Thank you for reading. Have a great and profitable week!
Przemyslaw Radomski, CFA
Founder, Editor-in-chief Sunshine Profits
“trade and invest in gold and silver” Gold & Silver Investment & Trading Website – SunshineProfits.com
* * * * *
About Sunshine Profits
Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of HYPERLINK “http://www.sunshineprofits.com/services-products/investment-tools/gold-stocks-ranking/” \o “gold mining stocks”best gold stocks and HYPERLINK “http://www.sunshineprofits.com/services-products/investment-tools/silver-stock-ranking/” \o “silver mining stocks”best silver stocks), proprietary HYPERLINK “http://www.sunshineprofits.com/services-products/charts/sp-indicators/” \o “gold indicator”gold & silver indicators, buy & sell signals, weekly newsletter, and more. HYPERLINK “http://www.sunshineprofits.com/services-products/services-overview/” \o “gold & silver services overview” Seeing is believing.
Disclaimer
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
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