Commentary
Did We Miss the Fat Lady?
By Gary Tanashian February 3, 2008
Here in the USA we have an expression that "It ain't over til the fat lady sings" and by the looks of it, we gold stock holders are losing the battle as many would-be gold bugs go scattering back down Hamburger Hill in a hail of bearish bullets as was surmised might happen in the January Letter. These legions include respected guest writers of Biiwii.com who have seen the 'whites of their eyes' and decided to sit this one out. This is happening in the face of real and perceived threats in the form of very long large speculators and very short commercials on the CoT, pressure on the commodities complex as oil sports a bearish MACD and confirming TRIX on the weekly chart and a supposedly deflationary economic contraction being fought tooth and nail by a US Fed sure to be joined by its global counterparts. Then, there is also the long awaited rise of the US Dollar - which has got many contrarians safely on the sidelines or short gold.
The bearish view calls for the Dollar to make a higher low here and in fact that may well be what is happening as risk averse reformed casino patrons of all kinds come flying out of commodities and other go-go plays of recent years despite the diminishing incentives to hold Dollars courtesy of the Fed. But I have been watching for economic contraction all along as a critical fundamental underpinning for the gold miners. In other words, I could not be fully bullish the gold miners until this contraction got under way. That is because I have been looking for the gold miners to assert themselves as a unique asset class separate from the general commodity complex and with the recent top in oil, the final fundamental piece of that puzzle has been realized. But of course the market can be very stubborn in coming around to a perceived 'correct' point of view. As gold stock traders we know that fear rides shotgun and with the overbought status of the metal in all time frames and the bearishly divergent major gold stocks (who themselves are bearishly diverged by the juniors and explorers, where the majority of my positions are) combined with the above noted bearish signals, my pal fear is right there on the buckboard at my side. But he is not going to get me to budge. Why? Because as I have written over and over, risk must always be managed by sober traders and I am doing so by trading a few traders and 'holding the holders' while always keeping significant cash levels. I will be damned if I am going to abandon core gold (and silver) positions at a time when finally the gold mining fundamentals have started to come in line all around. No, a rising oil price is not necessarily bullish for gold (other than for hype value which is different from fundamental value - in fact, a lower oil price gives authorities more cover to pervert the money supply which is bullish for gold) and rising oil is anything but bullish for mining operations. As I have shown several times previously, the USD chart has dutifully followed the decline and then rise in gold vs. oil over the last year as important transitions have manifested themselves in the economy and capital markets. Even if gold drops, gold miners' bottom lines benefit from gold declining less than industrial metals, oil and human confidence levels (human resources). While over bought technically and in need of significant correction/consolidation, gold remains bullish in the big picture. Anybody trying to read anything technically bearish into it (Goldman's TA call based on declining long term momentum comes to mind) beyond that is selling snake oil. Perhaps gold is going to take a short term hit here as the feel good (and very predictable) rally off of our targets (see S&P chart in the January Letter) that turned out to be capitulation lows continues for a while longer. The Dow-Gold Ratio has room to strengthen considerably (15.5 resistance) in the short term in a move counter the major downtrend. But there is no evidence that the fundamentals have changed for the metal, although for the miners they have; for the better. A condition of stocks outperforming gold in the short term could be supportive to gold stocks even as gold takes its much needed correction. It should also be noted however that the major averages are now up against very heavy resistance and are likely to decline in the near term, perhaps to test and confirm the panic lows of January. This could be a short term period where nearly everything drops as the USD gets the bid.
As a side note, while I have highlighted the Dow and SPX here, I picked up a couple debt free, high quality tech stocks during the January panic and plan to watch for more opportunity upon a retest of the lows. To summarize, I have waited since 2003 for the gold-oil ratio to turn favorable and not coincidentally that is the year gold miners made a significant top vs. oil stocks (see HUI-XOI ratio below). Former commodity bulls, as opposed to gold bulls are now making their exit from the gold sector and in so doing, are purifying the investor base. Gold is not oil. Gold is not copper. Gold is not part of the resource trade that ran hand in hand with the inflation bull market that took off in 2003. Gold is a safe haven from debased paper currencies and if the Dollar rallies, it will do so against other pressured paper the world over. This will kick off the race to the bottom as other major currencies are exposed as not much better fundamentally than the USD. In a medium term scenario where gold declines less than everything else (if it declines at all) and gold mining costs decline relative to gold itself, the setup is there. It is the nature of bull markets to scare out as many people as possible before major moves. That process appears to be at hand. It could be long and difficult but in a bull market, we always keep an eye on what is happening in the big picture for perspective during trying times.
Please note that my situation and goals are different from yours and yours are different from the next person's. I no longer have the time (nor frankly, the desire) to micro-manage and trade every short term cycle. As you can see by our current ranking in the SINLetter stock picking contest, sometimes 'hands off' actually does work. However, it is imperative to analyze fundamentals and technicals along the way. This article has primarily looked at the fundamentals of the gold stocks. I invite you to try TA onDemand for unbiased technical reads on short, medium and/or long term conditions of stocks or markets in your areas of interest.
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