Gold at critical point

Today is a good day to buy GRY.ASX because gold is about to reach a critical juncture; the closure of an ascending wedge, which will either see gold fall back, or mount a rally. Gold traders will be watching which way gold goes. Several times over the last month, gold has met resistance at the $1400/oz level, so traders will be looking for a sustained break and support above that level. This will of course be a compelling reason to buy gold stocks. Now, I'd buy today because if there is a $50/oz breakout, gold stocks will probably open 20% up, and they might not be sold off. If you wait for that, then you should wait for a sell off.
If I'm wrong, then you just acquire more at a later date when the stock finds a lower support. At the end of the day, we are interesting in tangible gold in the ground, massively discounted, so we are paying a patience game, waiting for the day the emerging miner will realise that revenue. We don't need to be right on the downside since the stock is already massively oversold, even if gold goes to $800/oz, the market cannot sustain prices that low, as nearly all mines would close. This is the value of mining stocks. The only risk is collectivist governments.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Gold destined to defy short-term sentiments

There is a lot of negative sentiment around about gold. In fairness, this news is not entirely fair. The reality however is that markets only strike fairness when the majority of convinced of its imminence. Markets are ‘democratic’ institutions when the great wealth of private and public sectors is in the hands of unthinking custodians. So what are the pertinent factors:
1. Technical picture – Gold is bearish in the sense that it’s on a downtrend; but the fact is that, whilst it broken the $1520/oz support, it’s found new support at $1480-1490/oz, albeit maybe only temporarily. If this support fails, then gold might well fall to $1000/oz. Of course, the longer gold stays above $1480, the stronger the support.
2. Strong equity markets – The argument is that strong global stock markets are a source of weakness for gold. The fact however is that ‘adverse equity markets’ are often a source of weakness for gold. The reality is that many people simply hate gold. They don’t believe in it, and yet it defies them at every turn. It is silly to argue that equities are strong because they are strong until they are weak. A correction in equities could result in a temporary sell off in gold to cover weaker equity exposures, but gold will eventually prevail because its price is not paper-based.
3. Low inflation: The argument is that we are in a “low-inflation environment in the major world economies, with even some talk of deflationary price pressures building. Deflation is the archenemy of all raw commodity markets, including the precious metals”.  This is actually not true. Whilst gold does correlate with inflation; it also correlates with deflation. Ultimately it depends on the reason for the deflation. If the deflation is caused by real wealth creation, gold does indeed fall, because people trust currencies. When deflation is because people are unemployed and there is an excess of capacity, high asset prices, low interest rates, then this is simply a single that ‘inflation’ as measured by governments is not representative of the facts. Ask yourself why property and equities are not measured by inflation? The reason is because inflation is designed to avoid these measures; and yet these are the largest class of traded possessions. Inflation is not correctly measured. If you want a sense of whether inflation is evident, look at real global output (stalled) and currency creation (i.e. Japan has recently announced its intent to expand its monetary base by 50%).
4. Slack demand: There is news that physical demand is weak in Asia. This is a silly argument for several reasons. Asia is a source of jewellery demand, but ultimately it is speculative demand which will drive the market. News that the “new India government regulations to thwart gold speculation have worked to decrease consumer demand in that gold-hungry nation” is of no substantive relevance to gold prices.  If we were to worry about this source of supply, we should worry more about the dumping of gold by central banks.
5. Speculative demand: There is the argument that “legendary investor George Soros and the BlackRock fund have cut their holdings in gold exchange traded funds”. This is without question interesting in the short term, but in a month, I dare say he will be a net buyer again, because he’s a speculator and a trader. He enters positions, and he opens them. He is a substantial trader using the current liquidity and rumours about his positions to give momentum to his positions. One has to distinguish between short and long-term trading action.
6. Money printing: “Federal Reserve Bank of Philadelphia president Charles Plosser said in Italy Thursday that the central banks of the world cannot create wealth and said central banks do not have the tools to fix the present economic and financial problems in the major industrialized countries. He said the U.S. should wind down its quantitative easing program”.  That argument does not make sense because the only action left to governments is to stimulate the market. More important is the fact that the world faces a threat of war in North Korea and Iran, as both countries develop nuclear weapons.

Federal Reserve Bank of Dallas president Richard Fisher: “Major central banks of the world continuing to run their money-printing presses is at best a short-term bandaid which will eventually create major long-term problems. The inflationary implications of the extremely easy central bank monetary policies of the past few years is very likely to become at some point down the road a long-term bullish factor for gold and other raw commodity markets”. 

The implication is that gold and silver is a great store of wealth, and emerging gold producers who are 1-2 years away from production make particular sense. This is particularly the case for companies sitting on short term cash, since they will not be diluted by the current low gold price. This of course will change when the gold market turns, and the ‘cash poor’ emerging gold producers are better placed. This will also mean investors will get a 2nd bite at the market. So, at present, I like cashed-up emerging gold producers like Gryphon Minerals (GRY.ASX). The paradox is that investors in these strongly discounted gold stocks cannot go wrong, as long as they pick stocks which:
1. Have large gold resources - Gryphon has 4Moz - so they have the capacity to ramp up peoduction to fully benefit.
2. Have low-cost resources - Gryphon is in Africa, it has some high grade resources, near-surface, so they will not suffer unless gold falls below $800/oz. I can't see it falling below $1000/oz given the context of currency debasement.
3. Have low sovereign risk - Anywhere is fine as long as not on under a town, in Iran, Venezuela or Central Asia.
4. Have sufficient cash - so they won't be raising substantial amounts of money in the next 6-12 months

These companies are trading at less than 5% of their gold value 'extracted', that's after they have mined and processed it. Aside from those dilution risks above, where is the downside. Remember that there is a lot of money squashing around the market looking for a speculative position.

Quotes: “P.M. Kitco Metals Roundup: Gold Ends Lower, But Up from Daily Low; Bears In Control”, Kitco News, website, May 16, 2013.


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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Gold equities offer best exposure to gold

In recent weeks gold has tested support at $1400/oz. For many gold pundits who see gold as a source of security, they were surprised to see it break a support level of around $1520/oz. At the end of the day, we are in an inflationary environment. Governments are resorting to QE to stimulate the global economy suffering from high asset prices. The equity markets are looking 'peakish' given their profit results were achieved in an environment of QE, so there is downside to the Dow. Having said that, this is not a time of labour union power, so we are not going to see high inflation expectations. On the country, we are going to see a continuing erosion of Western 'unskilled' wages and continued real wage growth in developing countries. Given the lack of 'wage demands', there is every reason to expect govts to resort to more QE if there is any sign of slack. I would even expect them to manage any fall in equities which was destined to undermine confidence. This will be needed since 'system trading' tends to result in corrections. Downside in gold simply makes it better value. If its sold off, its sold off for its strength, and can be considered a buying opportunity.
With interest rates at record lows, there are few places to hold money and make a return. Need you worry about any investment? Well, equities are yield paying, unlike gold, but consider:
1. Emerging gold producers like Gryphon Minerals are strongly discounted because they are mere projects, but will be very lucrative in the wake of further QE. We still have some years of 'rot' before we are going to see 'real' upside in equities. This is a 'super-cycle' so don't think there is some crisis unfolding...at least not for around 20 years.
2. Gold equities are actually 'earners' unlike the commodity. Gold merely needs to make sense in the future, and since this low interest environment is set to persist for years, one is best off trusting in gold equities rather than gold.

One however cannot discount the fact that you can short-trade equities. But what of the QE impact on your money. QE could result in a Dow of 20,000 points in a few years, due to inflation. Its all a lottery, and the trick is to invest in what is most tangible. Discounted gold in the ground for 'non-traders' I would suggest offers the greatest flexibility.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com