The Gold Bug: May 2012

Tuesday, May 22, 2012

Another Hike for Gold

By Scott Silva

5-22-12

Things may be looking up for gold bugs. The sellers are gone, and the bargain hunters have returned. Is this the reversal gold bugs have been waiting for? Or is it a short term bounce only to be followed by another leg down? Technical analysis says we may be seeing the beginning of another powerful upswing for the precious metals and gold and silver stocks.

Gold and silver stocks have been under pressure over the last several weeks. But we now are seeing signs of a bullish reversal. A look at the technical indicators for the HUI gold stock index gives us the first hint. The indicators we will examine here are Ichimoku Kinko Hyo, candlestick analysis and Moving Average Convergence/Divergence (MACD). Taken together, these technical indicators provide a degree of corroborated information from which to trade.

So let’s look what these three technical indicators are telling us about the HUI. We can see from the daily basis chart that on May 16^th, the HUI halted its slide begun earlier this month, and has traded up in the last several sessions. Price action on May 16^th produced a doji candlestick. The doji typically marks a reversal in an established trend. The doji candlestick has a long shadow and a small body, which traces out the push and pull between buyers and sellers, and reflects the fact that neither buyers nor sellers dominated the day’s trading. We can see that the May 16^th doji in fact marked a bullish reversal at the 376.86 level. The long white candle on May 17^th and following sessions pushed the HUI up to 412 or so.

The next set of indicators to examine is Ichimoku trend and momentum. Today, most Ichimoku indicators are bearish, but there are some bullish signs. Price action is below the cloud, which is bearish. The projected cloud is bearish (shaded pink) with Span A below Span B. And the Chikou Span (green trace) is below price action and the below the cloud, which is a bearish signal. Yesterday, price action climbed briefly above the Kijun Sen (red trace), which is a bullish sign. The Chikou Span, the momentum indictor, has made a move up, and could climb up to the breakout area covering the 420-470 price levels. In this area, the Chikou Span would be above price action, which would be a strong bullish indicator. From there, price action could break above the cloud at 444, the projected resistance level. By then, the projected cloud would be bullish as well.

The near term dynamic displayed by the MACD shows that the breakout scenario may in play already. The MACD shows the HUI to be oversold, with an index bottoming out at -20.0 on May 16^th, then making a bullish crossover on May 21^st.

Aggressive traders use MACD crossover signals to buy and sell. More conservative traders are happy to wait for the trend to develop fully, as indicated by all five Ichimoku indicators before committing capital. There are trading rules and strategies that combine Ichimoku with other technical indicators that work well in volatile markets. Aggressive and conservative investors alike can benefit from technical analysis of gold and gold silver stocks. Our analysis of the HUI is telling us we may be seeing blue skies for gold and silver stocks soon.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty? We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Follow @TheGoldSpec Subscribe at our web site www.thegoldspeculatorllc.com with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

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editor@thegoldspeculatorllc.com

Thursday, May 17, 2012

A Rainbow for Gold?

By Scott Silva

Editor, The Gold Speculator

5-15-12

Woe is me! The market is falling! When will it all end? Many who own gold and silver are losing sleep over the current downturn in precious metal prices. Some are ready to sell their long term holdings, for fear the market has yet to bottom and prices will continue to fall. The abyss seems bottomless. All hope is lost.

Well, things may not be so dire. The end of the world may not be so close at hand. There are forces building that will serve to propel gold and silver prices to new highs. Gold and silver are at attractive prices for bargain hunters who may be more cool-headed than the throngs of amateurs that rush to sell at the intermediate low.

It is human nature to want to conserve what a person has earned. For most retail investors, the immediate reaction during market downturns is to sell. Fear overtakes reason, and selling begets more selling. Prices tend to change much more quickly when the electronic trading algorithms take over, followed quickly by the cowardly crowds. These are the same retail investors, by the way, who tend to pile in at market tops, afraid to miss out on the big score. But most retail investors get it exactly wrong. They sell low and buy high, the certain way to go broke.

Why do so many people give their money away to the markets? It has as much to do with training, specifically the lack of training and discipline, than psychology. Fear and greed may be the great motivating emotions that drive the market, but control of fear (and greed) through training and discipline allows the investor and speculator to profit in the markets while others fail. This is true for any market. The trick is to learn to act apart from the crowd, move contrary to the path of the mob. The mob is motivated by fear and greed. The contrarian investor takes advantage of the untrained mob by selling to them when they jump in at the market top, and buying from them when they are compelled to sell at the market bottom.

The rise in gold to $1900/oz last year, and the fall in gold to $1550/oz this year are good examples of this dynamic. We can see from the gold futures chart how gold climbed in price, and more recently, how gold has come down in price. What’s important is the trading volume associated with these moves. Volume tells us the relative ratio of buyers and sellers who are acting in the market. When prices rise, there are more buyers than sellers. Trading volume (left scale) climbed to over 400, 000 contacts when the buyers came in to run the gold price last August. Trading volume also spiked above 400,000 contacts during the sell-off of late September of last year. When prices decline, it is because there are more sellers than buyers acting. We can see a similar relationship, but at the 350,000 contract volume level in the moves up and down so far this year. To make money from these moves, the trader must act against the market. That is, the successful trader sells into rallies, and buys the dips. Most professional traders then can be characterized as contrarian. They act precisely opposite of the herd.

We are seeing a market bottom in gold and gold stocks now. Many institutional advisors are telling their retail clients to sell gold and gold stocks just now. But we are not seeing a spike in selling volume. We may be running out of selling pressure. When there are no more sellers, the momentum will shift to the buyers. But some of us will have already bought, and will be ready to sell into the next rally. If there are more storm clouds on the horizon for gold, then let it rain. After all, there cannot be a rainbow without the rain. So let the sellers sell and sell. I’ll buy and buy.

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editor@thegoldspeculatorllc.com

Sunday, May 13, 2012

May Day in Paris

By Scott Silva

Editor, The Gold Speculator

5-8-12

It’s May Day again in Paris. Over the weekend, French voters elected Socialist Party leader François Hollande who promises to repeal all austerity measures in favor of a robust Keynesian spending program. This development is a setback for EU fiscal stability, and will likely undermine Franco-German cooperation and may spell the end of the Eurozone. What effect will the new socialist regime in France have on us here in the United States? Is socialism the answer to our economic problems? What affect will socialist Europe have on my portfolio?

May 1^st is celebrated traditionally in most socialist, Marxist and communist countries as Labor Day and International Workers' Solidarity Day. It is commonly marked by organized street demonstrations, parades and marches by working people and their labor unions throughout most of the world. In the heyday of the Soviet Union, May Day in Red Square included a parade of the latest military equipment, a feast for cold war intelligence analysts and NATO war planners. Nowadays, May 1^st is a national holiday in more than 80 countries. It is also celebrated unofficially in many other countries.

The United States has attempted to counter the left-wing May Day tradition. In 1921, following the Russian Revolution of 1917, the Veterans of Foreign Wars and other conservative groups promoted May 1^st as Americanization Day. In 1949, the holiday was renamed Loyalty Day. In 1958, Congress declared May 1^st Loyalty Day a national holiday. Popular recognition of labor-centered May Day has largely died out in the US. No longer do labor union-led crowds gather as thousands did in Times Square every May 1^st during the Great Depression. Last week, fewer than 100 Occupy Wall Street protesters showed up at Bryant Park in midtown Manhattan as part of the planned nationwide Occupy General Strike.

It’s no wonder that May Day and its modern day Occupy movement has failed to take hold in the United States. Collectivism has failed everywhere it has been tried. Communism failed in the Soviet Union. It failed in Cuba. It failed in South and Central America. It failed in communist China and North Korea. And the welfare state is failing today in Greece, Spain, and France.

Collectivism may show early signs of success. But economic prosperity in the collective state is fleeting and deceptive. Sooner or later the fundamental flaws of central planning reveal themselves. Price control, production control and “fairness” give way to corruption, graft and shortages. The central planners create the illusion of success built on a body of lies. The hint of prosperity for all provided by a benevolent government hand gives intervention its pernicious, seductive appeal. In the long run, collectivism in all its forms has always proven to be the path to tyranny and misery.

As Margaret Thatcher observed “"The problem with socialism is that eventually you run out of other people's money [to spend]." Apparently, citizens of France and Greece have yet to learn this lesson. In elections over the weekend, voter backlash to strict austerity regimes in the debt-ridden Eurozone countries toppled conservative French president Nicolas Sarkozy in favor of anti-austerity Socialist Party candidate François Hollande, and fascist anti-austerity factions defeated the centrist coalition Greek government which had negotiated the EU/IMF bailout based on massive budget cuts. The radical reversal presents a new existential threat to Eurozone and to the Euro as a currency.

Socialism does not work because it is inconsistent with fundamental principles of human behavior. The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives. The welfare state seeks to replace incentives with “entitlements”. The government that delivers “free” goods and services expects to gain voter loyalty and remain in power. We can see the flood tide of welfare state entitlements swirling in to swamp federal budgets and submerge the nation into unprecedented debt. Any thinking person knows that 100% debt/GDP is unsustainable. The demise of Eurozone economies under the weight of crushing national debt and an aging, dependent population should provides a clear, real-time example.

But Washington central planners are blind to the failure of the European welfare state. The current Washington regime clings to the notion that the Federal government has the solution to every problem. Government intervention is the answer to any ailment. The snake oil comes in many flavors: “Free” healthcare for all; Social Security retirement benefits for all and forever; affordable mortgages through federally mandated load modifications; low cost, subsidized college loans for all, with no repayment after 10 years!” And on and on. It doesn’t matter that budget cannot support current federal spending. And it matters not that we must borrow 40 cents of every Dollar the federal government spends. Will foreigners buy US debt when the US debt reaches 120% of GDP? Or 150%? Will anyone buy US debt when entitlements consume 100% of federal revenue?

Well, to be fair, socialism would work if central planners could anticipate demand and control production and distribution perfectly. We need only look at the Chevy Volt to conclude that government has great difficulty in judging demand for even one product, never mind the millions of products and services that make up the US economy. The genius of capitalism is that it accounts for demand, price, production and distribution of every product and service through the “hidden hand” of the free market and the incentives that accrue on through private property.

Free markets operate most efficiently when government intervention is minimal, or as Thoreau wrote in 1849 in his Civil Disobedience, “That government is governs best which governs least”.

In a capitalist economy, incentives are of the utmost importance. Market prices, the profit-and-loss system of accounting, and private property rights provide an efficient, interrelated system of incentives to guide and direct economic behavior. Capitalism is based on the theory that incentives matter. Capitalism works because it is aligned with the principles of human behavior. Adam Smith recognized the driving force of economics to be self interest. Individuals act in their own self interest, and respond to incentives of the marketplace. Capitalism is the best hope for the individual liberty and prosperity.

How can we tell that the current path towards the all-encompassing welfare state is failing? We can ask ourselves a simple question: “Are we better off today than we were four years ago?”

There answers are clear and stark. Real wages are lower than they were four years ago. Prices are higher than they were four years ago. Gasoline prices have more than doubled. Bread, eggs and coffee prices are higher. Mortgage rates are down, but 22.8% of all US mortgages are underwater. Unemployment remains at Great Depression levels- 14.2% including those unemployed, underemployed or no longer looking for work. Taxes are high and will be higher yet if the Bush tax cuts expire at the end of the year and new taxes kick in to support national socialized medicine. Education costs continue to rise by 7% or more each year.

May Day in Paris (and Greece) marks a return to socialist and fascist economic policy. Similarly, current White House economic policy is based on principles put forth by John Maynard Keynes and Karl Marx, namely, the font of prosperity is government redistribution of wealth and government intervention is virtuous.

So what can investors expect from the socialist revival in France and return to fascism in Greece? We are seeing the dynamic play out in the markets today. Stocks are selling off for the second day in a row. The Euro is trading down below the $1.30 mark, and funds are flowing into US Treasurys. The stronger Dollar is pushing commodity prices down; oil is trading below $100/bbl and gold is testing the $1600/oz support level.

Gold bugs see strong support at the $1600/0z level, the price that typically brings in the bargain hunters. The reason for this is longer term prospects for gold are bullish. New government spending sprees in the Eurozone will further debase fiat currencies which is bullish for sound money. The US economy continues to struggle; White House economic policy and US monetary policy have failed to stimulate robust economic recovery. Additional poor economic data will tempt the Federal Reserve to enter into a third phase of Keynesian Quantitative Easing later this year, which will weaken the Dollar and push gold prices up.