Steve Sjuggerud on Sep 03, 2010 03:56AM

Bargain-Hunting in Gold?

You're forgiven for being frustrated. Gold simply refuses to drop back...

THIS CHART has frustrated lots of bargain hunters in the gold market, writes Brian Hunt in Steve Sjuggerud's Daily Wealth. It shows the past year's trading in gold.

Gold is one of the world's most volatile assets. It is impossible to accurately value. You can't say "I'll pay 10 times earnings" for gold like you would with a stock. You can't say "I'll pay eight times annual rent" like you would with a property. Gold tends to trade on wild swings in investor fear.

That's why many seasoned investors expected gold to endure a substantial correction after its massive 2009 rally...or after its similar rally this year. They expected to add to their gold holdings well off the short-term high...at short-term bargain prices.

But as you can see from this chart, there's no gold bargains to be had this year. Gold is not suffering natural sell-offs after rallies. Instead, small price declines now trigger huge buying interest from Asia, the Middle East, and giant institutional investors...folks who want to diversify assets out of paper and into "real money".

For those people looking to buy gold, we here at Daily Wealth say don't worry much about the current price... just keep accumulating ounces.

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Steve Sjuggerud on Sep 03, 2010 03:29AM

Schizophrenic Silver

Industrial commodity or monetary asset? It doesn't matter according to this chart...

IF YOU OWN gold or Silver Bullion, today's chart is a reason to smile, says Brian Hunt in Steve Sjuggerud's Daily Wealth.

The price of gold has displayed major reluctance to decline over the past year. There is simply too much interest from Asia and huge institutional investors, so that budding declines are overpowered by waves of buyers. This brings us to a recent buying wave for gold's precious-metal cousin, silver.

Silver is a schizophrenic asset. It is viewed by some folks as a "real money" safe haven like gold. But it's also used in industrial production. So it tends to trade in line with economically sensitive commodities like copper and crude oil. Here's where it gets interesting...

The recent terrible job and manufacturing numbers have put new recessionary concerns on the table... which has clobbered stocks and crude oil. Silver however, has held like a rock. And just yesterday, it "broke out" to a new two-month high. This is incredible price strength. And if the US government attempts to "goose" the economy, we will see much, much more.

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Bill Bonner on Sep 02, 2010 02:40PM

Speculating In Gold...?

No longer under-priced, Gold Bullion is from here a speculation...

WEDNESDAY was a good day for stock market investors, writes Bill Bonner in his Daily Reckoning. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions.

Of course, we're always uncertain here at The Daily Reckoning. But sometimes we're more uncertain than others. What seems certain to us is that stocks are a bad bet.

You might find this interesting, dear reader:

Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today?

Well, we haven't done the calculation ourselves, but we've heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don't.

But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to "risk on" mode.

Back and forth...to and fro...Mr. Market is making us wait. But for what?

We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn't happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us...because it is not behind us.

Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what's the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn't want to invest in them anyway...

But where...how...are we going to make some money in the next seven years? That is a good question, dear reader. We're so glad you asked.

Do you have a good answer? Hope so, because we don't.

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we've been watching Bernanke, Jackson Hole, and stocks ?  gold has been quietly creeping up...

Stocks go down; stocks go up ? and gold keeps moving up...

Fiscal stimulus, monetary stimulus, quantitative easing ? and gold keeps moving up...

Recovery...no recovery ? gold keeps moving up...

Inflation...deflation ? and gold keeps moving up...

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we're right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here's the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you'll probably succeed. When the Bernanke Fed loses its grip ? which it will ? and when the public gets on board the gold bull market ? which it will ? gold speculators will probably make a lot of money.

We've been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative...not inherent. When we bought gold in '99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We're happy with our gold holdings and don't really care if the price drops. Heck, we'd be happy to see the price back below $1,000; we'd buy more.

But speculating on a rising Gold Price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

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Hard Assets Investor on Sep 02, 2010 02:38PM

Bull Signal for Gold from Its Miners

The falling ratio between broader Gold Mining stock prices and the juniors is bullish for gold itself...

The PAST FEW WEEKS have been bullish for gold, in its bullion form, and also as an embed in mining stock prices, writes Brad Zigler at Hard Assets Investor.

We've touched on the different volatility of bullion and mining stocks before here at HAI, previously comparing Gold Bullion (or rather, the SPDR Gold Trust proxy) with the Market Vector Gold Miners ETF (NYSE Arca: GDX).

There's more than one way to obtain broad exposure to the gold mining sector, though. Since its November 2009 launch, the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) has outperformed GDX by a 3.5-to-1 margin, albeit with a dollop of extra volatility. Some of GDXJ's components overlap into the GDX portfolio, but the newer fund weights smaller capitalization (read: development and exploration) companies more heavily than producers.

The excess variance can be seen readily when you plot the price ratio of the two ETF portfolios. The GDX/GDXJ ratio started life around 2.0 (that is, GDX's price was roughly twice that of the nascent GDXJ fund's), but has generally drifted lower since then.

I say "generally" because there have been significant gyrations along the ratio's downward course. At times, the ratio sinks, meaning GDX's senior producers lose value relative to the exploration companies. That's when investors' risk appetites sharpen.

At other times, when investors rein in their risk-taking, the ratio tends to rise in favor of GDX. Presently, the GDX multiple is 1.72 times ? not its lowest value, but well off its most recent top at 1.92x. If the ratio breaks through the 1.72x level, a test of its old low at 1.69x is likely to follow.

But here's the thing: A falling ratio means a bigger market appetite for risk. More specifically, a bigger appetite for Gold Mining stock risk. That, in turn, is an expression of investor confidence in bullion's price strength.

So if you're bullish on Gold Prices, then, you want the ratio between the broad gold-mining sector and the juniors miners to fall. Which it is doing.

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The Mogambo Guru on Sep 02, 2010 02:35PM

Confessions of a Gold Bug

A new name for a long-time paranoid lunatic...

SINCE I am known as something of a gold bug, a lot of people write to me about gold, says the Mogambo Guru in The Daily Reckoning.

But since I am a paranoid lunatic, I don't read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, "Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to Buy Gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes."

Alas, I don't have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly Buying Gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don't believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes:

"Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don't waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules."

And "just accumulate" sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, "Whee! This investing stuff is easy!"

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