Free Samples

The following excerpts from TSI commentaries should give those who are unfamiliar with our service a taste of the sort of financial-world analysis provided on a twice-per-week basis to our paying subscribers. Note that during a typical week our subscribers receive two market reports, with each report generally containing 2500-3500 words and 7-12 charts.

This page will usually be updated every Tuesday with one or more excerpts from recent commentaries.

 



Date posted as sample Commentary Excerpt
09-Mar-10 From the 3rd March 2010 Interim Update:

Currency Market Update

A daily chart of the Dollar Index is displayed below.

The Dollar Index has embarked on some type of 'corrective' move. A routine bullish correction would probably end up looking like the mid-December through to mid-January decline, and bottom-out in the vicinity of the 50-day moving average. Something more serious would be indicated by a solid break below the 200-day moving average. In other words, if this is just a routine correction within a continuing upward trend then it shouldn't do much more than take the Dollar Index back to around 79, whereas a break below 78 would point to an important trend reversal.


We favour the "routine bullish correction" possibility, because it meshes with the idea that the broad stock market is close to an important peak and because it is more consistent with the Dollar Index's recent price action.

When it comes to anticipating currency trends, also worthy of consideration is that the Greece-related problems that have made headlines over the past month are indicative of deeper and more widespread issues that will eventually lead to the unraveling of Europe's monetary experiment and/or a far more inflationary stance by the ECB.

We don't have a strong opinion on exactly how Europe's monetary union will break apart. There's a lot of talk at the moment about Greece and some of the other "PIIGS" choosing to -- or being forced to -- leave the union, but Germany is the only country that could leave and end up with a more stable currency as a result. However, there won't be sufficient incentive for Germany to leave the union until the average German believes that the costs of staying are much greater than the costs of leaving; and this situation probably won't eventuate until it becomes obvious that a major euro-inflation problem is brewing. Therefore, if there is going to be a fracturing or contraction of Europe's monetary union over the next 12 months then it will probably involve the departure of one or more of the "PIIGS".

Just to be clear: the potential for a break-up of Europe's monetary union is not the main reason we are intermediate-term bearish on the euro and bullish on the US$. The primary basis for our currency-market outlook is that a global economic contraction commenced in 2007, was interrupted during 2009, and will resume during 2010. As the private sector de-leverages in response to this contraction there will probably be an increase in US$ demand relative to the demand for currencies that were elevated by the boom of 2003-2007 and the 'echo-boom' of 2009.


01-Mar-10 From the 24th February 2010 Interim Update:

Gold

In last week's Interim Update we said:

"The gold price could drop back as far as $1080 over the next 1-3 weeks without negating this week's upside breakout (a steady decline to the $1080s would constitute a 'test' of the breakout). Furthermore, if it spends some time (a few days to a few weeks) consolidating below $1120 and then breaks above $1120, the measured short-term target will be $1190. This, we think, describes the most likely near-term outcome, but it relies on the gold price holding above $1080."

And in the latest Weekly Update we cited gold's resilience in the face of 'bearish' news as evidence that a break above $1120 would soon occur.

This week's action has neither added to nor detracted from the idea that the gold market is consolidating below $1120 in preparation for an upside breakout. In particular, the following daily chart shows that April gold has simply pulled back to the $1090s.

We continue to view support at $1080 as the demarcation level between a routine pullback from resistance and something with more bearish near-term implications.


01-Mar-10 Also from the 24th February 2010 Interim Update:

The Real SPX

Relative to gold, the S&P500 Index (SPX) double-topped in 1999-2000 and then embarked on a major downward trend. This trend reached its most recent bottom during the first quarter of 2009, at which point the SPX/gold ratio was down by an incredible 87% from its peak. A recovery then began.

It is possible that the Q1-2009 low in SPX/gold will turn out to be the bear market's ultimate low, but this possibility is remote (to put it mildly). With central bank and government policies on a seemingly inexorable path from bad to worse and with the vast majority of market participants still blissfully unaware of the damage that is being wrought, it is far more likely that SPX/gold will move substantially lower over the years ahead. In other words, the recovery of the past year will almost certainly turn out to be just another counter-trend move. In which case, the counter-trend moves of 2003-2005 and 2006-2007 could give us clues as to what we can reasonably expect over the months/quarters ahead.

As illustrated by the following chart, the 2003-2005 and 2006-2007 corrections involved a sharp initial advance followed by a lengthy period of oscillating within a horizontal range. In both cases, the horizontal range was defined by the peak of the initial advance (labeled 'A') and the bottom of the first pullback following the initial advance (labeled 'B').

If the current correction is following a similar pattern then SPX/gold's horizontal range has been established and we are now somewhere between points 'B' and 'C'. Also, if the length of the current correction matches that of the 2006-2007 episode then point 'C' will arrive during April-July of this year, whereas if the current correction ends up being as long as the 2003-2005 episode then we won't arrive at point 'C' until mid-2011.

Our guess is that the length of the current correction will be similar to that of 2006-2007. That is, we expect SPX/gold's long-term bear market to resume within the next few months. Moreover, short of completely reversing the current directions of monetary and fiscal policies we don't think there is anything the Fed or the Government could do to prevent the bear market's eventual resumption. The reason is that attempts to provide artificial support to the stock market would provide even more support to the gold market.


16-Feb-10 From the 10th February 2010 Interim Update:

Idiocy or Dishonesty?

At an event at the London School of Economics early this week, world-renowned economist Joseph Stiglitz said "[both the U.K. and the U.S.] deserve to keep the Aaa rating" and "the likelihood of a default is...small, particularly in the U.S. because all we do is print money to pay it back." He went on to assert: "The notion of a default is so absurd, it's another reflection of the absurdities in the financial markets."

But, Mr. Stiglitz, isn't printing money a form of default? That is, isn't it the case that when the government creates new money out of nothing in order to pay its debts it is effectively defaulting on its obligations, except that rather than the cost of the default being borne directly by those who loaned money to the government it is spread across all savers within the economy? And why is it OK for a government to print new money to pay its debt and not OK for a private entity to do the same thing? To put it another way, why is it called "economic stimulus" or something else with a positive connotation when the government does it, and counterfeiting when someone outside the government does it?

While we are at it, here are some more questions for the 'great' economist: Are you aware, Mr. Stiglitz, that the government doesn't actually "print" new money in the strict meaning of the word, but, instead, borrows new money into existence? That is, are you aware that for every new dollar the government brings into existence, the government's debt must rise by at least one dollar? Continuing on, doesn't this mean that the government only pays off its old debt by creating new debt, such that the total quantity of debt always expands and we are, in effect, dealing with a Ponzi scheme of unprecedented proportions? Lastly, if a Ponzi scheme doesn't ultimately end in default, then how does it end?

As if the quips about money printing and default weren't enough, Stiglitz went on to state: "What we need now is a second round of stimulus, [because] if we don't the heavy level of indebtedness is going to press down on the economy."

So let us get this straight -- to prevent the heavy load of indebtedness from pressing down on the economy, what we need is...more debt.

Is Joseph Stiglitz really that stupid, or is he being very economical with the truth in order to support an anti-free-market/pro-intervention agenda?

09-Feb-10 New TSI Pricing Structure

The price of a TSI subscription has been unchanged since the inception of our subscription-based service almost 10 years ago (October of 2000). Since that time, the average length of a TSI commentary has more than doubled and the US$ has lost about 75% of its value relative to gold. We have therefore decided that it's about time we raised our prices.

As of 1st April 2010, the price of a yearly TSI subscription will increase from US$120 to US$240.

To take advantage of the old ($120/year) subscription rate while it lasts, please do one of the following by 31st March:

1. Go to http://www.speculative-investor.com/new/tsi_form.html, select the 12-month payment by credit card option and enter your details as if you were a new subscriber.

2. Use PayPal to transfer US$120 to sas888_hk@yahoo.com, noting your name and email address (the address to which TSI emails are to be sent) in the PayPal message.

3. Use Goldmoney.com to transfer the gold equivalent of US$120 to our Goldmoney account (Holding Name: The Speculative Investor, Holding Number: 50-25-53-G), noting your name and email address in the Goldmoney message.

09-Feb-10 From the 8th February 2010 Weekly Update:

Gold Stocks

Gold bullion lost about $17 over the course of last week while the HUI gained 16 points. This has created a bullish divergence between the HUI and the HUI/gold ratio as indicated on the following chart. This divergence has the form of a lower low for the HUI in parallel with a higher low for the HUI/gold ratio, followed by a rise to a new multi-week high by the HUI/gold ratio. It is the opposite of what happened between mid September and early December of last year, although on a much smaller time scale. Refer to the following chart for details.



Based on what happened during previous intermediate-term corrections over the past decade, our expectation is that the HUI's next multi-week rally will retrace 50%-70% of the decline from the 2nd December peak. If Friday's intra-day low of 363 proves to be the bottom of the decline then we will look for a rise to 440-470 within the next two months, with some hesitation along the way at 400 and 420.

In the email alert sent after the close of trading last Thursday we cautioned that even though the gold sector could be close to an important low it was not the time to be buying anything -- including gold stocks -- aggressively. In general terms, it can often be a mistake to buy quickly in response to a price decline or to sell quickly in response to a price rise; the reason being that prices will regularly move much lower during the downward corrections and much higher during the rallies than a rational observer initially expects. This is particularly the case when dealing in small-cap stocks, as is our wont. The fact is that many 'investors' are easily spooked, oblivious to value, and liable to either cough-up shares at ridiculously low prices or eagerly buy at ridiculously high prices.

The best way to take advantage of the market's manic-depressive nature is to methodically build positions over time during the purges and to methodically harvest gains over time during the subsequent surges.

02-Feb-10 From the 27th January 2010 Interim Update:

Gold Stocks

The following chart shows that the HUI spiked below its 200-day moving average on Wednesday and then ended the day right at this moving average.



If a short-term low wasn't put in place on Wednesday it will, we think, be put in place within the next four trading days. In terms of time we are therefore probably at, or very close to, a tradable low. The risk is that support at 380 will give way and that there will be a quick spike down to the 350s before a rally begins.

Taking a broader view of the situation, we think the HUI is close to the end of the FIRST phase of an intermediate-term correction that will continue until at least May. The next phase of the correction should involve a 1-2 month rebound that retraces a large chunk of the decline from the 2nd December peak, after which another downward phase would be expected to begin. 

With regard to our own accounts, an unusually large cash position is being maintained at this time. We are looking for opportunities to add to our gold-stock holdings and have accordingly placed several under-the-market buy orders, but for these orders to be filled there will probably need to be a final downward spike over the coming days. If the gold sector begins to rally immediately then we will re-think our tactics.

The BMO Junior Gold Index ETF (ZJG) began trading on the Toronto exchange this week. As is the case with its US-listed counterpart (GDXJ), ZJG's largest holdings generally reside at the upper-end of the junior range (some would more appropriately be described as mid-tiers). For practical reasons, ETFs tend to limit their holdings to stocks that offer good liquidity.

Information on ZJG can be found at: http://www.bmoetfs.com/ETFConsumer/controller/funddetails/glance?fundId=75750.


19-Jan-10 From the 13th January 2010 Interim Update:

Gold Stocks

We downgraded our short-term gold sector outlook to "bearish" via the email alert sent to subscribers after the close of trading on Monday 11th January. The risk is that the HUI completed a counter-trend rebound at Monday's intra-day high (475) and that the next move of consequence will be a decline to test, and probably breach, the December low (416). As noted in the email alert, this bearish view will be 'stopped out' if the HUI closes above 475.

The HUI's current situation is shown below. Our guess is that it will spend the next week or so 'horsing around' between Wednesday's low of 440 and Monday's high of 475.



Intermediate-term corrections in the HUI over the past decade have, at a minimum, resulted in a spike below the 200-day moving average and a drop in the daily RSI(14) to below 30. A decline to support at 380 within the next few weeks would accomplish both of these.

12-Jan-10 From the 11th January 2010 Weekly Update:

Gold versus the Industrial Metals

Gold tends to weaken relative to industrial metals when economic confidence is on the rise and strengthen relative to industrial metals during periods when confidence is falling.

At the beginning of 2009 we thought that there would be rebounds in economic confidence and the broad stock market during the first half of the year, paving the way for gold to retrace some of the gains it had made during 2007-2008 relative to the industrial metals. This, we believed, would be followed by a second-half resumption of gold's relative strength due to the emerging realisation that a sustainable economic recovery would not begin anytime soon. We seemed to be 'on track' when the gold/GYX ratio (gold relative to a basket of industrial metals) reversed upward in August of 2009, but the following chart shows that the August-November gains made by gold/GYX have since been given back. This tells us that despite the absence of supporting evidence, investors, as a group, still have moderately optimistic expectations about economic growth.


We view the on-going strength in the industrial metals in both dollar and gold terms as the triumph of hope over logic. It is indicative of a general perception that the world is entering a period characterised by robust growth and minimal inflation risk. This, in our opinion, is not only unlikely, it is one of the lowest-probability outcomes we can imagine.

As long as the broad stock market holds together there probably won't be large price declines in most industrial metals, but at their current prices the downside risk certainly appears to be high relative to the upside potential. This is particularly the case for copper, a metal that has now recouped the bulk of its 2008 losses despite burgeoning inventory levels.

We were long-term bullish on the industrial metals complex throughout the past decade, but even with the strong likelihood of a lot more monetary inflation over the next several years the risk/reward no longer justifies such a view.

12-Jan-10 From the 6th January 2010 Interim Update:

The stock market's 4-year Presidential Cycle

The following chart, which was extracted from the free weekly stock market report issued by Mike Burk, shows the average performance of the Dow Jones Industrials Index over the past 50 years. The average for all years is displayed in magenta and the average for the 2nd year of the Presidential Cycle (2010 will be the second year of the current presidential cycle) in green.

The charts tells us that the stock market's average return during the second year of the Presidential Cycle has been much worse than its overall average return. It also tells us that the second year of the Cycle has, on average, encompassed:

1. A January pullback

2. A rally from late January through to April

3. A decline from April through to early October that takes the market well below its starting point for the year

4. A rebound during the final quarter that takes the market back to around where it began the year


Anyone who thinks they know the path that the stock market -- or any market -- will take over the coming 12 months is kidding themselves, but the map provided by the green line on the above chart does not look unreasonable to us. For one, it is roughly in line with the "1937-1942 Model". For another, it suggests that by the second quarter of this year market participants will start becoming suspicious of the economic recovery's sustainability. This meshes with our expectations.

21-Dec-09 From the 16th December 2009 Interim Update:

Gold Stocks

The HUI's correction low to date occurred on Tuesday 8th December. It has since drifted sideways.



The pullback from the 2nd December peak could be the start of a new intermediate-term decline or it could be part of a correction within an on-going intermediate-term advance. At this time we favour the former possibility, but there is simply no way to be sure. In either case, however, last Tuesday's low will probably be breached before a short-term bottom is put in place. Also, in either case a short-term bottom should be followed by a tradable rally that retraces 50%-100% of the preceding decline.

In our opinion, speculators should operate under the assumption that an intermediate-term peak was put in place on 2nd December until/unless proven otherwise. This would likely entail doing some additional selling or hedging if the HUI were to rebound to 480 or above at some point over the next few weeks, and applying relatively tight stops to short-term trading positions.

A move to a new 52-week high by the HUI would obviously constitute proof that an intermediate-term peak was NOT put in place in early December. As noted in previous commentaries, such a development would suggest that the intermediate-term advance was set to extend into March-May of 2010. Also worth mentioning is that although it wouldn't be absolute proof, a move by the HUI/gold ratio to a new 52-week high would constitute strong evidence that the HUI had not yet peaked on an intermediate-term basis.

With or without new highs in the gold-stock indices, we continue to expect that many juniors will reach new 52-week highs over the weeks ahead. In fact, this is already happening. For example, First Majestic Silver (TSX: FR) and Chesapeake Gold (TSXV: CKG) made new 52-week closing highs on Wednesday of this week and Clifton Star Resources (TSXV: CFO) made a new all-time high last week.

15-Dec-09 From the 14th December 2009 Weekly Update:

Gold

Gold Sentiment

As we noted a week ago, the recent touting in the mainstream press of ambitious upside price targets for gold created the right sentiment backdrop for a correction. That the gold market was very extended to the upside (the gold price was a long way above its moving averages) and that large speculators had built up a record-high net-long position in COMEX gold futures also set the scene for at least a short-term correction. However, the people who believe that gold sentiment recently hit the sort of extreme that would be consistent with a major peak are, we think, completely misreading the situation.

The best measure of sentiment is what the public is doing with its money, and right now the average member of the investing public has ZERO exposure to gold. Also, for the small percentage of the population that currently has some exposure, in most cases the exposure is relatively minor. Very few people have more than 10% of their net worth in gold-related investments. This tells us that what some analysts refer to as the bull market's "speculative third phase" has not even begun at this time. To put it another way: "You ain't seen nothing yet."

Current Market Situation

On a short-term basis the gold market appears to be in a similar situation to the HUI in that it probably has just completed, or will complete early this week, the first stage of a multi-stage correction. December gold moved to within 2% of its 50-day moving average on Friday (see chart below), so it's likely that almost all of the correction's price decline is now behind us. However, the correction is only 6 trading days old, which probably means that more time will have to be used up before the next rally to new highs gets underway.

In our opinion, support at around $1000 continues to define the MAXIMUM downside risk in the gold market on both a short- and intermediate-term basis.



01-Dec-09 From the 30th November 2009 Weekly Update:

Gold Stocks

...The short-term prospects of the gold-stock indices are unclear to us, but the long-term outlook is clear. We'll describe our long-term outlook with the aid of the following weekly chart of Newmont Mining (NEM), the world's largest unhedged gold producer. Here's how we interpret the chart:

1. A long-term bull market began in November of 2000

2. The first major leg of this long-term bull market ended during the first half of 2006 and was followed by the bull market's first primary correction. Note that the HUI moved well above its H1-2006 high during the first quarter of 2008, but when the HUI reached its peak the majority of gold stocks (including NEM) had already been in correction mode for 1-2 years. This means that for NEM and most other gold stocks, the plunge that began in March of 2008 and ended in October-November of 2008 was the final phase of a multi-year downturn.

3. The rally that began in Q4-2008 is the first intermediate-term advance of the long-term bull market's second major upward leg. If the second major upward leg lasts as long as the first, it will end during H1-2014.

4. It is possible that the first intermediate-term advance of the long-term bull market's second major upward leg has just ended. However, we point out that none of the intermediate-term advances during the first major upward leg ended until after the weekly RSI shown at the bottom of the chart had moved above 70. In other words, despite the power of the past year's advance NEM is not yet sufficiently 'overbought' on a weekly basis to indicate more than a short-term top.



Our interpretation of NEM's chart is influenced by our understanding of the fundamental backdrop.


01-Dec-09 Also from the 30th November 2009 Weekly Update:

Efficient Market Baloney

We don't know, or know of, any successful speculator or investor who believes in the Efficient Market Hypothesis (EMH: the idea that the current market price takes into account all available information, and, therefore, that "beating the market" is not a realistic objective), but inside ivory towers it is still possible to find many unbowed devotees to this idea. Once someone has made a career advocating a particular theory they will tend to stick with it, regardless of how much contrary evidence emerges. After all, doing otherwise would be an admission that one had misdirected the best part of one's professional life.

That EMH is really EMF (Efficient Market Fallacy) is evidenced by the fact that sentiment follows price rather than value. For example, there was obviously a lot more value in the US stock market when the S&P500 Index was trading at 670 in March than there is today with the S&P500 at 1100, but most people were bearish in March and are bullish today. If the market really were efficient then the opposite would be the case.

Successful investors are successful because they are able to exploit the market's inefficiency. Most people, however, just get dragged along with the crowd.

24-Nov-09 From the 23rd November 2009 Weekly Update:

Gold

Current Market Situation

Either gold has entered blow-off mode (not likely, but possible) or it will soon begin to 'correct'. A normal short-term correction would take the gold price down to $1050-$1070.

We are presenting the following weekly charts to counter the increasingly popular idea that gold has entered 'bubble territory'. At the bottom of each chart is a 60-week rate-of-change (ROC) indicator.

The first chart shows that when platinum was peaking in early 2008 its 60-week ROC was 100%, meaning that it had doubled over the preceding 60 weeks.


The second chart shows that when oil was peaking in mid-2008 its 60-week ROC was around 120%, meaning that it had more than doubled over the preceding 60 weeks.


The third and final chart shows that gold's 60-week ROC is presently around 30%, and that gold broke out to the upside from a lengthy basing pattern only 7 weeks ago. It looks 'overbought' on a short-term basis, but does not appear to be remotely close to 'bubble territory'. By way of comparison, when gold was peaking in 1974 its 60-week ROC was above 150%, and when it reached its ultimate peak in January of 1980 its 60-week ROC was in excess of 200%.



Quick note regarding "tungsten gold bars"

A story about gold bars being filled with tungsten has been doing the rounds. We think that this story should be filed under "unadulterated hogwash".

There are very good reasons to be bullish on gold. We wish that some gold bulls would stop giving the rest of us a bad name by spreading ridiculous rumours.


16-Nov-09 From the 11th November 2009 Interim Update:

Weimar-style hyperinflation: Is it possible today?

Our view for many years has been that focusing on the ability, or inability, of the banking industry to lend new money into existence misses the critical point that it is ultimately the government, not the private banks or even the central bank, that determines the amount of monetary inflation. The fact is that under the current monetary system there is no limit to the amount by which the government can increase its obligations in terms of its own currency. That, in a nutshell, is why we have such a terrible monetary system. It certainly didn't come into being as a way of promoting a stronger economy.

The bond market could, of course, impose a practical limitation on government debt expansion at some point in the future, although there is no guarantee that even a plummeting bond market would curtail the expansion. A plummeting bond market certainly didn't stop the frenzied increase in government debt -- and the associated hyperinflation -- in "Weimar" Germany during the early 1920s. The question is: could something along the lines of the Weimar Republic's hyperinflation happen in the US within the next several years?

We think it is very unlikely, for two main reasons. First, the US Government will probably default DIRECTLY on its debt before it risks hyperinflation. This is because hyperinflation would destroy the economy, whereas the costs of a direct debt default would largely be borne by foreign governments and institutional investors. Second, we think the most likely next stage in the monetary system's evolution will be a global currency 'managed' by a World Central Bank.

However, hyperinflation is certainly possible under the current system.

Today's monetary system is actually not as different as most people believe to the one that was inflated into oblivion during the days of Germany's Weimar Republic. Like today's minor (by comparison) increase in the money supply, the spectacular surge in the money supply that led to Germany's hyperinflation was driven by the monetisation of government debt.

16-Nov-09 Also from the 11th November 2009 Interim Update:

Gold Sentiment

Is the gold market too 'frothy', with speculative enthusiasm at a dangerously high level?

Not as far as we can tell. Actually, we were more concerned about sentiment in the gold market three months ago than we are today. The reason is that during the first half of August gold was trading in the $950s and its price action was indifferent (it had spent several months chopping back and forth below its February peak), but the 'so-so' price action was associated with a high level of bullish enthusiasm. By our reckoning, this meant that sentiment was excessively optimistic.

Gold has since broken upward from a large base, and yet sentiment does not appear to be any more bullish now than it was in early August. The total speculative net-long position in COMEX gold futures has risen by about 25% since then, but Market Vane's bullish percentage and the premiums to net asset value of closed-end bullion funds (CEF and GTU) are roughly the same now as they were back then (84%-85% for Market Vane's bullish percentage, 4%-8% for the NAV premiums).

While it is true that a lot of traders are bullish on gold right now, this is 'par for the course' for a market in a strong upward trend and at a new all-time high. It would be strange, indeed, if there weren't plenty of gold bulls considering that, with the exception of short-term interest-bearing securities with no additional upside potential (because their yields are already near zero), gold is the only high-profile investment in new-high territory.

In summary, gold market sentiment appears to be realistic rather than irrationally exuberant. At this stage it is not, in our opinion, a good reason for 'contrarian' investors to be rushing for the exit.

10-Nov-09 From the 9th November 2009 Weekly Update:

Gold

Current Market Situation

The December gold futures contract ended last week at 'round number' resistance ($1100) and at the top of its short-term price channel. As such, there is a good chance that some sort of downward price correction will soon commence. Our short-term outlook remains bullish, however, due to the risk of an upside blow-off.

An upside blow-off is not the most likely short-term outcome, but it's a possibility that should be taken seriously. It should be taken seriously because we are into the final two months of the year and with the exception of interest-bearing securities such as T-Bills, which have almost no remaining upside potential, gold is the only high-profile market that is at, or near, an all-time high. This puts gold in the position where it could conceivably attract substantial additional speculative demand between now and year-end as hedge funds and other large speculators scramble to maximise their 2009 returns.

By way of further explanation, gold's current position could be likened to the position of the NASDAQ100 Index (NDX) exactly 10 years ago. At the end of the first week of November 1999, the NDX had just completed a 3-week surge from 2300 to 2750. Based on most oscillators and other momentum indicators it was very 'overbought' at the time and apparently in need of a pullback; however, it continued to move upward with almost no hesitation and ended the year at 3750. In other words, it ignored most technical indicators and gained 40% over the final 7 weeks of the year.

We are not forecasting something similar for the gold market, primarily because we think gold's bull market has at least a few years to run (upside blow-offs such as that experienced by the NDX during the final quarter of 1999 and the first quarter of 2000 usually only occur at the ENDS of long-term bull markets). What we are saying is that an upside blow-off is a realistic possibility given the gold market's current position.

With regard to downside risk, we suspect that $1000 has become the 'floor' under the gold market.

Gold relative to other currencies and other 'stuff'

Up until about 6 weeks ago gold's short-term rally had a lot more to do with US$ weakness than genuine gold strength, but gold has recently begun to strengthen relative to almost everything. For example, the first of the following charts shows that gold is now clearly in a short-term upward trend in euro terms, while the second chart indicates that gold is probably about to complete its consolidation -- and resume its upward trend -- relative to the CRB Index.

By the way, if gold/CRB can build on its recent gains it will be a bearish omen for the broad stock market as it will confirm that a shift away from riskier investments has commenced.





27-Oct-09 From the 26th October 2009 Weekly Update:

Gold

Gold's Fair Value

A well known gold-market analyst likes to calculate a "fair value" for gold by assuming that the percentage change in the gold price should approximate the percentage change in the money supply, which amounts to applying the simplistic "Quantity Theory of Money" (QTM) to the gold price. The reality, though, is that QTM creates a misleading picture of how changes in the money supply affect prices. It should not be applied to anything, including (especially) the gold market.

It is vitally important to understand that an X% increase in the money supply will NOT lead to an across-the-board X% increase in prices. The reason is that new money does not get evenly spread throughout the economy; rather, it enters the economy at specific points and benefits the first recipients at the expense of everyone else. Monetary inflation is, in effect, a means for stealing and redistributing wealth as opposed to a means for raising the average price level.

Due to the way it works, monetary inflation will lead to dramatic increases in some prices while other prices barely rise or perhaps even decline. The distortion of relative prices will, in turn, create major economic problems, and once these problems start becoming evident to the masses (including policymakers) the response will tend to be twofold. First, policymakers will try to mitigate the problems caused by monetary inflation by promoting even more monetary inflation. Second, the public will attempt to increase its savings, but due to the blatant efforts of policymakers to inflate their way out of the economic morass created by prior inflation it will begin to dawn on people that it is no longer prudent to save in terms of the official currency. At this point gold could become the focal point of the public's collective desire to save, resulting in a gold price that bears absolutely no relationship to the growth in the money supply.

A "fair value" for gold can't be determined based on changes in money supply, but the more general point is that there is no such thing as a fair value for gold. The whole concept of a fair value for gold is nonsensical, because value is subjective. If we had enough data we could perhaps conclude that over extremely long periods of time the gold price had tended to oscillate around a number determined by the difference between the change in money supply and the change in gold supply, but because the gold price has only been 'untethered' since 1971 we don't have anywhere near enough data to do such an analysis. Furthermore, even if we had enough data to do the aforementioned analysis it wouldn't lead us to a "fair value" for gold and it may not tell us anything about gold's future (since the future is not just an extrapolation of the past).

Although we shouldn't kid ourselves that it is somehow possible to calculate gold's "fair value", history does give us some clues as to what we can expect from gold over the coming decade. For example, the previous two secular bear markets in US equities have taken the Dow/Gold ratio down to 1, versus its current level of around 10. Financial-market history therefore suggests that gold has additional long-term upside potential of around 900% relative to the Dow Industrials Index. For another example, the following chart shows that the gold/TMS ratio (gold relative to the True Money Supply) was about 5-times higher at its January-1980 extreme than it is today.