Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

Bonds commenced a secular BEAR market in June of 2003. (Last update: 22 August 2005)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

The Dollar commenced a secular BEAR market during the final quarter of 2000. The first major downward leg in this bear market ended during the first quarter of 2005, but a long-term bottom won't occur until 2008-2010. (Last update: 28 March 2005)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the CRB Index, commenced a secular BULL market in 2001. The first major upward leg in this bull market ended during the second quarter of 2006, but a long-term peak won't occur until at least 2008-2010. (Last update: 08 January 2007)

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Outlook Summary

Market Manipulation

The article linked HERE and some other recent internet articles discuss the large short positions in gold and silver futures built up by a small number of banks just prior to and during the July-August plunges in gold and silver prices. Most of these articles assert that the banks in question aggressively sold gold and silver futures with the aim of causing sharp price declines that would otherwise not have occurred.

We don't know if the aforementioned banks acted with the sole intent of pushing prices downward or if they correctly positioned themselves for market moves that would have happened anyway, although we think it is more likely to be the latter because the prices of almost all commodities tanked over the same period. It was a virtual certainty that gold and silver would get hit during the initial phases of a US dollar recovery and a downturn in industrial commodities; the only real questions related to timing (when would it happen?) and extent (by how much would gold and silver fall in response to a US$ rally and industrial commodity correction?).

In any case, from an ethical perspective there is nothing wrong with selling something with the sole purpose of forcing the price downward or buying something with the sole purpose of forcing the price upward. People should be allowed to sell or buy for their own reasons, whatever those reasons happen to be. However, selling or buying with the aim of creating an artificial price move is generally an ill-conceived tactic because it will tend to result in a loss. The markets tend to reward buy/sell decisions that are based on the correct assessment of the facts, not decisions based on an attempt to create a false impression.

From a legal perspective there may well be something wrong with making a sale for the sole purpose of pushing the price down, but we see no good reason to rail against the violations of laws that shouldn't exist and are policed by government agencies that also shouldn't exist. Putting it another way, we have no desire to encourage the government to implement more regulations or to more stringently enforce current regulations that shouldn't exist in the first place.

It should be obvious to any moderately astute observer that economic/financial problems are routinely used as justifications for the further expansion of government power, even if some form of government intervention caused the original problems. For example, the debt crisis of the past two years has been used as the justification for assigning more power to the Fed, even though the Fed's actions sowed the seeds of the crisis. In most cases the popular "government oughta' do something" response to a perceived problem is, in our opinion, part of the problem.

Also of note is that if -- and it's a big if -- the recent sharp declines in the prices of gold and silver were mainly the result of manipulative selling (selling motivated solely by the desire to push the price downward) on the parts of a few banks, then these banks have, in effect, granted to investors the opportunity to purchase bullion at artificially low prices. This should have been viewed as a plus by gold bulls with spare financial capacity, but would have presented a problem for margined-to-the-hilt speculators or anyone who did not have sufficient cash in reserve to take advantage of the bargains on offer. It's important to understand, though, that the primary cause of the latter's dilemma was a money management error, not market manipulation. We don't think it's wise for any non-professional investor to trade on margin, but those who choose to do so should use a disciplined stop-loss approach to ensure that all losses are small losses. Furthermore, no one knows what financial-market events and opportunities lie in the future so a substantial cash reserve should always be maintained just in case.

Lastly, we don't think it's possible for manipulative trading by banks or governments or anyone else to significantly damage the long-term bull market in gold. In our opinion there are only two things that could de-rail the gold bull market, one being a prolonged period of genuine deflation (money-supply contraction) and the other being a whole-scale change in the political landscape involving the adoption of non-inflationary policies. The probability of either of these actually happening is exceedingly low.

The Stock Market

Current Market Situation

The first of the following charts shows the NYSE Composite Index and the NYSE A-D Line (a cumulative total of the number of advancing stocks minus the number of declining stocks). The A-D Line is a measure of market breadth.

The unimpressive nature of the A-D Line's recent rebound supports our view that the stock market is experiencing nothing more than a consolidation within an on-going bear market.

The second of the following charts shows how the NYSE Composite Index and the NYSE A-D Line performed during 1972-1974. Our view is that the rebound from the 15th July 2008 interim bottom will prove to be similar to the bear-market rebound that began in December of 1973. This rebound will probably encompass at least one test of the July low.

This week's important US economic events

Gold and the Dollar

Gold and Silver

The "Shortage"

The aboveground stock of gold is so large relative to annual mine supply and to the amount of metal used each year in industrial/commercial applications that there can never be a true shortage of gold. Unlike the situation with commodities that are consumed, obtaining gold will always be purely a question of price. In other words, if you are prepared to pay enough you will always be able to obtain plenty of gold. Due to manufacturing limitations you may not be able to get the gold in a particular form, but you will be able to get it in some physical form.

It's the same situation with US dollars or any other type of money in that there can never really be a shortage of money. For example, if the Fed freezes the supply of US dollars at its current level then the purchasing power of the dollar will begin to trend upward, but there will always be enough dollars to satisfy the requirements of the economy. A perceived shortage of money can develop during periods when prices rise faster than the supply of money, but this is because people are anticipating future inflation. That is, the perception of a shortage can arise when the anticipated effects of future money-supply growth get factored into today's prices. Such a shortage can, however, be addressed by STOPPING the printing presses.

The claim that the modern "dynamic" economy requires a flexible money supply -- meaning a money supply that can be ramped up at will -- is just propaganda designed to hoodwink the masses. In reality, the more constant the money the better for the economy. The reason is that when money does not get created 'out of thin air' all price signals will be genuine (undistorted by inflation) and there will be a greater chance of people making the correct business decisions.  

Gold is no longer money, but due to its supply/demand characteristics it should be analysed as if it were. As is the case with money, the purchasing power of gold will adjust to account for any amount of supply.

While a genuine shortage of gold is not possible, as mentioned above it is certainly possible for there to be a shortage of gold in a particular type of manufactured form. For example, such a shortage could develop if manufacturers were unable to convert gold from bar form to coin form fast enough to meet the public's demand for gold coins.

There has not been any shortage of gold in the world over the past few weeks, but the demand for some types of gold coin has been greater than could be immediately satisfied by various mints. For example, the US Mint was recently unable to fill orders for 1-ounce gold coins because it encountered more demand for these coins than had been anticipated. The question is whether increasing demand for gold coins on the part of the general public in parallel with a declining gold price should be construed bullishly. As discussed in our 25th August commentary: we think not. If it is anything it is a BEARISH sentiment divergence.

The following sharelynx.com chart entitled "US Mint Gold Coin Sales" was sent to us by one of our readers. The chart does not provide conclusive evidence regarding the relationship between the US public's demand for gold coins and the gold price, but it does support our view that the recent high level of demand for certain types of gold coin should not be construed bullishly. For example, the public's demand for gold coins was very high during the Asian debt crisis of 1997-1998, peaking along with the financial crisis in October of 1998. This was also an intermediate-term PEAK for the gold price. The public's demand for gold coins then collapsed and was almost non-existent when the long-term gold bull market began in 2000. Also, the early-2003 peak in the public's demand for gold coins, which was most likely prompted by anticipation of the Iraq War, occurred just prior to a quick 20% fall in the gold price. On other hand, the late-1992 peak in coin sales occurred near an intermediate-term LOW in the gold price.

It is almost axiomatic that the peak in the public's demand for an investment will roughly coincide with the peak in the investment's price. It has to be this way because it is the surge in the public's enthusiasm for an investment that leads to the massive over-valuation that sets the stage for the ensuing bear market. We are, of course, aware that the public was aggressively selling gold and silver artifacts at the January-1980 peak in the precious metals, but we don't think this negates the previous sentence because most of the things that were being sold by the public -- silver cutlery and trinkets, for instance -- weren't purchased as investments. We don't have the data, but our guess is that the public's demand for gold/silver INVESTMENTS (such as coins) either peaked in line with the January-1980 price peak or during the 2-year period following the major price peak.

Having said all that, we aren't very concerned about the public's recent enthusiasm for some types of gold coins because the message being sent by other sentiment indicators is that the public is now LESS bullish on gold than it has been at any time over the past three years.

Current Market Situation

The following daily chart shows that December gold is poised just below resistance at $860.

Regardless of whether the recent up-move proves to be the start of a new intermediate-term advance or a counter-trend rebound within an on-going correction, it's reasonable to expect that gold will make some additional upward progress -- most likely moving beyond the resistance at $860 -- during the next couple of weeks.

In euro terms the gold price appears to be following a similar path to the one it followed during the 2006 correction, the main difference being that in 2006 the second low of the correction was above the initial low whereas during the current correction the second low was slightly under the initial low. The situation is depicted below.

We will be very surprised if the euro-denominated gold price breaks below its August low.

Gold Stocks

The gold sector, as represented by the AMEX Gold BUGS Index (HUI), has consolidated between 340 and 355 over the past 6 trading days. Consolidations within short-term trends often last 5-8 trading days, so if the short-term trend has turned up then the HUI should break above the top of the aforementioned range within the first three days of this week. As noted in a previous commentary, it is likely that the HUI will work its way back to around 380 in the near future regardless of whether or not the overall correction has come to an end.

Over the past ten years there has been a strong tendency for important turning points in the gold sector to occur during May-June and October-November. There has recently been a deviation from this cyclical tendency in that the most important low of 2007 occurred in August and another important low has potentially been put in place this August, but last year's October-November cycle still provided an important turning point (the HUI reversed downward in early November of 2007) and there is a reasonable chance that some sort of extreme (an important high or low) will occur during October-November of this year.

Based on what we expect to happen in other markets we think an October-November low is the more likely outcome. Moreover, while an October-November low would be more bearish on a short-term basis it would be more bullish on an intermediate-term basis. The reason is that lows during this turning-point window are generally followed by strong multi-month rallies whereas highs are generally followed by multi-month declines. The decline from the November-2007 peak lasted only 6 weeks, but in some important respects -- most notably the number of gold stocks that participated -- the subsequent advance to the March-2008 peak was more like a rebound within an intermediate-term downward trend than a continuation of the August-November-2007 upward trend.

On the following daily HUI chart we've drawn what we perceive to be the two most likely scenarios, with the blue line based on the assumption that there will be an important low during October-November of 2008 and the red line based on the assumption of an October-November high. Under the "Blue Scenario" the gold sector would be expected to make a short-term peak during the first half of September and then decline to an October or November low, after which a major upward trend would commence. Under the "Red Scenario" the gold sector would maintain an upward bias into October-November of 2008 and then trend lower for many months, most likely reaching its ultimate correction low during the second quarter of 2009.

Our current plan is to exit most short-term trading positions if the HUI moves up to around 380 over the coming fortnight, leaving our much larger longer-term exposure essentially untouched. If the "Blue Scenario" plays out we will then look to re-establish short-term positions during October-November. On the other hand, if the "Red Scenario" plays out we will reduce our long-term exposure and/or buy some insurance in the form of put options during October-November.

Currency Market Update

The following weekly euro futures chart shows that there is a confluence of support at around 1.45. As noted in a recent commentary, this is a likely area for the euro's INITIAL decline to bottom out.

We remain short- and intermediate-term bearish on the euro, but think it's likely that a quick rebound to the low-1.50s will soon begin. We are not interested in buying the euro in anticipation of such a rebound, but we will consider selling the euro -- or buying euro put options or making some other form of bearish bet -- if it rises to around 1.52 at some point over the next few weeks.

Update on Stock Selections

(Note: To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question)

Gryphon Gold (TSX: GGN). Shares: 62M issued, 80M fully diluted. Recent price: C$0.295

We think it's wise at this time to direct most new buying within the gold/silver sector to the mid-tiers and majors because these are the stocks that will likely rebound the quickest during the early stages of a new upward trend. We are referring, in particular, to stocks such as RGLD, SLW, HL, NGD and GFI. However, the juniors should not be totally ignored because the current lack of liquidity amongst the more speculative gold and silver stocks is creating phenomenal bargains. In fact, it would be an understatement to say that we have been surprised by how cheap some of the small exploration- and development-stage stocks have become. With very little new buying coming into these stocks, even small increases in selling pressure are resulting in sizeable price declines.

We highlighted the absurd under-valuations of ADM.V, FVI.V, KGN.V and SBB.V in the 20th August Interim Update and will now take a quick look at GGN.TO.

GGN has a gold resource of around 2.5M ounces at its Borealis project in Nevada. This means that at Friday's closing price of C$0.295, GGN was being valued by the stock market at around US$7 per ounce of gold-in-the-ground. Such a low valuation would not be unreasonable if there were no chance of GGN's gold ever being profitably mined, but based on information provided to date there is a good chance that GGN will be able to make the transition to a profitable gold producer.

More information is due to be provided in the near future. Specifically, the company noted in its 22nd August press release that: "The independent NI 43-101-compliant preliminary assessment study establishing the economic potential for a heap leach mine from Gryphon's 700,000-ounce oxide gold resources, as well as the NI 43-101-compliant independent scoping study affirming the longer-term opportunity for mining from Gryphon's 1.8-million-ounce sulphide gold resources, are scheduled for release in early September."

Many of the low-priced Canadian juniors will be hit by tax-loss selling in December, but even so it's likely that some of them are bottoming now. If the information scheduled to be provided by GGN in early September confirms the economic viability of its gold project then there's a good chance that this particular stock will make a higher low in December.

    Geovic Mining Corp. (TSX: GMC). Shares: 101M issued, 134M fully diluted. Recent price: C$1.04

GMC's stock price has recently been very weak in response to the general lack of interest in junior mining stocks and a sharp decline in the price of cobalt (GMC's main asset is its 60% stake in the development-stage Nkamouna cobalt mine in Cameroon). It should be noted, however, that the projected economics of GMC's mine are very robust at the current cobalt price of $33/pound. In particular, the Feasibility Study completed late last year showed that the Nkamouna project would have an after-tax net present value of US$695M at a cobalt price of only $20/pound. This suggests that GMC's 60% stake in the project is worth more than US$400M even allowing for a further 30% decline in the cobalt price, which compares rather favourably with the company's current market cap of around $100M.

Also of importance is that GMC has about $66M of cash in the bank. As a result, the company probably won't have to issue much new equity to fund its share of Nkamouna's construction.

Although the primary focus of most investors should remain on gold and silver at this time, it would be reasonable to accumulate some GMC near its current low price.

Chart Sources

Charts appearing in today's commentary are courtesy of: