Monday, April 19, 2010

What Does 'GOLD'man Sachs Have To Do With Gold?

Nothing's easier than hopping on board a consistent and trending market.  A Buy and Hold strategy is the most effective.  However, the precious metals market continues to trade within the confines of a fairly narrow range. 

After peaking briefly just above $1,200 in early December, Gold has traded in a $100 range for the last 4 months,  primarily oscillating between $1,050 and $1,150.  After slighty piercing the upside part of the range several days ago and giving signs that it was ready to resume its bull market, the yellow metal has once again given faithfull investors a temporary heart attack - dropping about $25 on Friday.

The benchmark index for precious metals stocks, HUI or "Gold Bugs Index", has also traded within a fairly narrow range despite a great deal of intra-day volatility.  After reaching a high of about 500 in early December, the HUI lost a quick 25% to the 375 level in February and has been gently climbing in a stair-step fashion.

Trading a market is always virtually impossible except for the extra-ordinarily skilled or lucky.  In the case of GOLD, or the underlying HUI, the pattern has demonstrated very little momentum or continuity in either direction.  So, trading has resulted in whip-saws, unnecessary transaction costs and frustration.

The question remains as to what to do now, especially in light of the Friday smackdown ostensibly driven by the SEC allegations levied against Goldman Sachs (GS), aka "Government Sachs".  It would seem that these allegations are specific only to the company and not a market event.  It's even more difficult to comprehend how the "GOLD"man Sachs situation would cause the smashing of GOLD itself.

The answer is quite simple.  They aren't related!  The reaction in the overall market and the precious metals space was purely coincidental.  The S & P 500 was already tremendously overbought and overdue for a sharp correction.  On some dimensions, so was GOLD and the precious metals market.  Traders often use significant news events as a reason to go to cash, especially in advance of a weekend, so as not to get caught in an adverse situation while the markets are closed.

This led to the significant broad market selloff which took other financial assets with it.  GOLD and the underlying precious metals stocks weren't nearly as stretched as the general market, but there had been a decent rally in the last several weeks and nimble traders used the news as an opportunity to take profits.

From a technical perspective, the charts of GOLD and HUI remain in a bullish configuration.  Neither has experienced a downward penetration of their respective 200 day moving averages.  If that should occur, it might justify taking a closer look.

None of the underlying fundamental factors suggest that any change in outlook is warranted.  Physical supplies of GOLD and SILVER remain tight and precious metals mining companies continue to deliver record revenues and profits.

The effects of record stimulus spending remain to filter through the economy.  We've witnessed some, but not much, good news on retail sales, GDP and corporate profits.  Yet, without much benefit to employment.  Economists refer to that initial reaction as the "output effect".

Historically, the "output effect" is followed, with a time lag, by the "price effect".  The price effect, or an increase in reported and un-reported inflation, is still simmering beneath the surface.  The inevitable price effect will prove to be an excellent underpinning toward the continuation and acceleration of real assets such as GOLD and SILVER.   As that occurs, the precious metals companies will continue to spit out even better profits and will be leading market participants.

One should view these temporary one- or two-day selloffs in precious metals stocks as gifts.  Once the mining sector is clearly into gear, it will be very difficult to board the train.  The character of the market will change and short-term selloffs will become fewer and shorter. 

During the great NASDAQ bubble, as the tech-market accelerated, many experienced investors became skeptical of the move and missed the opportunity to generate incredible wealth.  I should know.  I was one of them!

The GOLD and miners market have all the hallmarks of being on the cusp of entering a hyperbolic growth phase.  Letting the day-to-day noise affect our emotions and investment strategies is a mistake that even the most experienced investors make.  No one has a crystal ball.  However, until demonstrated to the contrary, Marko's Take says stay long and stay patient.

Marko's Take

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  1. I agree 100% with you, the GS news should of had nothing to do with the Friday's gold price going down.But as I come to figure out ,the cartel will use any news story to take down gold/silver ,even if it has absolutely nothing to do with the metals .If the Lakers were to loose in the first round of the NBA playoffs ,the cartel would use that as an excuse to bring the price down.
    It's the same old story ,everyone is negative on gold ,but just look at the last 10 years, we will have the last laugh .

  2. Hi RD:

    I think the correction is over. Yup, any excuse to take the market down. Maybe if Obama has a hangnail, they'll have another reason..

  3. This correction is probably over, but then I think the 27th is expiration day, so expect them to take down the metals that week. Then a week later is the jobs report another day they always use to try to take the price down . Then there we will be some news that has nothing to do with gold and they will use that, just like with the GS news. It never ends with the corrupt comex gang.We can only hope, the corruption ends one of these days

  4. Compensation and high profits in the financial industry are about as broke and misguided as I can express. Do all realize the more bankers and their products suck profit out of the system, the less there is to actual make something? I just cannot believe the media does not jump on this sad state of America and the World regarding this matter. As an example, as reported by MarketWatch, Goldman Sachs said its first-quarter profit was $3.46B, or $5.59 a share, on revenue of $12.78B.
    While a major company like Boeing, that actually makes something, as being reported by Yahoo and AP that its earnings, which reports on Wednesday, is expected to be a profit of 63 cents per share on revenue of $15.29 billion. That's includes a charge of $150 million, or 20 cents per share, that Boeing took during the quarter because it lost a deduction for some prescription drug expenses for retirees.
    Is anyone worried, and just plain fed up, that the financial systems and all its madness are the leeches sucking the life out of everything ? When is enough, enough?


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