It may be time to go grab our red capes from the closet and dust them off. In the pen is an increasingly agitated bull, snorting and pawing at the dirt. He's been held back by a combination of natural and man made forces. He ain't happy.
Gold has had every reason to correct sharply. It appears that we are in the early stages of another deflation scare. The money supply is shrinking at unprecedented rates and the economy is going into free fall. These are NOT the best pre-conditions for a rally. But they are GREAT conditions to fool everyone, and that is how great moves get set in motion.
When any asset or stock ignores what is unequivocally bad news, it virtually always suggests that the information has already been factored into the market. I believe that's going on now.
The rally in Gold to near its all time highs has occurred very quietly and without much notice. So has the recent strength in Silver. The underlying mining stocks appear to be forming healthy base patterns which are ideal for a resumption of the strong advance that still has a very long way to go.
The key obstacle to an advance here is the tremendous liquidity in Gold. When the really nasty part of the upcoming market meltdown asserts itself, it will inevitably trigger margin calls among the hedge fund community. They may be FORCED to sell the most liquid assets they have, and Gold would be at the top of that list.
The key levels to watch for an upside move are $1,250 on Gold and 500 on the HUI. If these are both exceeded, the technical picture goes from neutral, where it sits now, to very bullish. Given the very small overall market capitalization of the mining sector, even a small re-allocation of investors' portfolios will lead to huge gains. Remember how those internet stocks were propelled by the combination of small market floats coupled with surging demand? You ain't seen nothin' yet!
But, I would highly urge that one does wait for the key levels cited above to be penetrated before diving in. This is a very tricky market which is actively being intervened in. A false breakout CANNOT BE RULED OUT!
To play this market in the event of the now growing more likely upside breakout, you can't go wrong with physical GOLD. But, the real profits will be made in junior precious metals mining stocks. We will update our analyses of which stocks are the most appealing at the appropriate time.
I would, however AVOID the various Gold ETFs, most notably GLD. These are built on derivatives and there is very credible information floating around that there is not enough bullion to honor scheduled deliveries. Thus far, this shortage has been met by the issuance of more paper, but the supply of GOLD is falling rapidly from existing mines. Imagine the move if future delivery obligations can not be met.
I can see the bull's breath steam in the cold air. Toro, Toro, Toro!
Marko's Take
Marko,
ReplyDeletePhysical gold is good. What do you think of Sprott Physical Gold Trust ETV or Central Fund of Canada?
Agree with everything except I really do expect that the shorts won't go out without throwing a final mother of a tantrum. Desperados rarely quietly slip into oblivion, they go out with the guns blazing hoping for a last miracelous win.
ReplyDeleteI would however not put my core investments on the line hoping for another bargain down the track. The paper trading account is for such plays.
And the juniors....I had a couple of them go up 8X since the lows (Australian stocks) and noone has even raised an eyebrow. (Don't I wish I had poured all my money into those)