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Predicting the Bottom in Gold

by: Bill Cara August 15, 2008 | about stocks: GG / GLD    

Bill Cara

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Yesterday I remarked, “The technical damage (in the precious metals) is severe, and not going to reverse in a single day on a single estimate (of gasoline inventory in the US). The commodity markets are global in scope and the global economy is shrinking.”

Earlier this year, I sent out a (draft) report on Goldcorp (GG) to 200+ of you who requested it. The price was US$44.71 and all the dozen or so broker-dealer analysts who follow it were positive. I opined, however, that GG was a SELL and that a trader could buy the stock at $31 later in the year. That was a good call as the price of GG closed at 30.92. I suppose my crystal ball worked. Anybody who wants a copy of that report should just hit the e-mail button and insert GG. You should know, however, that I was at the time merely using GG as a case study for a new type of report Cara Trading Advisors (Bahamas) Ltd is preparing. I didn’t have the time then to finish it. But the message was clearly there.

Now that my price objectives have been met, I’m going to say that the cycle bottom for GG will likely be hit within 30 days. I recommend that everybody study the Monthly RSI-7 data for the gold miners that I list in the WIR. The Monthlies are quickly catching up to the Daily and Weekly RSI-7 values that have fallen below 30, but the Monthlies are still above 30. I feel if there is a rally here, it will be a short-term rally because the technical damage needs to be corrected before a new Bull phase for these stocks can begin. But if the current cycle grinds out a bottom as Crude Oil continues to plunge, that bottom could occur in the next month.

In any case, traders know that, whether it is the US or Europe or many other countries, governments are not being (as kaimu says) honest with the money. They are still printing excessively. Governments are still not prepared to drop key interest rates in advance of the onset of deflationary pressures because they are too scared that commodity price inflation will suddenly reappear. So, there will be a break in the commodity Bull, but it will be fairly short-lived. Oil is a consumable so the price, in a period of economic contraction, will drop further than the precious metals. Traders like me will be looking ahead and figuring that gold and silver is not a bad place to be later this year.

Look at it this way: When thinking long term, would you rather put your confidence in government and banks than in gold? The answer depends on many factors, but at this point, I have very little evidence that shows me that financial assets and government budgets deserve our support.

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This article has 16 comments:

  •  
    Aug 15 05:46 PM
    To borrow an investment strategy from the late Sir John Templeton, focus on helping people. "When everyone wants to buy something, help them out by selling it to them. When everyone wants to sell something, help them out by buying it from them." Right now it looks like everyone is wanting to sell oil and precious metals. Help them out, buy it from them at these depressed prices.
    Reply
  •  
    Aug 15 06:05 PM
    Gold's long-term track record is no better than the currency or the economy as a whole. Did you ever know of a gold owner whose horde's value wasn't affected by the rest of the economy? Did you ever know an owner of gold who didn't live in an economy and under a government? Trade gold if you like, but never for a minute believe the hype surrounding it...
    Reply
  •  
    Aug 15 06:29 PM
    Good analysis,gold will always be gold,there is no debt on it as contrary to the $.Bull market in gold will finish one day but it maybe the day when Dow Jones will be at 4000.What will happen then to gold?
    Probably it will be much lower than today,but it will keep moving up from now on and support might be near,I see the gold will reach it's high by December as speculators will stay away from stocks and buy everything gold,only what this high will be I can not now but it might be anything between 700-1000 as I don't expect demand to be at more than 1000.
    Reply
  •  
    Aug 15 07:10 PM
    Gold may have a trading bounce as it is slightly oversold at this point, but the bull is dead as a doornail with half a dozen swords sticking out of its back. We meander down to the $600-700 support and then go sideways.

    As for the silly people comparing gold to paper stuffed in a mattress, try comparing it to interest earned on anything instead. Gold may have some insurance value in a portfolio for zigging when other things zag, but its long run returns are punk and its volatility enourmous. The last thing it is, is "safe".
    Reply
  •  
    Aug 15 07:50 PM
    yes Jason I agree. In 2000 gold came out of a 20 year bear. I wouldnt bet on a 20 year bull.
    Reply
  •  
    Aug 15 09:03 PM
    DZZ is still working, wait until the ETF's have to start liquidating.....
    Reply
  •  
    Aug 16 09:05 AM
    August is the seasonally weakest month for precious metals. This has been a pattern for years. 2006 was the only exception in the last 8 years. So it's the cycle low for GG and all the others. Last year GG bottomed in August and doubled by December. This year the oversold condition is extreme, setting up a big move higher.

    The driver for the CRB is oil and oil bears failed again to close below 112. How many more times will they beat their brains out on that wall before they cover, reverse and go long? T. Boone says 110 will hold. OPEC says 100 will hold. OPEC has control of what little spare capacity still exists in world supply. Oil will lead the CRB and gold higher.

    Read the IEA Interim report omrpublic.iea.org/curr...

    Non-OECD demand is growing 3.8% per year, more than compensating for the drop in OECD demand. World demand is still growing.

    During the 4 weeks of spec liquidation and shorting in crude, gasoline demand increased week over week. There has been no demand destruction, just demand suppression. As the price declines, that demand comes back.

    This sharp 5 week dislocation in commodity prices was caused by hedge fund speculation, not by fundamentals. The lower prices are causing resurgence in demand.

    Reply
  •  
    Aug 16 09:26 AM
    Great article. It's time to play!
    Reply
  •  
    Aug 16 10:03 AM
    Friday was a day for the holders of Phyical PMs! I saw a change that hit the paper market where it hurts. Paper has been seperated from the Physicals traders! Those holding Physical now sell at what they want, not like paper ETFs! I enjoy being a observer of this,as Paper took a wacking,as Physicals took control from them!
    Reply
  •  
    Aug 16 11:07 AM
    It is shocking to me how unknowledgeable many "investors" are about gold and more importantly macroeconomics. They rely on rules of thumb, history, and virtual "old wives' tales" rather than looking at how economies and currencies work together. They ignore common sense and rely on old-era truisms for their faith that gold is a loser.

    You tell me. When it costs you $15,500 to buy a week's groceries, will gold still be at $800/oz?

    Meanwhile, when credit has frozen up, consumers are maxed out and unable to borrow anyway, and foreigners have wised up and quit lending us money to re-lend, will our domestic stocks prosper and show record sales levels? You think people who can't pay their mortgage or credit cards are going to spend like they could in the days when they could pay them?

    Go check the reports on Ford or GM or any retailer and tell me we're in for great times in the stock market.

    Then go ask yourself. If not US stocks, if not gold, if not silver, if not ag commodities, if not oil, then WHAT? What are you going to put your money in that will at least retain its value in a period of real 10-12% inflation?

    Only if one is so myopically concentrated on his beloved "markets" can one ignore all that and say "gold will be lower when the dow is at 4,000".

    In 5 years gold may not be a smart move, but in a period of transition and massive change in the economy (bye bye sharper image, many financials, starbucks, service economy bs etc) where thankfully pitifully few even understand it, those in early should clean up. When it becomes a "sure thing" mania, that's the time to sell.

    Reply
  •  
    Aug 16 12:01 PM
    Gold is insurance, holds its buying power (but no necessarily price) and provides diversification.

    The US mint has stopped minting gold coins. You can buy "paper" gold at $800/oz, but not physical gold!
    Reply
  •  
    Aug 16 01:21 PM
    Bruno...great post. You're right on...the majority of Americans, along with all who think they "wanna be like Mike...er, Uncle Sam," are so brainwashed that they can't see what is in front of their faces anymore...or as the expression goes...they can't see the elephant in the living room. When they've been shown no other universe than the one TPTB want them to believe...and it is shoved down their eyes and ears daily...hourly...by the Ministry of Truth, to use one of Orwell's favorites, all "alternative"... perceptions of reality are considered "fringe" and centered somewhere in the Stone Age. And that universe fed in daily doses of governmentspeak is the fiat currency / central banker controlled economy that the MSM (Mainstream Media) has, under the direction of this Shadow Govt, painted as the utopia desired by all mankind.

    What it is is financial hell...for the working class, esp, but not for the Mephistoclean elite who rob them blind day after day thru continued debasement of the currency they get paid in...and then taxing what's left with more and more cleverly disguised "charges" and "levies" and anything else that can be dreamed up to take the little money that's left.

    They (the Fed and their fellow Western CBs, their bullion/investment bank lackies, eg, JPMorgain4Elites and GoldmanSuchs, and our "own" Treasury, run by ex-GoldmanSuchs officers, along with the PPT [formally, the President's Working Group on Financial Markets]) "intervene" now daily in...ie, manipulate... ALL markets...COMEX, DOW/DOG/S&P, futures, currencies, bonds to make everything look to still be the Goldilocks economy that Americans want and want to hear about...where everything is "just right."

    Then comes price inflation. And since most Americans haven't seen the whole thing yet, what will turn out to be a monster man-eating lion at the moment still looks like a nice little pooty cat with a little bit of a bad temper. But even those who smirk and throw around their little ignorant putdowns about "silly" people know in their knower that the ground they walk on is levitated artificially and that the rumbling they hear below aint their stomachs.

    You've got a chance to trade in some good chunk of your worthless paper for real money now--silver and gold...now that it's been taken down on the PAPER markets (though the physical markets are fast becoming very different and changing...go try to buy 100oz silver bars, or 1oz Ag Eagles...or now gold eagles...you can't...and what you can find is at a major premium, despite the law that the mint was to ALWAYS have silver and gold Eagles available on a timely basis for all who wanted them, and if they didn't have the silver or gold, they were to go to the open market and pay whatever price needed to assure a constant supply...yes...that is LAW!!).

    Those with eyes to see and not too impressed with their own ability to throw verbal bullets at a real problem that won't kill it any more than taking a piece of note paper and writing $1,000,000 on it will be able to pay their bills...YOU will take the red pill and leave the Matrix before it drains the rest of the life out of you. And no, you won't be able to just up and leave...you do have to live somewhere, under some govt. with some kind of economy. But with eyes opened, you will understand what is REALLY happening and take appropriate measures. jt
    Reply
  •  
    Aug 16 03:13 PM
    All countries print fiat dollars. The only thing behind them is the GDP and ability to tax the citizens. Why has Canada's dollar gone from 1/2 to par value with ours?? Could it be their raw materials and oil, that have real value, that is reflected in their currency??.

    We have good people, with fewer jobs every day, more debt and more fiat dollars, that are worth less and less--just because there are more than yesterday, with nothing but a song and dance to make you happy to take them.

    Now you can believe the song and dance, believe the figures they put out, and believe all the shills who produce nothing, but owe their jobs to the current financial system. Believe "The almighty dollar" is just crossing a speed bump. And load up on more of the same.

    Or you can go with your gut and go for the gold.
    And if your gut doesn't tell you something these days, you'd best just get out of the game and watch CNBC, cause either way you're going to be living off your "Victory" garden till you get some down to earth perspective and a "Gut" you can depend on.

    You got it right Bruno:
    Reply
  •  
    Aug 16 05:41 PM
    To: BrunoT, jt, and captbob: A(fucking)MEN!
    Reply
  •  
    Aug 17 02:41 AM
    I really don't buy that crap about August being the "slow" month i Pmetals.If the mining company's can borrow money at 4-6% (if they even need to) then WHY should they sell the PRODuce, at a 20% DISCOUNT in august.
    They don't, it is the paper gold that is pressing it down, as ALL those shorts have to cover at some point, or go to Bear sterns.
    ONE day or probably night, the mining company's. will WAKE UP, and actually BUY physical gold in August.
    ?? WHERE are all those HEDGE funds that are lending short and buying long, this is steal bargin at 20-30% + that they can GEAR up to 100 times.
    ( Except for BARRICK & co, who for years solf FORWARD >7 years - their gold - for 3-4-500$, forcing the price down, and now creating MASSIVE losses when they have to deliver it today at much higher production costs. Idiots, set up buy their OWN banks, as this was a condition to the loans, they needed to BOOST production, that would suppress the price further.
    WHEN will resource company's and COUNTRies, WAKE up and OVER RIDE the paper market.
    It could be closer than most think, OPEC looks like they have began to understand, that oil in the ground is more valuable than that sold for $paper - bonds - mortage crap.
    Notice that China agree's to pay 70% MORE for iron ore than the spot price, for a longer term kontrakt. ? Is that because there is TOO much supply floating around, I doubt it.
    Same with oil, that will expolde when The cantarell and Gehwar mega fields really start declining.
    And now the dollar is suppose to be THE best bet....
    WAKE UP..... turn of the TV... and start thinking your self. !!
    Reply
  •  
    Aug 18 09:49 AM
    @malkiel and JasoC: you abviously have a short-term approach. of course, gold lags almost any other investment out there over the past 20, 30 or 40 years. that's undisputed. the point however is: what will these paper-asset returns be worth 20 or 30 years from now? There are close top 100 TRILLION in unfunded medicare, pension and medicaid liabilities in the USA. The picture for japan and Europe is hardly any better. So you can be pretty sure that either by inflating or by a sudden currency reform all these huge liabilities will be brought downto a fraction of their nominal value pf today - and at the same time the corresponding assets owned by households will be cut by the same factor. One of the very few things you cannot cut like this is gold (your own home being another one). Now, you are certaibly soooo smart to knwo in advance when this digital moment of devbt-resetting or hyperinflating will occur, no? and buy gold right the evening before.
    I have news for you: there may not be any physical gold that you can buy then. all you may get your hands on might be some paper contracts, etfs or the like. good luck with those as they could get terminated at any moment and you get paid worthless paper only.
    if you think about it, iz makes perfect sense: gold pays no interest, because it has the lowest risk of them all when it comes to payback time. it#s upon you to decide whether 4-5% for treasuries are worth the risk
    Reply
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