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GOLD STUDY
SEPTEMBER 1, 2000
BOB HOYE
Preface: Our study of June 15 observed
"An extended recovery in
gold's deflated price requires more distress in the credit markets, a
definite downtrend in base metal prices as well as in other commodities,
and breakdown in the senior stock indexes. This could begin in September."
Technicals:
On the chart, gold's nominal
price remains within a pattern that, in past examples, has been
constructive. The recovery this week in the face of a stronger dollar is
impressive, but as it is with recovering commodities, it is vulnerable to
those failing in early October.
The last low was 271.10 on August 23 as
Market Vane reported sentiment at 16 to 17 percent bulls for the three
weeks to August 22. This compares with the same range for 5 weeks at the
254 low in August, 1999.
Fundamentals: Of course, what really
counts on operating margins is the real or deflated price.
Considering the behaviour of the yield
curve and base metal prices along with the sensational rally in the techs
into early September, the year has some similarities with the new era
conclusions of 1929 and 1873. Specifically, 1929 followed the 1873
pattern.
The key to gold's deflated price is the
performance relative to commodities and, after October, it is likely that
most commodities could begin to decline relative to gold.
Another key would be the yield curve in
the midst of acute financial distress reversing to steepening. This is no
ego-boosting intellectual conjecture by the editor as the main features
following a bubble have been falling commodities and a steepening yield
curve. It's the way financial history works, which often confounds those
with personal convictions on how it ought
to work.
The intelligence gathering abilities of
serious participants in the gold community likely exceed and is more
sophisticated than that of the fixed income fraternity. No matter how
astute or far reaching this endeavour, it mainly comes down to "who
is selling what to whom" gossip on the trading desks. This may assist
short term traders, but it has limited predictive abilities.
For one thing, any impartial review of
financial history observes that government treasurers and central bankers
identify with any major trend and exacerbate the concluding moves. Nowhere
is this more glaring than with the natural characteristic of the deflated
price of gold declining to a significant low with the climax of a
financial bubble.
So the only interest in monitoring the
establishment's manipulations in the gold market is to watch them as they
eventually change their story and behaviour to accommodate a rising real
price of gold.
Position: Since late May, 2000, our advice
to central bankers has been to add to gold reserves, producers to cover
forward sales, and institutions to accumulate gold and gold shares.
Historically speaking, this would be sound
advice at this stage of the credit cycle.
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GOLD 1Q2002
BOB HOYE JANUARY 9, 2002
INVESTMENT
DEMAND, REAL PRICE AND OPERATING MARGINS
"Of
course, what really counts on operating margins is real prices; and
after October most commodities could begin to decline relative to
gold." - Institutional Advisors, September 1, 2000 [Gold's relative
low was on September 21, 2000.]
Near
Term: On the chart, gold's
nominal price is in an intermediate uptrend with recently constructive
technical action.
Of much greater importance, gold
has been rising against proxies representing improving operating margins.
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Relative to our commodity
index, gold has increased 36% since September 21, 2000. This compares
with the 36% gain in the XAU and the 52% return from the much broader
Toronto gold index.
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As measured by the CPI, the
rate of inflation peaked at 3.7% at the end of 2000 and rolled over at
3.6% in April, 2001. Its chart has since broken down to the November
report at 1.9%.
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Our May, 2000 study on base
metals expected a cyclical business contraction with weakening base
metal prices. Our index was then at 696 and the initial target of 375
was met in November, 2001.
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During the 18 months (to
September, 2001), from their high in 2000, base metal prices plunged
78% relative to gold. This compares with the 73% decline in the first
18 months from their high in 1929. The "invisible hand"
seems to be doing some fascinating things.
Longer
Term: Gold's price behaviour
has been consistent. It has now declined with every New Era and set a
significant low in association with its concluding bubble.
In all five previous examples,
this was followed by a 3-year recovery within a much longer period of
around 20 years, or until the long credit contraction concluded.
Mechanism:
For most of the past 300 years, gold and money have been synonymous and
both, in real terms, have declined during the dramatic climax of a New
Era. In that gold's real price has declined during ours suggests that gold
has been behaving remarkably like money.
Relative to the CPI, gold has
reversed to rising, which is typical of the first year following the close
of a New Era and, in this regard, is continuing to act like money.
As shown on the following chart,
gold's real price has been progressively increasing with each post-bubble
period. This is the basis for our target of a 100% gain.
Standard Supply/Demand: It has
been highly probable that gold's typical behaviour during a New Era would
overwhelm the associated increase in jewelry and industrial consumption.
Once past the boom, it has been equally probable that the reduction in
this standard demand will be overwhelmed by growing investment demand.
INVESTMENT
DEMAND
Our approach has been original
and assumed that the investment demand would diminish until the New Era
climaxed.
Our overall model integrates
gold's real price with the stock market, base metal prices, credit
spreads, and the treasury yield curve. Within this, the curve has been
expected to be most closely associated with the start of gold's long
recovery in its real price and investment demand.
Treasury Yield Curve: After two
thrusts to inversion, the curve was expected to reverse to steepening
around November, 2000 (4) and retrace all the inversion within 1Q2001 (4).
With this, gold's price relative to the CPI or most commodities would
begin to improve. As noted at the top of this study, the latter started on
September 21, 2000.
Steepening
was likely to be massive and initially accomplished as short rates
declined. Treasury bill rates set a cyclical high of 6.40% in November,
2000 as the curve was inverted at -58 bp (longs to shorts). By the first
week of 2002, the curve had steepened to 385 bp and the bill rate was
1.71%. Obviously, returns from the alternatives ranging from stocks to
bonds to treasury bills have been becoming less rewarding.
Credit
Spreads:
Relative to long
treasuries, yields for lower grade securities narrow inordinately during
the culmination of a great financial boom and then they widen with the
subsequent financial and economic contraction. Such widening would
anticipate growing insolvencies and defaults.
Widening would likely confirm the
change to contraction, but not expected to be as closely linked as the
curve in monitoring gold's recovery.
Real
Interest Rates:
The orthodox
view that gold goes down as real interest rates increase does not hold
during the climax of a New Era and the subsequent contraction. Real long
rates in the reserve currency have now declined with every financial
mania. This is recorded on the accompanying page of charts, which also
plots the increase since 2Q2001.
Real interest rates and gold
prices have increased following each bubble and have been doing so through
2001.
Our
Position: Since the summer of
2000, our advice has been that investors accumulate gold shares and golds,
producers cover forwards, and central bankers increase their reserves.
OUTLOOK
2002
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Favourable developments for
industrial commodities, credit spreads, and stock markets have been
likely to be intermediate moves maturing around March. Our regular
Friday publication, Pivotal Events, of January 4, 2002 noted that
gold's nominal price would likely rise above 280 this week. [4 on
January 9] After mid/year, the financial and economic contraction
is likely to resume. As an integral part of this, the improving trend
for gold's real price and investment demand would also resume. [this
resumed on May 15]
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Following previous New Eras,
gold shares have soared with no change in gold's price. Although there
is no gold standard, we assumed that the costs declining relative to
gold would again be critical. The results from Homestake provide an
example. Earnings declined until 1929 and increased by 139% on the
1932 report as the stock rallied 120%. Until 1933, gold was fixed at
20.67. In Canada, Dome results were similar.
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A multi-year bull market for
gold shares has been confirmed.
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GOLD
SPECIAL
MAY 24, 2002
Model:
The model that expected the cyclical low for gold's real price and shares
in November, 2000 (actual in October) called for the initial phase of the
bull market to last for 3 years.
For the shares, possibly
speculative highs in March and then around May, 2002 would initiate a
tradable correction.
Once started, it could take a
month or so to stabilize. After that, there could be some vulnerability to
heavy stock market liquidation around September-October, from which the
powerful bull market in golds could continue.
The largest gold fund in Canada
is up 120% since the first of the year and has tripled since November,
2000. Worth stressing is that there has been negligible net buying of the
fund.
So the public, retail brokers,
and mutual fund dealers are not in the market. They will be at the
eventual top.
Relative to commodities, gold's
real price rallied to February when the first correction due to rising
commodities was likely to come in. This was likely to complete as
commodities rolled over in April.
Our gold/commodities index
rallied 44% to 273 in February, corrected to 241 in early May, and has
jumped to 260 this week. However, much of gold's recent buying has been
inspired by the weaker dollar and the expectation of soaring commodity
prices. Both of these could reverse in the next week or so and dismay the
goldbugs as well as senior economists who jumped on the bandwagon this
week.
Advice
2000:
In August, 2000, our
advice was that investors should have representative positions in gold and
gold shares; producers should get unhedged, and central banks should
increase their gold reserves.
Technicals:
Three weeks ago, the ChartWorks noted that gold itself was reaching a rare
overbought condition not seen since 1996. What was missing was rampant
speculation in the stocks.
This has now come in with gold
and the stocks reaching significant "overbought" readings
together. This is on a monthly basis and was last recorded in 1993.
Only six such examples have
occurred since 1970 and each was followed by a 24% to 31% correction in
the stocks over a few months. In looking at the structure of the top, it
requires a tested high (i.e. a high followed by a lower high) over two to
three weeks. Typically, the failure to break out then leads to a violation
of the support line and a deep correction.
Even in 1977, which was only one
year into a four-year bull market, gold stocks corrected significantly as
gold corrected only from 149 to 137. Tuesday's ChartWorks included details
for recognizing the reliable entry point.
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Advice
Now: The action is spiking
close to a possible reversal in the stock market.
Readings on the dollar index
indicate an imminent low. Gold can correct, but not enough for investors
to trade. Gold shares can do a tradable correction.
The
impetus is probably becoming disquieting to the establishment, if not
distressful to ill-advised shorts. As the price drops, officialdom will
likely make some announcement to "drive" the price down.
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ChartWorks
June 21, 2002 GOLD AND GOLD SHARES
A Pause Following the Most Overbought
Reading Since 1993 Gold and gold stocks are following the typical action
subsequent to the "classic" simultaneous sell signals registered
in May.
The price action of the stocks should take
the form of an A-B-C downside correction. The A leg down was concluded on
June 10 th. The B leg recovery rally (50-70% of
the decline from the highs) is expected to top next week.
Specifically, an overbought reading on the
CCI (Commodity Channel Index) has identified the recovery highs in the
past six examples. At a minimum, stops should be raised to a one-day
trailing low once the CCI becomes overbought. The C leg down should then
begin. The target for the XAU (Gold and Silver Index) is 63.40. Hopefully,
this coincides with gold testing it's $306-$309 breakout and the long
term moving average support.
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The three most recent examples of a
simultaneous monthly overbought Gold / Homestake stock signal generated an
A-B-C correction followed by a continuation of the uptrend.
WRAP:
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This updates the May 21 and
May 24 technical studies.
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Gold was expected to correct
to the rising band, which is currently near 300.
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Gold shares were expected to
offer a tradable correction within the long bull market.
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Recognition of recurring
patterns seems less reckless than intuitive conjecture.
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GOLD RESEARCH PACKAGE
2000 - 2004 BOB HOYE
UPDATE JUNE 24, 2002
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Following the dramatic conclusion
to every new financial era, gold stocks
have been outstanding performers.
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Once the stock market top was in in early
2000, the cyclical low for golds was
expected around November (actually in October) with the first
speculative surge accomplished in March and May, 2002; the latter
would be against a generally weak stock market.
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As we are in a long bull market for gold
shares, our objective is to anticipate
attractive entry points.
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The May, 2000 advice was to accumulate
gold shares and in November, 2000
this became an "aggressive buy". In February, 2002 this advice
was extended to include "small
cap golds".
REAL PRICE UPDATE
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Relative to our commodity index,
gold is up 37% since the cyclical low in October, 2000.
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The calculation of the CPI is suspect
and, notwithstanding this, gold is up 20% relative to the CPI (deflated
price) from its low in March, 2001.
The historical charts are updated and
follow. The following documents our research through the historical
transition.
Deflated Gold Prices and
Financial Bubbles
As recorded in the reserve
currency, the recovery in gold's real price following each new financial
era has been reliable and represents an increase in investment demand (as
jewelry demand slipped) and operating margins. So far, the price increase
is 20% and the conclusions below were made in June of 2000.
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Gold Can Double:
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In the 3 years following the last
bubble in London and New York, gold's real price doubled. Post-bubble
gains have progressively increased: 1825 (+11%), 1873 (+35%), 1929
(+114%).
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One of the rules of history is that
policymakers magnify financial events. The greater the intervention,
the greater the volatility.
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Intervention has been more pervasive
than in the 1920s and accumulation of speculative imbalances has
likely exceeded that new era. With a full loss of speculative
abilities, gold's deflated price could more than double over the
following 3 years.
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Bob Hoye
Editor & Chief Investment Strategist
www.InstitutionalAdvisors.com |
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