More on Gold Miners

If we look at the Gold Miners ETF (GDX), which I now own as of yesterday, we see that the chart has bounced off of support of its 50 day moving average. The GDX is a little safer way to play the miners as it tracks the AMEX Gold Miners Index. Most importantly, from a technical position this etf bounced past resistance in a bullish flag position. It is very possible this area should continue to outperform the market in the short term.

Go for the Gold Miners (GDX)

For the most aggressive ETF trader, I would recommend the GDX, which an ETF that only invests in the gold miners. Gold miners will benefit more from the movement of the price of gold as every penny the price of gold goes up, is pure profit for the miner. Recently most of the gold miners took the hedges of their pricing to reduce volatility. It would be wise to look at this as a six month trade taking profits at intervals as they will be affected by the reduction in price of gold the same way.

INFLATION IS REARING ITS UGLY HEAD

Continued downward pressure on the dollar should continue to support the price of gold. The GLD, is currently selling for $98.78. If the current price holds a price target of $105 should be attained. This is a short term target, but after a nice couple of weeks for commodities, the triple top breakout on September 2nd supports a bullish forcast.

Relationship of Gold/Silver prices

As the sunny month of August draws to a close we take a look at the next few months from September to the year end. There are a myriad of factors to be considered but we will try and keep it brief.
The inflation/deflation debate continues at some pace with analysts and researchers coming down hard on both sides on the line. Our humble opinion for what it is worth is that inflation will take hold sooner or later due to the amount of financial stimulus that has been injected into the global system. The US has been particularly aggressive in this area with their low interest rates, quantitative easing et al, which now weighs heavily on the dollar. Other nations have followed in this direction though in many cases to a lesser extent.
Gold itself still appears to be inversely linked to the dollar as it eyes the $1000/oz hurdle, and the dollar looks for support at the ‘78′ level on the dollar index, hoping to keep the lid on gold prices. As they say nothing goes down in a straight line and that holds true for the dollar, however, the dollar has been debased and we see the next stop being ‘76′ followed by a test of support at the ‘72′ level. During this process of the dollar weakening, gold will challenge and pass the $1000/oz hurdle. We all know that it is only a move up of fifty dollars or so but the psychological barrier will have been breached. This should become headline news and generate plenty of air play for gold and its related mining stocks. Having achieved its immediate goal a rally should ensue taking gold to much higher levels in short order. If it dithers and falls then we will need to re-evaluate the whole story for gold. By News Years Eve we will either be relieved that we were in the right place at the right time or it will be a case of back to the drawing board.
However if we may quote Jim Sinclair of JSMineset recently:
“The price of gold is all in the US dollar, nowhere else.”
The next biggest influence we see is the broader markets as equities have rallied extremely well since hitting the bottom in April when the DOW hit 6,469 before recovering to 9,535 on the 25th August 2009. If this rally keeps going and the dollar declines then one would expect the gold producing stocks to deliver very good returns. However if the broader markets sail into a bout of profit taking which is severe then gold stocks could be sold off as investors flee to the sidelines. If this happens then gold prices will need to hold up thus facilitating a rapid return to favour for the gold producers.
Assuming that gold is about to have its finest hour where should we be positioning ourselves you ask? Well to answer that we can only tell you what we do and you can it add this tiny piece of data to the pot of research that you have gathered to date to help you formulate your investment plan. We hold both physical gold and silver along with the associated mining stocks and some cash for possible opportunistic trades.
We have long held the view that silver will outperform gold and and see no reason to change this stance. Indeed there exists an aberration in the relationship between gold and silver where historically the ratio has been around the 50:1 mark. With gold at say $944.90/oz and silver at $14.25/oz the ratio is at ‘66′ now if gold hits a $1000/oz and this aberration returns to the norm then silver should trade at $20.00/oz. This in turn would see the quality silver producers trade at more than double the prices that you can buy them for today. So our attention will now be concentrated mainly on the silver space.

INFLATIONARY PRESSURES

Inevitable going forward and gold should have a place in anyone's portfolio. The doom and gloomers will tell you this is a solid investment and so will the bulls. Wait for a $1000 per ounce and should take off.

WILL GOLD BREAK A $1000 AND HOLD?

Gold has had a nice run of late. Many don't understand it, and many more can't. The best way to describe why so many are unsure of the recent rally is oil. Oil and gold have traded hand in hand for some time now. The marked change worries many. At some point, the two will have to marry up again, but how will this happen? One of two things will happen in the coming months. The first is the collapse of gold prices to come down to the current levels of oil. The second is a recovery in the price of oil that will have it trading somewhere in the $60-$80 range. I would say that oil will move some and gold will move some, but everyone is entitled to their opinion.
Historically it may be tough to believe, but the price of gold has only had two runs in the last four decades. When you pull up the chart, you will see the price of gold steadily move upward in response to gold's price being unfixed from the $35 an ounce range. The price of gold steadily increases until the beginning of the 1980's. At $850 an ounce, the price fires down. This was the end of the first spike and first bubble in this time frame. This bubble was created by very high interest rates, and as these periods usually dictate, inflation. Gold would settle down to the $400 range and through expansive growth in the United States, even go lower.
The part of the equation that is forgotten is that tragic day on September 11th. This day was important, not only in significance, but also in timing. When the planes crashed into the twin towers, it didn't cripple the U.S. economy, it created something much more powerful, fear. The Fed always does things not only due to economic numbers, but also sentiment. When people are scared they don't spend. This can cause the same problem we are having now, only inversed. The banks won't lend now, but when consumer sentiment is bad, people won't take loans. Before 9/11, the United States was ready to raise interest rates, but fear forced them to cut. Adding liquidity in the market makes it easier to obtain loans, this tends to quell fear or at least counter it somewhat. Although many wanted to increase rates with the real estate bubble forming, the Fed was hog tied trying to keep money flowing. The day this started gold was at $286 an ounce, and it already looks to be trying to take out the all-time high of $1003 from March of last year.
Gold has been trading up mostly on the basis of a flight to safety. As investors have gotten out of the crowded US Treasury trade, gold seems to be what is favored. This is another reason gold has been heading up while oil has gone down, but looking out many think inflation is on its way. This could continue a long term bullish trend for gold. No matter how you look at it, the United States looks likely headed for inflation like that of the Reagan years or possibly greater.
Another interesting aspect to this trade is when the GLD (Gold Commodity) is compared to the GDX (Gold Miners). The GDX has been around since June of 2006 so I used this as a starting point. Until November of 2007, these ETFs traded in concert. Shortly thereafter we see a divergence and the GDX started to trade at a major discount to the GLD. This peaked in October of 2008 and has since seen a more symmetrical chart of the two. Two opposing thoughts would dictate your next move. Gold is overvalued at this time would be one. If gold is overvalued, the miners would be trading within the right range. If gold is at its proper value and we see a move to another all-time high, the gold miners should follow suit and see an even larger gain. Since the majority of gold miners bought back their hedges, I believe that the gold miners will head higher even if gold trades within its current range.