THE VALUE VIEW GOLD REPORT

Transcription

1 THE VALUE VIEW GOLD REPORT Disciplined Analysis of GOLD Purchase Timing for Profits Volume 2015, No. 9 September 2015 A DISCONTINUITY IN MARKETS Sounded like a sure thing: Equity markets were to rise forever. One need only buy those stocks dominating the NASDAQ 100, and do so on margin. If that was not sufficiently thrilling, do some levered speculation in Chinese stock market. Investors were again to be rich, just as they were in 1999 and Oh yeah, those are the years before the stock market crashed. In the Summer of 2015 the stock markets in the two most important economies of the world, China and U.S., crashed, collapsed, fell, declined, cratered, or tanked. You pick the descriptor. Which you choose will probably reflect that which resides within one s portfolio. Only real fact we have is that most equity markets have failed this year. Opinions on what value the S&P 500 might end the year may be entertaining for the media, but such forecasts have no meaning Reality is that equity market in 2015 have experienced a major discontinuity with the past. The trend in equities has been broken, and that is reality. Chinese stock market rose on speculative debt, and then crashed as that speculative leverage was reversed. Easy for Western analysts to criticize that. However, Western investors, especially U.S.- based funds, have been borrowing and betting for years. In April U.S. margin debt borrowing in financial markets Ned W. Schmidt,CFA Publisher Schmidt Management Company th 2015 is our 28 Year Beach Boulevard Unit 812 Jacksonville FL Phone: nwschmidt@earthlink.net OUR WEB SITE FOR SUBSCRIBING IS This written effort is simply an attempt to report on global financial matters, and the foolishness of policymakers around the world. Wise people should not believe everything we write. Investing should only be done after research and study.

2 hit a high of $507 billion. Those borrowings were $231 billion in June of In five years, borrowings to speculate in U.S. securities more than doubled, or rose by about $276 billion. Speculation on borrowed money has been rampant in U.S. financial markets. Level of speculation by individual in currency futures continues to be at an extreme and dangerous level. Reversal will come, and it will be painful for many individuals. Does not really matter why the Chinese and U.S. equity markets are now broken. They are. Unwinding of leverage in both markets will continue to depress both the absolute levels of the markets, and the returns. The connection with the past, rising levels of borrowed money pushing stocks higher, has passed. Those equity markets have passed through a discontinuity, and that is all we need to know. U.S. equity market is now under the burden of unwinding much of that speculative debt, and will suffer from structural problems that are developing with hedge funds. Are we experiencing the beginning of the end of the hedge fund era? Quite likely the answer to that question is yes. We will be discussing the structural changes coming to the investment world, but we can leave that to later. Investors should now be looking past the future trough in equities. That is easy to say, but may be difficult to do. Reason for that is we do not know when the equity trough might occur, or how deep it might be. So, let us just assume that it will be happen. The question to answer deals with what will rise from ashes in the next cycle. Each and every investment cycle is different from that which preceded it. We do believe that as equity market returns wither that investors will look to alternatives, as they always do. One of those alternatives is Gold. China: In reading the reports out of China, Caixan being an excellent source, one finds the only difference between speculators in China and those in the West is the language. Both chase rainbows in hopes of becoming rich. One difference we enjoyed reading about is that in China those that attempt to manipulate markets quite often receive a visit from the police. One U.S.- based hedge fund has had Chinese accounts frozen for not behaving. On a positive note for the future, local pension plans are likely to soon receive approval to invest in Chinese equities. That change would allow around $300+ billion to flow into Chinese equities over time. If you read of reference to National Social Security Fund that does Page -2-

3 not refer to a system similar to social security in West. It is a profit making entity for the Chinese government. Never forget that the Communist party in China is often referred to as China s Chamber of Commerce. Chinese Renminbi, chart bottom of previous page, is now attempting to put in place a base. Down move was, as China said, a readjustment of the reference price for each day s trading, not a devaluation. China is still going to be the dominant economy in the world, and the Renminbi will become a reserve currency. Valuation: The current ratio of $Gold/S&P 500 is shown in the table below. Not since 2007 has Gold been so cheap. The probability of Gold going higher, especially relative to equities, is sufficiently high to now support the price of Gold. It is a precondition for Gold s price moving higher. Analysis of $Gold / S&P 500 Ratio Data: Years Current Ratio Probability Go Higher 75% Average Ratio 1.16 Standard Deviation 0.86 If S&P 500 = 1,961 $Gold should be: $2, % If $Gold = $1,109 S&P 500 should be: % 54 DAYS, AND COUNTING, SINCE GOLD BEAR MARKET LOW While we have no way of determining exactly how much Gold is held by speculative funds in the West, we suspect a fair statement would be that they own very little at this time. Since the beginning of the Summer investment funds have been selling their holdings of Gold. The low net long position in Gold and Silver are shown in the charts bottom of the next page. For months speculative funds have been a source of supply of Gold and Silver to the market. That has been accomplished by selling off of their net long position. Funds simply do not want to show Gold and Silver on their year end financial statements, which are struck from September thru December. Given the run down in their net long positions and the action in the $Gold market, a reasonable conclusion would be that they have little Gold and Silver left to sell. That means that in 2016 funds are more likely to be a source of demand for Gold and Silver rather than a source of supply. Continued on page 5. Page -3-

4 VALUATION US$ GOLD RENMINBI CNY/$ $/CNY US$ SILVER Final Target $2, % 3.00 / $ % $ % Fair Value $942-15% $ % Current Price $1, / $0.157 $14.60 Probability of BULL trend 6% 97% 4% Bear Market Low $1, Jul 15 $ Aug 15 % Change From Low 3% 5% Days Since Low Speculative Trader Ratio 1.5 [2.2] 1.5 [3.8] 200 Day MA London PM Current - Value $1,180 -$71 $ $1.43 Major Resistance Current - Value ~$1,296 -$187 $ $3.62 Note on table: We have added two lines to bottom of the table to help keep us focused. One is the 200-day moving average of the London PM setting. Below it is the current value of $Gold minus that moving average. Last line is the resistance level of importance. Virtual Demand: Net long position of large speculators in futures is one component of total demand for Gold and Silver. Chart bottom left is for Gold futures while that on the right is for Silver futures. Way we are reading developments in these charts is that a new, lower range for net long position in both Gold and Silver is developing. That range in Gold may be thousand contracts and 5-20 thousand for Silver. That low range should persist through year end to show little or none on year end portfolio statements. A move above 80 thousand contracts for Gold and 20 thousand for Silver in the new year would be a very positive development. Page -4-

5 A common observation on Gold in other currencies is that either a buy signal has occurred or is about to occur. Gold in near all currencies is over sold as year end window dressing for dollar denominated portfolios has been occurring. Dollar denominated portfolios do not want to show Gold on year end statements. Note again that all the charts begin with year end Thus they portray how investors have fared owning Gold in Top right chart is for Canadian $Gold, and that investment has been rewarding for Canadian investors. Are Canadian investors likely, given these results, to dump their Gold in order to buy stocks? We think not. When one combines the cheap price of Gold with the turmoil in stock markets and other events around the world, a reasonable conclusion would be that individuals will retain their Gold and Silver, and more likely add to holdings. Reports on physical demand in the U.S. and India certainly show strong buying. Page -5-

6 SILVER might be described as stubborn at the present time. Three day sell off last month pushed Silver to a new low, but it refused to stay there. A lateral patten running from about $14 to $15.5 is readily apparent. However, a more distinct range is essentially between $14.3 and $15. With demand for virtual Silver at a low, as we observed earlier, what may be happening is that physical demand is becoming more dominant. That conclusion, if correct, would suggest that last low truly was an important one. Silver is an absolute buy below $17. GOLD STOCKS Gold stocks, those producing Gold, have the potential to rise 50% by the middle of January Start with the middle chart. Combination of under valuation of Gold and the stocks is now at an extreme we have not seen in years. In second chart we can observe that the Gold stocks have fallen by more than 50% in the past year, with a significant portion of the fall occurring in past few months. Such a move is the type of liquidation created by some kind of capitulation. Near frantic selling experience in the past few months in the Gold stocks reflects the extremely strong consensus belief that Gold is going to zero and that money should be in Page -6-

7 the really cool stocks that comprise the NASDAQ 100. Further this selling is intended to purge completely the Gold stocks from many portfolios. No one wants to own the Gold stocks when end of year portfolios are presented to investors. Another driver is end of year selling for tax purposes. Investors with taxable profits are offsetting those gains with losses. Normally this selling is done in October, but it may have come earlier this year. All of this combines to create an unusual opportunity in the Gold stocks. Move between now and end of January could be quite dramatic. Note that we are talking about producing companies. Situation in small companies has not been resolved. End of year could mean the end is near for many small companies. GOLD STOCKS ISSUES HI Denotes New 52 Week High in Month CURRENT US$ PRICE % CHANGE ESTIMATED VALUE % TO VALUE % GROWTH NOW / LAST* Kinross Gold (KGC) $ $ % - 5% / - 8% Yamana Gold (AUY) $ $ % + 0% / + 6% AngloGold (AU) $ $ % - 6% / - 4% Barrick Gold(ABX) $ $ % - 2% / - 6% Eldorado Gold(EGO) $ $ % - 5% / - 9% Newmont (NEM) $ $ % + 0% / + 3% Gold Fields (GFI) $ $ % - 3% / - 4% Goldcorp. (GG) $ $ % + 8% / +11% Agnico Eagle (AEM) $ $ % + 4% / + 3% Randgold (GOLD) $ $ % - 4% / - 5% MEAN -20% +146% - 1% / - 0% MEDIAN -19% +101% - 3% / - 4% *Six month rate of change for trailing twelve month revenues. AGNICO EAGLE (AEM) is portrayed in the chart. Here again is a picture of divergence that has potential to cause a significant move in the stock. First, note solid line for revenue growth. It has been positive, though flat, for a considerable time as revenues continue to grow. At the same time the stock has been crushed with the emotional selling of recent months. Market seems to be saying Gold is going to zero and so are the stocks. AEM should be significantly higher a year from now. Website: Page -7-

8 Top chart is for GDX, the ETF for producing Gold miners, and the bottom chart is for GDXJ, the ETF for smaller mining companies. Let us start with the GDXJ, the bottom chart. As highlighted by curved line in chart price collapsed in an inverted parabolic. Just prior to exiting that formation price hit a low of $17.92 on 24 July. Current price as we write is about $19.1. That low was created almost two months ago. Despite all that has been going on the GDXJ has not penetrated that low. We would have to conclude that the low is in place for the GDXJ. That is somewhat a bold statement as year end selling is always possible. But the situation in that chart does seem to suggest that no meaningful sellers exist. Seller exhaustion may finally have arrived. GDX was showing an improved situation, but two factors seem to have taken hold. One of those is year end selling. Other is the use of GDX as an alternative short position for portfolios. Some managers may not be able to sell Gold futures so they turn to GDX to sell. Additionally, some may short GDX as they believe the stocks would fare worse than the metal. In any event, those forces should become less of a factor the closer year end. Page -8-

9 Silk Road or Silk routes as seen by China Trans Pacific Partnership trade routes CHINA AND FUTURE TRADE Recently we discussed the Trans Pacific Partnership and how it would increasingly tie China to trade in the Pacific. Map top right was included in that discussion. China is also looking West. Map on the left is of the modern day Silk Route, which is far more complex than that of Marco Polo s day. China sits between those two maps. The new Silk Route is an important national priority for China. It intends to expand West building roads, bridges, other infrastructure, manufacturing, and so on. China intends to spend hundreds of billions of dollars on that Western expansion. As trade will increase both East and West, so will the use of the Renminbi. With trade to and from China growing along these routes the need to use the dollar will be minimal. BitGold.com is a new introduction to the market. Investors can easily buy Gold through this site. It also offers the ability to pay others using Gold and to fund a prepaid debit card for cash purposes. We have been testing this site as we believe their approach is innovative. To do that we have been making small purchases on a weekly basis. So far, using the site has been satisfactory. They also have a phone app. Our one try with the app resulted in a double purchase, which could have been a serious problem if it had been a sizable amount. While our experience with the site has been satisfactory, we would avoid using phone app for purchases. Next policy announcement from FOMC will be on Thursday,17 September. Best reason to do a rate increase is to get it over with. A rate increase would put all the discussion to rest, and the world would begin adjusting to a normal rate environment. APPROPRIATE ACTIONS: Investors should be holding their Gold. Gold should be bought on price weakness. Investors should be establishing investments in Chinese Renminbi deposit accounts. Be selective, seek value, and take care of the dog, NED ned@valueviewgoldreport.com Follow Publication schedule: Next Trading Thoughts: 30 September Next monthly issue: 15 October Page -9-

10 BitGold: We now accept payment for subscriptions through BitGold.com Should you wish to use that mechanism rather than PayPal, simply send us an at VALUE VIEW GOLD REPORT MAJOR BUYS SIGNALS ON $GOLD Based on buy signals from Intermediate oscillator. Starting Date of This Record 8 July 2002 Ending Date for This Record $Gold = $1,109 on 14 September 2015 Number of Buy Signals 59 Correct Buy Signals 28 Percent Correct 47% Average Gain on Signals +41% Average Buy Price of Gold $1,024 Gain on Average Price + 8% The signals are from the published record. They do not represent actual trades. This record is not a prediction of future performance. Wish it was! VALUE VIEW GOLD REPORT MAJOR BUYS SIGNALS ON GDX, GOLD STOCK ETF Using Intermediate Oscillator Starting Date of This Record 21 February 2006 Ending Date for This Record GDX = $13.2 on 14 September 2015 Number of Buy Signals 50 Correct Buy Signals 0 Percent Correct 0% Average Gain on Signals -61% Average Buy Price of GDX $37.72 Gain on Average Price -65% The signals are from the published record. They do not represent actual trades. This record is not a prediction of future performance. Wish it was! Page -10-

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