“War trade” unraveling, Gold Update (edited version)
Excerpts from the EGSNEWS ALERT "War trade" unraveling, Gold Update
War trade, Saddam's regime unraveling
The long anticipated and feared war in Iraq is underway. And guess what? Gold, oil and bonds fell like Presidential Palaces in Iraq, while the U.S. Dollar Index rallied and stocks enjoyed their best week in nearly 21 years. The Dow rose 8.4% and, along with the S&P 500, broke out over their respective 200-day moving averages.
Even before getting underway, the markets were betting on a successful outcome as the "war trade" unravels.
Terrence Corcoran at the National Post recently makes a convincing case in an article entitled: "The Last Days of The Bush Bear" (March 18, 2003) for a cyclical recovery. No doubt the current move could still have some wheels, assuming everything goes as well in Iraq as it has to date. And I for one have to admit the charts for the Dow and S&P 500 look somewhat impressive here - having completed what appears to be a triple bottom and a break over the 200-day MA's, they look poised for a major frontal assault on their multi-year downward sloping trend lines.
Of course the longer-term outcome remains very much up for debate. Did anyone else happen to catch NBR's "
Market Monitor" of the week this past Friday afternoon - the highly successful Florida-based asset manager Michael O'Higgins? This guy is nobody's fool, not at least according to his moves and record the past few years - up 369% for five years vs. 5.5% on the Dow for the same period (ending 2002).He's moved from stocks to bonds to gold at exactly the right times. And is he ever a super-bear, regardless of the fantastic rally last week - just as bearish as
Ian Gordon (Long Wave Analyst). For all the same reasons I suppose, he's expecting a deflationary depression resulting from the bursting of a debt bubble of historic proportions. He apparently also cites the Dow/Gold Price ratio as one of the benchmarks.I'm sticking with our original forecast of a
possible cyclical bullish market (if even just a positive close for the year) within a longer term secular bear market - one that should last at least another decade or even longer if my worse fears materialize (I'll leave these for another time).Gold - back to fairly priced
Gold's taken its beating as of late, now testing $330 - the low end of our 2003 forecast. I’m pleased to have been lukewarm on the sector the last few dispatches, strongly suggesting the correction had further to go and that it might be better to hold off while it plays out.
It's been played out now allot, getting right back down to the major long term upward sloping trend lines. This applies both to the metal and the gold stock indexes. Some juniors on my watch list are back down to their year-end seasonal lows again. The rabid enthusiasm for gold stocks in late January has been replaced by apathy and feelings of complete disillusionment. This may very well play out more, but my guess is the bulk of the war trade premium is now gone.
Ten-Year Gold Price
I see no idea why the price shouldn’t roughly trade within the channel above. The disciplined trader would buy gold stocks when the price is nearest to the lower channel line, and trade them out (or at the very least, NOT get trapped into buying) when gold is nearest the top channel line.
Ten-year XAU Index of gold stocks
Looks like a massive Inverse Head and Shoulders formation almost completed bottom
As a result of the negative sentiment and vastly reduced prices I'm taking down the Yellow flag raised just after the metal price peaked on February 4th. I'm not raising the Green Flag because I would almost never do this any other time than the last few months leading to year-end. But if one has absolutely no gold stocks, and they were anxious to buy at the peak but waited, they may want to start as this could be a decent entry point.
At $380 gold was overbought running ahead of improving fundamentals too quickly. At $325 (Friday's NY Spot price close) gold is much closer to being "fairly priced" at equilibrium according to Gold Fields Mineral Services. Below $325 it's oversold and cheap.
Other signs the worst may be over:
1. The stocks are finally starting to out-perform the metal price for a change.
2. My technical analyst confirms this past week marks the bottom of a 40-week cycle low (I'm admittedly not familiar with this cycle so I can't say how reliable it is).
Finally, on a very long-term basis, the production supply shortfall that is looming on the horizon may be even more serious than expected. Exploration spending has not yet recovered as much or as quickly as I was expecting it would, with only US$900 Million being spent last year compared with US$3.3 Billion in 1997.
Alex Davidson, VP of exploration with Barrick Gold recently told an audience at the PDAC convention in Toronto: "The state of affairs in exploration spending is untenable for the health of the industry." And, "Big companies need to spend more on exploration, or else reserves will be depleted in 10 years."Now when we hear that kind of alarmist-sounding talk coming from a boiler room in Florida, or some newsletter publisher trying to sell subscriptions, of course we should take it with a great big grain of salt. But to hear an industry insider speak in such strong terms is something we take to heart.
While this doesn’t help us much in the short term, it helps to confirm for me that the bull market for gold is not nearly over. Well before
"reserves will be depleted" there would be a massive price squeeze as the masses figure this out.Meanwhile the metal price will need to build a new base now, I suspect at the $325-$330 area and stair-step upwards once again as the fundamentals gradually continue to improve. I can’t imagine $400 will be breached this year and it will very likely take several attempts to clear this hurtle just as it took some time and effort to break over $330.
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