After a two month drop, the dollar has been stronger for the second week in a row and stocks were concomitantly weaker, as were commodities. Gold bucked the trend, rising modestly. With earnings season largely behind us, I had a chance this week to focus on the big picture. I want to talk mostly about gold today, but first I want to give you some context. If a picture is worth a thousand words, this one is a Rembrandt, worth millions.  (chart courtesy of Stockcharts.com) This is a chart of the U.S. Dollar over the last five years. Also displayed (as a red, dotted line) is the S&P 500. Notice how the two prices move opposite of each other much of the time. It is an expression of the fact that as the dollar weakens, assets priced in dollars, like stocks and commodities, rise in dollar terms. Neither the dollar nor the stocks index has made any net progress in the last five years. Now let's look at another million-dollar chart:  (chart courtesy of StockCharts.com) This is a 5-year chart of gold with its 50- and 200-day moving averages. It is the epitome of a true bull market. Aside from the autumn of 2008, when no one knew what to do with any asset except sell it, gold has not dropped below its long-term uptrend for more than a few days. Also note that its peak-to-trough drop during the crisis was only 30%. The S&P 500 dipped 57% during that period. What is also interesting is that very few gold stocks outperformed the bullion for those five years. In the past, bull markets in gold have seen the gold mining shares soar above the price of the metal, based on the assumption that the miners were leveraged to the price of gold, since some costs were fixed and variable costs wouldn't rise proportionate to the rise in the metal. That assumption has been generally true in the past, but the soaring rise in energy prices from 2003 through 2007 thwarted that expectation. Energy is the second-largest input cost for miners, next to labor. At times the rise in that cost outpaced the rise in gold's price, compressing profit margins. What are the risks? This is not only a reasonable question, but an essential one for all investing. After all, even the strongest bull markets eventually die, and when they do, the beginning of it looks pretty similar to another correction. If we are now going into a deflationary spiral, as some reasonably and articulately argue, won't gold fall too? I've thought about this a lot. Before I discuss my conclusions, let's look at some more charts.  (chart courtesy of StockCharts.com) The heavy black line is gold price over the last five years. The dotted red line is the CRB Index that tracks overall commodity prices. Note how from 2005 through 2008, gold moved in approximate step with other commodities. The rate of change (angle) wasn't always the same, but the general direction was. Now notice how in the blue box separating the last two years, the relationship has broken down significantly. At first it was just in a few spots, but this year, the two prices have gone their separate ways, with gold continuing to rise, while the CRB has been flat to down. Let's take a closer look:  (chart courtesy of Stockcharts.com) In the two year chart, it's easy to see that except for the three areas in gray, when both prices moved in step, they've decoupled. We first see it clearly in February of '09 where we get one of those eye-shaped bulges as the red and black lines move counter to each other. Again, black is gold, red is the CRB. Then around August '09, you see a gradual divergence where the two move in the same direction, but the CRB's rate of growth is slowing. Next, after a brief period of approximate proportional growth, the two paths diverge rapidly, with overall commodities staying flat to slightly down, while gold continues to rise noticeably. All the above charts serve to put in perspective what has been going on, despite the day-to-day gyrations that distract us. Two observations are now clear: Although stocks have lost money over the last ten years, gold has remained in a strong bull market; gold is decoupling not only from the stock market, but from commodities as well. It is rising in the face of a weaker stock market and weaker commodities. Let's add one more observation to that list. Gold is now rising even in the face of a stronger dollar.  (chart courtesy of Stockcharts.com) Gold is the black line; the U.S. Dollar is the red one. You can see we're still getting some of those "eye" formations where one curve goes in the opposite direction of the other, but since February, the two lines move more in step than out, although gold is the stronger of the two. This is undoubtedly due at least in part to the fact that we're heading into the strong holiday season for gold, but there may be another factor: Gold may now act–not only as a long-term hedge against a weakening dollar–but as a hedge against all risky assets. Succinctly, gold and the dollar are both havens for investors who are risk-averse. Gold is the stronger of the two since it serves as a haven for those who are also wary of the risk of owning dollars, given government monetary and fiscal policies. All this may indicate that global systemic risk is now coming to the fore, as well it should. The currencies and economies of all the developed nations are being called into question. With debt high and growth sub-par, every country wants to export its way back to health. To do that, they want their currencies to be soft. Only Germany rejects this mindset, preferring to maintain fiscal and monetary discipline and earn its exports by making good products efficiently. Germany still remembers the Weimar Republic. Here are the conclusions I draw from the above: • Gold remains in a true long-term bull market that should be exploited. So what should investors buy now? Although I think BVN is still a buy at prices near $40, I prefer bullion for now, either ETFS Physical Swiss Gold Shares (SGOL) or SPDR Gold Shares (GLD). I like SGOL a little better because the bullion is stored in Switzerland. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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