September 16, 2010 – The Gold Bulls Are Vindicated

SPECIAL GOLD ALL TIME HIGH ISSUE

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1) The Gold Bulls Are Vindicated. For the faithful who have crossed the desert and suffered the slings and arrows of critics and the ridicule of non believers, gold’s move today to an all time high of $1,276 delivers the greatest of all vindications. All it took was some comments by Ben Bernanke about quantitative easing triggering dollar weakness, and it was off to the races. It didn’t hurt that the Indian wedding season, the largest annual purchaser of gold, is just beginning. Actually, it wasn’t much of a desert, maybe more of a Zen rock garden, as the barbarous relic, (yes, Alison, it’s barbarous, not barbaric) sold off for only six weeks, down to $1,155, before it resumed its recent ascent. The Chinese buying I predicted put a floor under the price much higher than traders anticipated, frustrating hoards of buyers lower down (click here for ‘China’s Insatiable Appetite for Gold’).

So now the question arises of what to do with your bounteous profits, and how much risk does the yellow metal present here. I get asked this question a dozen times a day, by some who have been long since the current move started more than a decade ago at $260, and others who stood on the sidelines and watched in awe as it went to the moon, kicking themselves all the way. Is it too late to get in?

They call the yellow metal the barbarous relic for a reason. Let’s face it. We’ve had a great run. Gold is one of the top performing assets of 2010 by a long shot, soaring 16% YTD to its peak today, when most other asset classes sucked. Investors did even better in the futures, leveraged ETF’s like the (UGL), and gold mining shares or their out of the money calls.

If you are the world’s greatest day trader, and think you can grab something here on the short side, then go ahead and knock yourself out. But you will be going against the long term trend. Obama has not suddenly turned into a paragon of fiscal rectitude, and Ben Bernanke still has the keys to the printing presses. The Fed has yet to even admit its role in the credit bubble of the last decade. Fiat paper currencies are still running a frenzied race to the bottom. Politicians of both parties see the only way to win elections is to inflate.

Almost all short term money market alternatives globally are yielding close to zero, meaning that the opportunity cost of owning the gold is nil. It turns out that they aren’t making gold any more. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to $500/ounce. Reserves everywhere are playing out, and top producer Barrick Gold (ABX) isn’t opening a new mine at 15,000 feet in the Andes because it likes the fresh air. The upcoming slugfest in Congress over whether to extend tax cuts for 97% of the populace, or the whole 100%, will almost certainly cause many investors to just throw up their hands in despair and start shopping for American gold eagles at Amazon (click here for that link).

Now that we have broken out to a new high, many traders think the yellow metal won’t pause to catch its breath until we hit $1,300. I still think my long term target of $2,300 is a chip shot, but it might take three years to get there. There are higher predictions of $5,000, $10,000, and $50,000 based on ratios of gold to broadening definitions of monetary assets, but I won’t bother with those here (click here for ‘The Ultra Bull Case for Gold’). First things first.

Below are the downside support points on the charts, with my comments.

$1,212 -50 day moving average, probably holds, but a break signals a more serious pull back
$1,166 ‘“ 200 day moving average held last time, should work again. Unlikely to get there, but the world is a big buyer if it does.
$1,050- The 2010 low, the old multi year high, and the place where the Reserve Bank of India kicked off the current love fest with its surprise 200 tonne purchase 11 months ago. Unlikely to get there, but the world is a big buyer if it does. Bet the ranch here.
$680 ‘“ The 2008 low- In you dreams. We aren’t going to get a full blown flight to liquidity we saw in that dreadful year. Relegated to the history books for good.

Use any serious  dips to accumulate low cost, growing, gold miners with decent valuations, which are enjoying escalating operating leverage the higher the barbaric relic runs. Some new names you might entertain are Royal Gold (RGLD), Agnico-Eagle Mines (AEM), and Great Basin Gold (GBG).

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