Thursday Dec 29, 2011
These comments were written before the Thursday market open.
Crashes occur at the end of moves not at the beginning, think Oct 1987 or Nov 208.
A crash is generally defined as a 20% drop.
CEF is down 26%.
GDXJ is down 42%.
Central Fund CEF was begun to create an alternate form of money. This closed end fund holds only two things, gold and silver bullion. Handily its website reveals whether CEF is trading at par, a premium, or a discount to its net asset value. Closed end funds exhibit this characteristic. Since the fund has a finite number of shares, the shares move to over valuation, premium, in bull markets. Most of this past few years CEF has traded at at premium to the bullion it holds. INvestors were paying more for the gold and silver than it was literally worth. Clearly that is not an ideal purchase.
At yesterday's close CEF went to a 4 percent point discount to its NAV, one would pay 18.76 for 19.39 worth of bullion. How can this be, investors are irrationally dumping CEF for tax loss selling these last few days of 2011.
At top I placed the ratio of CEF to the price of gold.It has returned to it former discount level. In the main panel note I am using a
65 - 130 -260 day moving average to represent the days in a quarter of trading.
In the main panel the gold line is the price of gold. One can readily see that CEF outpaced the price of gold in early 20-11. Now CEF is leading the way down. More investors own CEF than can easily sell physical gold.
At bottom the weekly MACD is quite low. But how low will CEF go? ONe would think that the end of the year, tomorrow would end the tax loss selling. But..
GDXJ
GDXJ does not have enough price history to generate 130 and 260 bar weekly MAs,
John Paulson had a terrible year in 2011 by investing heavily in gold mining shares. A few days back I mentioned that GDXJ might go to 20 at which point it would be quite a buy. This morning gold is down another $30, so such lower prices for the miners, with few to no buyers, looks quite possible.
I took time just now to visit Jesse Cafe American which has been one of the most bullish gold sites. Interestingly his first topic is why Americans pay too much for drugs, about as far from the topic of gold as he could be. Jesse is one that continually charges there is massive manipulation in the markets, big banks shorting gold in concert with the FED, etc. This is one of the difficulties of investing in gold there are no end of conspiracy stories. But, he suggests one does not buy into a falling market, a considerably different view than say Steve Kaplan. Oh and Denis Gartman who runs a very expensive advisory service has announced the end of the gold bull market after 13 years. Yesterday I linked to Doug Kass predictions who suggest gold will rally in 2012.
So take you pick. Here is a You Tube on taxing wealth which shows just how absurd proposals are to tax our way out of a $14 T debt. Which is to say that sooner or later, governments will have to inflate or re peg the price of gold much much higher. Either way gold will go up.
One may want to wait till the dust clears this next week. I doubt prices will immediately rebound. And clearly the long term MAs are much lower for CEF and GDXJ.
What do I think? I think times like this are when one has to accumulate the bullion or the miners. Dave Rosenberg has suggested that the latter half of the gold bull market, which lies ahead, will see the miners shine. Certainly they are getting negative publicity now.
This would be a very long term hold and investors should be prepared to do just that. And there is no necessity of trying to catch the falling knife today. The markets will be open next week. But we have provided a good deal of material here for the basis in making a decision. I recommended GDXJ at 27. CEF is good buy when it trades at a discount to bullion. Of course bullion prices could fall further.
Gold
We can be sure of a couple of things. Computer programs are written using 50 ad 200 day MAs. Look at what gold did this week.
Breaking the red 200 day MA no doubt generated sell orders above and beyond just year end tax selling. But this is a daily chart.
Gold Weekly
Gold would have to fall to 1174 to hit its 200 week MA. It's been three years since that happened but at this point that seems rather far fetched.
After market open
It may be that hedge fund managers do not want to show gold positions in their year end statements, so this selling could continue until tomorrow. Other commodities like oil and copper do not seem to be affected by a universaL desire to throw gold overboard. From that stand point this is a bit like Fall 2008 when funds were mindlessly selling stocks, now they are mindlessly selling gold.
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