Weekend Readings

Below are some articles I’m reading this weekend:

Gold shares would soon play catch up – Prieur de Plessis

ECRI Recession Call Update – Doug Short

What Debt Default Means for the Stock Market – Tom McClellan

EU Summit May Be Eurozone’s Last Chance to Avoid Financial Disaster – Satyajit Das

Bloomberg News Responds to Bernanke Criticism of U.S. Bank-Rescue Coverage

20 Truths About the Stock Market – Ivan Hoff

A Player to be Named Later (pdf) – John Mauldin

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Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Investment Readings

Below are a few articles I’m reading this week:

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Occupy Wall Street Must Occupy Congress, AG Offices – Barry Ritholtz, ”I suggest the following three as achievable goals that will have a lasting impact:

1. No more bailouts: Bring back real capitalism
2. End TBTF banks
3. Get Wall Street Money out of legislative process”

Occupy Wall Street: More Popular Than You Think – CBS News

Suzanne – The Reformed Broker

10/17 Afternoon Technical Update – Adam Hewison

Europe: Just Getting Warmed Up – John Hussman

Nouriel Roubini to World - AllAboutAlpha

Put Gold Miners on Radar Screen - Prieur du Plessis

Can “It” Happen Here – John Mauldin (via The Big Picture)

US Stock Market: Bulls vs Bears; Historians vs. Risk Takers – Cumberland Advisors

The Key to Watch For In November – Tom McClellan

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Gold Projection & Mid-Week Investment Readings

David Banister has released his new projections for Gold here.  You’ll remember last week I posted a gold forecast projecting a short-term dip.  It’s possible that “dip” could be coming to an end if Banister is correct.  The smarter play, however, may be to look at GDX (Gold Miners ETF) because the Gold to XAU (Gold & Silver Miners Index) ratio is currently at 8.49, high by historical standards. For some background on how to use this ratio, please search my site for “GDX” or see my previous articles here and here.

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A Second Lost Decade: an Update of the Secular Bear Market in Equities (pdf) – Pring Turner Capital Group, Pring.com

Did Tail Insurance Turn South in Recent Market Volatility? Geoff Considine

Brace for a Long Recovery From Global Credit Glut: Simon Johnson

Fed Policy – No Theory, No Evidence, No Transmission Mechanism – John Hussman

Is the US Monetary System on the Verge of Collapse? (pdf) John Mauldin

Preparing for a Credit Crisis (pdf) John Mauldin

Nursing the Patient (Part III): Unwinding the Monetary Mess (pdf) – BCA Research via Cumberland Advisors

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Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Weekend Investment Readings

Below are a few investment related articles I have or will be reading this weekend:

Your Gold Teeth – Paul Brodsky courtesy The Big Picture.  This is a great article for those interested in Gold and Gold Mining Stocks.  For some of my previous analysis on Gold Miners and Gold (GDX and GLD), see these articles here and here.

The Whole Truth and Nothing But – Thomas Friedman

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Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower? Mebane Faber

Gold Price is a Measure of Dollar’s Debasement – Tom McClellan

Equity Allocations: Thinking Outside of the Box (pdf) Research Affiliates Newsletter

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Gold Forecast

David Banister has been nailing Gold price movements, so I though it is worthwhile to continue to post his articles on the subject.  Below is his full, free article.

Before reading Banister’s article, my thoughts on Gold and GLD are that a short-term pullback is probable, but the long-term uptrend is still intact.  My thesis for a short-term pullback is based on the current divergence between price action, which is near a double top, and a variety of momentum indicators.  Using stochastics, MACD, and RSI, we see that while the price of GLD is near its high from the middle of August, the momentum indicators are lower than they were in August:

I think it would be crazy for an individual to outright short GLD or Gold at these levels.  However, profit taking for short to intermediate term traders and investors could be in order.  Stop losses on current long positions in GLD would serve to lock in (presumed) gains if my thesis is correct.  If I am wrong and GLD continues higher, the stop loss could be adjusted upwards as the price of GLD increases.

A defined-risk short option position could also be implemented.  Specifically, a vertical call spread on GLD would offer a limited-risk, limited reward short position.  A current example of a bearish call spread trade on GLD would be the 186/188 spread, which entails selling the September 186 call and purchasing the September 188 call.  This spread last traded today for $.58, giving you a $.58 credit and $2 in risk. (Please note: I am writing this after hours so tomorrow’s option prices will differ).  This is basically a low-risk, low-reward bet that GLD will not reach a new all-time high in the next 8 days.

And now, onto Dave’s article.  If you are interested in reviewing his service, checkout out Market Trend Forecast here.

A few weeks ago I penned a public article and private forecast for my subscribers calling for a major correction in Gold being due. 72 hours after my forecast, Gold had dropped a stunning $208 per ounce in 3 days catching most by surprise. Why did I forecast a top in Gold then? Why did Gold rally back to new highs recently? Is the Gold Bull Market now over? Let’s see if I can answer those questions with some level of logic below.
I had forecasted a major correction because Gold has had a run of 34 Fibonacci months from October 2008 to August of 2011 from $681 to $1910 per ounce spot price in US dollars. That type of pattern was formed with a clear 5 wave move, with obvious corrections along the way. The reason I was confident of a major correction was due to the confluences of the 34 months of time, the price relations to prior rallies and corrections, and the Fibonacci sequences coupled with the sentiment and cover stories on Gold in major publications. Gold should have entered into a multi-month correction that will consolidate that 34 month move, and the first shot across the bow was the $208 drop in 3 days.
Interestingly, that $208 drop over 3 days corrected 50% of the 8 week move from $1480 to $1910. As we can see markets move very very fast these days and can whipsaw even the best of traders. I told my subscribers to cover their short bets at $1724 spot, and since then we rallied to $1920 this week before topping again.
The reason Gold rallied back and touched the old highs and then some was due to the German Court pending decision regarding the constitutionality of backing the Eurozone countries with bailout funds. Today we had a positive decision by the court denying claims that the bailouts were unconstitutional. Had the German Court ruled the other way, we would have seen Gold spike to $2000 and the SP 500 and European Bourses tank hard. So if you were getting long Gold on this recent rally, you were taking on a lot of short term headline risk and I told my subscribers it was best to stand aside until we got the ruling.
Now that the ruling came out, Gold has topped at 1920 in what typically traders would call a “Double Top” pattern, but it’s more involved than that. In the work I do, we call it an “Irregular correction “ pattern, where the retracement of the $208 decline runs all the way back up and past where the decline began at $1910. These are very rare patterns and again, I believe exacerbated by the Eurozone issues as they hinged short term on the German decision. What we should see now is what I call a “C WAVE” to the downside, with targets typically at $1620 relative to the rally from $681 to $1910 over 34 months. A drop of $290 is only 15% from the highs and would fill in gaps in the Gold chart.
Will Gold drop that low? The fundamentals for Gold are screamingly bullish, but the entire world knows that and it may be priced in for a while. Gold should consolidate those topping highs for a while to let the fundamentals catch up the price action in Gold which ran ahead of them and then some. The Gold bull market should run for 13 Fibonacci years, and I have been bullish since November 2001. I understand the fundamentals are very strong for Gold, so please don’t miss-read my comments ore forecast. I use crowd behavior and psychology to help pinpoint major tops and bottoms, and right now we should have some more work to the downside to correct sentiment in Gold and then allow for the base building period before the next leg up towards the highs in 2014.

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Time to Buy Gold or Stocks?

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Today was not a good day for equity markets. The S&P 500 closed down nearly 4.5% and the NASDAQ Composite was down over 5%.  Meanwhile, Gold (via the ETF GLD) was up over 3% on the day.

Gold and equities and have been inversely correlated for most of July and August.  This means that they have tended to move in opposite directions:

Given this negative correlation, investing in one has essentially been a bet against the other.  After today’s equity sell-off, what is the outlook for both stocks and gold?

I’m not a day trader and do not claim to have a crystal ball.  However, the saying “the trend is your friend” is a cliche for a reason: it tends to be true.  On Tuesday I highlighted two key price levels on SPY, the $120.64 which could act as resistance and $110.41 which could serve as support on a sell-off.

It did not take us long to  hit resistance around $120.64 this week and sell-off, so at this point a re-test of support looks more likely.  If the $110 range does not hold then I think $102 is a possible next point of support. If stocks were to reverse course and breakout above $120.64, then $125-$126 is a likely point of next resistance. The first chart is a daily chart and the second a weekly:

JW Jones noted today in Are Gold &the S&P 500 Behaving Logically or Irrationally that we are currently oversold, which is true.  However, equities can remain oversold for extended periods of time, so a quick sell-off to $110 or even lower is not out of the realm of possibility.  His graph below indicates oversold conditions by the number of stocks trading above their 20 day moving average:

If we return the $110 range on SPY, gold could have a little more room on the upside. However, the parabolic move in recent weeks shows that some consolidation or a sell-off is most likely coming. Chris Vermeulen is a little more bullish on equities but does see some choppy action in the next few weeks.  He has an interesting GLD chart in “Gold &Stocks Are About to Move in Opposite Directions” that highlights volume spikes, which tend to be followed by a consolidation or sell-off:

Bottom line: Gold is looking overextended, I think patience will be rewarded as a consolidation or sell-off could present lower prices.  Equities (via SPY) look like some additional short-term downside is possible to $110-$110.41.  I’m going to reserve judgement on the intermediate trend until we either break through either $110-$110.41 or $120-$120.64.  Cash, which is my biggest holding currently, is a viable position until we get further clarity.

Given the Federal Reserve has stated they will hold rates near 0% until 2013, Gold could remain in a long-term uptrend until this policy, either voluntarily (via the Fed) or through market forces, unwinds itself.  I expect volatility in stocks, gold, treasuries, currencies, and commodities to rear its head as the great sovereign debt unwinding unfolds.

Big Picture: I think we should get accustomed to seeing volatile, macro-driven markets in the coming weeks, months, and possibly even years.  Sovereign debt issues on the scale we are dealing with today do not disappear overnight and I expect they will unwind themselves over months and years.  After Greece there is Portugal, Ireland, Italy, Spain and…let’s hope we stop there. John Mauldin, whom I cite frequently, warns us that overextended sovereign debt are inevitable coming to an end in his Endgame: The End of the Debt Supercycle and How It Changes Everything. Greece is but the beginning.

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Gold to Gold Mining Stock Ratio Jumped Today


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The equity market sold off hard today, and with it the gold and precious mining stocks. After consolidating in recent weeks, the ratio of the spot price of gold to the XAU index (mining stocks) is again near 8, closing today at 7.61. For those seeking exposure to gold, I would watch this ratio closely when determining whether to purchase the metal or the companies that mine the metal. The easiest way for individual investors to gain exposure is via ETFs such as GLD (gold) and GDX (miners).

I have detailed this ratio in-depth in the past, most recently here

To chart the ratio, simply go to stockcharts.com and enter $gold:$xau.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

This Week’s Outlook for Gold, Silver, Stocks, and the Dollar

First, my weekly list of ‘Stocks to Watch’ has been updated on the right hand side. I may not be writing commentary this week but will be watching for a new long entry in PSMT this week (a stock on the list from previous weeks) if it can break $60.  AIS has not performed well yet so this week will probably result in either my stop loss being hit or the stock rebounding.  Also, GDX is an ETF to watch per my article from last week.

Below is an excerpt from a  guest post from Chris Vermeulen on his outlook for gold, silver, stocks, and the dollar. You can read the full, free article here:

In short, I am bearish on the dollar for a week or so which should help boost stocks and commodities. After that we could see all investments make some big trend changes if buyers don’t step up to the plate to buy. If we any major headline news about the sky is falling then it could trigger a sharp correction. Unfortunately, at this time head line news is running wild spooking investors from buying much of anything other than gold. Any resolution to foreign economic issues will put pressure on both gold and silver and likely help boost stocks. 
The past month I have been very cautious because the market is wound up and ready to explode in either direction. During times like this I prefer to stay mostly in cash until I get low risk setups and a clear trend.

Disclosure: Long AIS

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Gold Mining Stocks: Still a Buy

On June 20th I wrote about a potential Gold Miner / Gold trade.  The basic premise is that a) a Gold / XAU ratio above 4-5 is bullish for Gold Miners or bearish for the precious metal gold, b) a NAPM PMI below 50 is bullish for gold miners, c) risking inflation is bullish for miners, d) falling treasury bond yields are bullish for miners, e) seasonality could create some headwinds for the price of gold this summer


This summer we have seen points a, c, and d come to fruition.  The recent NAPM Manufacturing PMI number, while relatively unimpressive, still shows a growing economy with a reading of 55.3 for June.

The current Spot Gold to XAU ratio is around 7.35.  This ratio will behave closely to the ratio of GLD to GDX.  The ratio of GLD to GDX is currently 2.6.  At the time of my original article in June, the Gold:XAU ratio was 8.09, meaning GDX has outperformed spot gold since the original piece.  A ratio of 7.35 is still high, however, by historical standards; thus, there is still value in gold and precious metal mining stocks relative to the price of gold itself.

 There are only two potential headwinds preventing GDX from reaching the “optimal” trade setup.  The first is seasonality, as commodities tend to under-perform in the summer.  However, this is not necessarily a hard-fast rule, it is simply an historical observation.  Thus, we could buck the trend this year.  The second headwind is that the economy, as judged by the aforementioned PMI, is still expanding.  This could change, but to date  the data does not yet put us in “optimal” position for a trade.

Nevertheless, GDX has too many factors in its favor to ignore as a potential long trade.  For those investors nervous that gold could retreat this summer (despite hitting a new high this week), a long position in GDX could always be hedged by a short position in gold.

 I detailed in June 2009 an alternative trade to simply going to long the miners. An investor “could purchase GDX and short GLD (or as a substitute, use the short Gold ETN, DGZ) until ratios regress closer to the mean. ” This pair trade would simply be betting on the miners outperforming gold over the length of the trade. As long as GDX performed better relative to GLD, the trade would be profitable, even if both declined.

Hedging your GDX position in this manner could potentially hurt returns if both gold and the miners continue to move higher.  However, the purpose of the hedge is simply to reduce potential volatility if we see a decrease in the price of  both.  The hedged trade could turn into a losing trade if the ratio of gold to mining stocks reverses its recent course and heads higher again.  However, I expect any move higher in the ratio to be short lived.

For those looking to time an entry into either GDX or GLD, the next few sessions could give us a clue as to whether the recent move in gold is “for real”, or just a headfake.  As Christ Vermeulen points out here:

As you can see from the chart below, gold is making a new high. The big question is if it will do what it has done many times in the past, which is make a new higher for only a few days to get the general public (herd) long, only to then get sold into and come back down? The next few sessions will give us a better feel for this breakout/rally.

If the recent high in gold holds in the short term, we may be bucking the seasonality trend and heading higher.  If so, I expect a position in GDX to be a more profitable long trade than simply owning the physical commodity.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Learning to Trade the GDX Butterfly

Below is an excerpt of an article from JW Jones of Options Trading Signals on how to trade the Fibonacci Butterfly using the Gold Miners ETF, GDX. It may be a little much for those not interested in technical analysis, but if you are looking to improve your technical analysis skills it is a great example of a chart pattern.

The full, free article is available on his site, here. You can also get his Profitable Options Strategies Report by clicking on the link.

The basis of the trade I would like to discuss is that of a Fibonacci butterfly, in this case, a bearish Fibonacci butterfly. This pattern is derived from price relationships and the proclivity of these relationships to form predictable zones of price resistance and reversals. 

The subject of the Fibonacci sequence, its origin, and potential applications is well beyond the scope of this posting. Suffice it to say that the numerical relationships found within the Fibonacci series have wide distributions across a host of natural relationships. For those interested in learning more about these relationships and their derivations, any internet search engine will point to a huge trove of supplementary information. 

The Fibonacci butterfly was best described initially by legendary trader Larry Pesavento. It represents one of two well defined Fibonacci reversal patterns that include both the Gartley and the butterfly…

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com