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September 16, 2005
For gold traders only, Fri., September 16, 2005, 10:22 AM
Yesterday afternoon, I wrote that this chart of the GLD, which is the spot (cash) price on the bullion, trading as an ETF on the NYSE, shows the trend as well as the movement caused by global trading outside NYSE hours.
I hope you got the message.
If you are going to trade gold or forex, you must recognize that these are global markets, which unfortunately don't keep NYSE hours. While you are sleeping (presuming that most of my readers reside in the Americas), there are gold traders busy at work in places like Bombay, Singapore, Shanghai and Moscow, and hundreds of other cities like that.
Get it into your head, Gold is not American".
I've written that before, but still there are traders who wonder why there are such extreme markets at the NYC open " not only for the GLD but for a host of other securities that trade in international markets.
What the world needs is a continuous trading market 24 by 365.
I mean why do we stop everything for Christmas when the far majority of the world is not Christian? Etc.
In any event, let's take another look at the gold market today. Most readers seem to be interested. They don't have to read government data regarding inflation and debt to know that both are growing, and impacting on their lives, daily.
Weekly and Daily Gold EOD Continuous Contract Index:
This interactive chart shows the recent trading for the Gold Bullion index.
Weekly and Daily U.S. Goldminers Index:
This interactive chart shows the recent trading for the U.S. Goldminers group.
The Toronto Exchange-listed goldminer iUnits S&P/TSX Capped Gold Index ETF trades under the ticker symbol TSE:XGD.
Here are the TSX Goldshares (XGD) index data charts:
Goldminer stocks typically trade at high PE multiples. That's because the products they produce are, well, as good as gold. There is never an inventory problem, no bad debts, and so forth. A successful gold operator is in an enviable position. On the other hand, most business corporations face incredible risks: a storm like Katrina can wipe it off the map, yet most all the gold ever found is always going to be in existence. It would take Armageddon to put a stop to gold.
Obviously, some of the goldminers have better mines, better operating conditions, better financial resources and management, and so forth, but the bottom line is the same. It would take an alchemist working in reverse to make a solid gold operator disappear " at least in less than a couple years.
For an interactive look, here are links to the Hourly data charts of three groups of proven goldminer stocks. You can click on the tabs for the Monthly, Weekly and Daily data charts.
Note that some of these companies have mining operations in countries where the currency and the operating costs are rising or falling relative to similar operations in different countries. Also, some produce greater or lesser percentages of gold, silver, copper, and so forth, which have prices that may not move synchronously.
But the essential point to grasp is that the trends and cycles are going to start and end at nearly the same time for the whole group. So, you may have one or two eggs in this basket, but you watch the whole basket.
Most of these stocks are trading at PE multiples that cannot be sustained unless the price of gold, silver, and copper, continue to rise. For the typical business corporation (i.e., non-gold), this concept is called pricing power.
Right now, at this point in the business cycle, most corporations do not have pricing power, because the global demand " over and above the available supply " is insufficient. A healthy global economy would change that.
Goldminers have pricing power as anybody can see in looking at charts of the metals complex. That's because of rising inflation. But, for how long will inflation be a problem?
Over hundreds of years there are very few periods where inflation was a problem for very long in stable societies like e.g., the industrialized nations of the world. It typically occurs after a major international military conflict that involves the great industrial powers.
That's because those nations have to print excessive money during those years, and the majority of that money goes into non-productive uses. So, wealth is destroyed, on balance, and the price of fiat money falls and the price of gold rises.
That's what is happening today. The U.S. needs to reflate in order to recover from Katrina and to continue its military actions in the Middle East. Japan, Germany and the U.K. all need to reflate to kickstart economies, which are on the verge of going into recession. The emerging economies of China, India, Brazil, etc, are growing so fast that their small economies are now becoming giant ones, with tremendous demand for metals and oil.
So, if the global economy stays in a positive growth mode, which is most likely, the metals prices will likely continue to move higher. That will alleviate the high PE multiples of the goldminers, in time.
For now, however, every time that the Fed or the other major central bankers tighten monetary policy, there will be a small and temporary pull-back in the goldminer shares.
The time that long-term investors would want to sell their goldminer share positions is when the long-term inflation trendline in the U.S. starts to head back down through the critical 2.5 pct level. That's when the Fed will start to relax, and they will continue as long as that long-term CPI trendline falls below, and stays below 2.0 pct inflation.
For the immediate-term, the $463.30 price I noted earlier will likely pull back into the high 450s until after the FOMC speaks on Tuesday afternoon. Gold has backed off about $2 in the past hour, then recovered a bit. Traders are nervous.
Traders are also starting to put their bets on more Fed tightening to come " as they should.
But that move will just push down a bit on Gold, but not much. The bigger CPI and growing deficit/debt picture in the U.S. is not going to be solved very quickly. Those cycles tend to go for years.
Posted by Posted by Bill Cara on September 16, 2005 10:22:46 AM | Category: Economics , Gold