Barron's Online
Wednesday, May 7, 2008

HULBERT ON MARKETS
When Bad News Is Good News for Gold
By MARK HULBERT

I HAVE SOME GOOD NEWS for beleaguered gold investors: The editors of gold timing newsletters finally have thrown in the towel and given up hope that the bull market in gold will soon resume.

If you have a hard time understanding why that is good news, you're not familiar with contrarian analysis. According to contrarians, the market rarely accommodates the majority, especially at major market turning points.

That means that the rallies that have the most staying power tend to be those of which the majority is skeptical, while declines thrive on the hope that the decline will be only temporary. To put it in terms of phrases that most of you probably have heard before: Bull markets like to climb a wall of worry, while bear markets like to descend a slope of hope.

From this perspective, things as recently as mid-April were not looking good for the gold market. During the second and third weeks of April, for example, a period in which gold bullion dropped some $25 per ounce, the editor of the average gold timing newsletter actually became markedly more bullish.

This reaction far more closely fits the template of what precedes more serious declines than mere bull market corrections, and, as a result, contrarians concluded that a bottom was not yet at hand.

The price of an ounce of gold quickly dropped another $50.

Today, however, the editors of gold timing newsletters are beginning to throw in the towel. This has dramatically changed the sentiment picture, to the point that contrarians are now willing to entertain the notion that a sustainable rally can now begin.

Consider the latest readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest.

As of the close of trading on Tuesday, May 6, the HGNSI stood at minus 10.7%. This negative level means that the editor of the average gold timing newsletter is net short the market, advising that 10.7% of the typical recommended gold portfolio is invested in a bet that the gold market will decline.

Since the beginning of 1985, some 23 years ago, the HGNSI has been this low or lower only about one-tenth of the time.

But that's not the only reason that contrarians are encouraged: The HGNSI's decline in recent weeks has been precipitous. In mid-April, for example, the HGNSI stood at plus 25.0%. So in only about three weeks' time, the HGNSI has declined by nearly 36 percentage points. This quick a drop suggests that many gold timers have thrown in the towel, which is a bullish sign according to contrarians.

The Hulbert Financial Digest has rigorously analyzed the HGNSI back to the 1980s, studying the correlations that exist between high and low sentiment levels and how gold bullion has performed over subsequent weeks and months. These correlations are statistically significant at the 95% confidence level that statisticians often use to assess whether patterns are genuine.

To illustrate, consider first the 10% of weeks since 1985 in which the HGNSI was as low as it is currently, or lower. (About 120 individual weeks are included in this decile.) Over the 30 days following each of these instances, gold bullion produced an average annualized return of 14.1%.

That's a lot better than the 4.4% average annualized produced by gold over the entire period since the beginning of 1985.

Now consider how gold bullion performed in the wake of sentiment readings at the opposite end of the spectrum -- when the typical timer was quite exuberant, in other words. On average following the 10% of weeks since 1985 in which the HGNSI was highest, gold bullion produced an annualized loss of 1.4%.

That's markedly worse than average.

These results definitely point to a higher gold price over the next month. But note carefully that there is no guarantee: Statistical significance does not equal a guarantee. So one most definitely should not throw caution to the winds.

Nevertheless, unlike the situation that prevailed as recently as mid-April, the odds are now looking good.

Mark Hulbert is founder of The Hulbert Financial Digest. He is a senior columnist for MarketWatch.

So, why are the miners going down while the spot price is pretty stable today?

Rob.

Anyone have a feel for market direction today? I can't figure out what happens next.

I'm thinking we won't sit here for long. It has to either break up or break down soon.

Rob.

Re: Silver

Silver spot price advanced this morning against a decline in gold spot. We'll know by the end of the week if that's a sincere indication of a rally in the precious metals sector.

Rob, take a look at IEF/TLT. When they're buying treasuries/long bonds they aren't buying equities.

Nice slight of hand with the indices today though....except that pesky S&P....LOL!

So I think it's more down....

finger lakes:

ive been asking myself that same question for the past 2 years.

Ooops! Sorry Rob, it's IEF/TBT.
IEF is the Lehman long and TBT is the ultrashort.

V Selling June 67.50 puts here as V went under 79.

Sounds like shark moved from the Westport library to Suffolk Downs!

Observation on TLT--my screen shows a put/call ratio of 4.10! Lot of people betting on the T-O-G.

Know it's a new ETF, but wouild like to see more volume on TBT.

Down would be my choice as well. Especially since the magical 13K DOW and S&P 1405 didn't hold and there hasn't been any real effort to get back up there.

Bonds prices going up while Oil and Gold are pretty stable and the stock market is levitating is very confusing. It's almost like the money is going in all directions right now to fake us out and make us jump into something.

You can bet wherever we jump, the big money will go the opposite way.

Rob.

Gittyup! Now that's a horse of a different color. As in green.

dr.cosa--good article. So should I go utra-contrary and say that because he's calling a bottom in gold that's still too bullish?
To be honest with you, I didn't see the recent correction all that bad. It was in a mid-teens percentage drop for gold I think, and a mid-twenties percentage drop for GDX. Maybe it was worse in Canada, I don't know. I was actually hoping it would go down a little more, so I could get better bargains.
I really find the bottom-calling futile. Gold could skyrocket, plunge, or go sideways from here and it would all be sort of normal.

ETFC looking very good right here. Just announced that they are exiting the mortgage origination business, which has been a HUGE drag on the stock. Underlying brokerage business has actually been doing quite well. I believe they will sell off their remaining 700+ FICO mortgage loans and use the proceeds to pay down the debt they brought on when they entered into their deal with Citadel back in November. After this happens, their core business can generate $1.20+/share in earnings. I believe this will be a $15 stock in a couple of years.

Wow, I've never seen everything rally at once before. Right now we have Stocks up, Oil up, Gold up and Bonds up.

The only thing I can find down is the Dollar.

It's funny because the news stories haven't caught up yet. They're still saying "Stocks up because Oil down" and "Stocks higher with Dollar".

Maybe that means short stocks/dollar and long bonds/gold/oil is going to be the path of maximum frustration for now.

Rob.

Good article on senior gold producers - who after all control the outlook for juniors!

Why Barrick is a star, Anglo-American a loser, and Newmont a riddle.

Newmont gets paid the most for its gold, has the lowest cash cost, yet had a $1B writedown in Q4 that a major analyst can't get to the bottom of:

http://tinyurl.com/453hte

Any KBX silver mine holders out there. Seems to be making another run higher.

Anyone have insight into Eastern Platinum ELR.TO?

Bill, I got the book finally. Finished chapters 1-4 last night.

craig- are you posting from vegas?

GDX back above 46- forget who it was that paired an options trade with an underlying position on this (was it SteveC)...looking good here...

CAF down 3%? so now i've pretty much given back what i made on the last move up...all i can say is, if you hold anything longer than a day or two in this market, you risk complete reversal...

ulvy, are you talking about kobex? If so, I'd be interested to know what may have caused its fall from 3.50 to 0.54 ...

2nd "you risk complete reversal..."

Yep, that's why I sold the rest of V last week with an 87 handle. . . blink and it's gone.

seamus- nice move on V...to be honest, i can't think of any nice moves to make right now...

2nd, it's a tough market no doubt, have to know your stock . . .think Sundance's FSLR short may work if/when oil starts to pull back, but you don't want to be absent from the screen for long. . . did sell some June puts this a.m. on V when it looked intraday oversold.

Otherwise, holding that preferred ag/energy play CHSCP, which has a nice dividend, somewhat illiquid though. doydd.

Anyone been eyeing TSO? Looks like it may be worth watching as a play on temporary commodity weakness......still need to do some more research but definetly trading inversely to crude...could make a run into the close

HB&B running stops

Does running stops occur on conditional stops where a condition on another security must be met to trigger the stop on the underlying security? eg sell stock A when stock B falls below price X.

LOL! No, no Lost Wages for me.....although I can see if I had real money on my call I would have been gored by the bulls.....

I'm in a similar situation to Seamus, holding CHSCP and another nice div payer/trade, CNSL.
Small position in SBUX that I add to when it gets taken to the woodshed. And of course RRPIX which I should have sold Friday.

Hope you had a good vacation 2nd.

All the refiners are getting a boost and improved crack spreads/falling oil.

I still think FSLR is wildly overvalued - it is a waiting game right now as shorts get cleansed and the downward path is cleared out.

FSLR hasn't been participating in the oil rallies over the last couple weeks as it had been previously (it took the Citi upgrade last Fri to keep FSLR propped).

I still can't find any evidence that FSLR has a moat that either wide or deep. They are benefitting right now from short term (temporary)supply issues for polysilicon PV producers (which is expected to end in '09) and massive pumping from the Sith Lord.

Craig also holding some RRPIX in own and others' accounts . . . led to believe it may come to pass around September time frame as inflation heats, but that's JMO . . . by then meat including beef, chicken and pork will start rising and squeezing families more. . as ranchers, meat producers, etc. are today leading the herds to slaughter as grain prices are too high . . as previously mentioned, Canada is providing $50 mil to reduce the hog population . . . it may take awhile after supply is run through, but the cost of food will go higher . . . reminds one of the seventies (oil was spiking then also) . . still recall the 30 year bond hitting around 18 @ 1980-1981.

2nd - take a look at ETFC. that is one of the few long term investmenst i like out there. they got crushed by their mortgage investments, but they sold off the worst ones they had and are exiting the origination biz. they got rid of all old executives and brought in a new management team. in my opinion, they will also be selling their exisiting residential mortgages, leaving them with a core brokerage biz that generates $1.00+ in earnings.

Welcome back from your "trading" holiday, 2nd_ave! :)

> "all i can say is, if you hold anything longer than a day or two in this market, you risk complete reversal..."

Don't worry -- just wait for a few more days and you'll get a complete reversal. :) It looked like your bet on CAF was a long-term one, and so local fluctuations should not scare you. For example, tomorrow will most likely be an "up" day for CAF, as China will likely rebound tonight after few straight days of declines and after today's strength in US -- don't you think so?

DavidV

Does anyone have experience using Worden for chart software? the demo looks very user friendly! just curious before i sign up.

http://tinyurl.com/5mbn83

craig- for some reason, thought you might be attending the money show in vegas...

RRPIX- you might consider a lateral trade from 1.25x to 2x-> buy TBT at the next short-term peak in bond prices...i'm still waiting to trade DXKSX for TBT, not for any additional leverage (DXKSX is 2.5x), but b/c it trades continuously intraday, which can be a big advantage when volatility kicks in...of course, if we get a repeat of 1980-81 (and you're still holding), it won't matter which 'rising rates' play you own-> you will be able accelerate your 'retirement' by a few years...

ETFC- i'll check out the new management team when i get a chance...

CAF- not really worried about it, David->just don't like leaving any money on the table ;)

2nd,
I agree with you. I can't make heads or tails out of this market at all right now. Glad I sold my DIA puts on Friday but not sure what to do next.

It seems like there's alot of indecisive money out there wondering where to go. Gold was up/down. Oil was up/down. Bonds were up/down. Stocks following the same pattern too.

I'm keeping my powder dry until I can get a better read into what the game is this week.

Rob.

Rob- that's a good idea...'nothin' can be a pretty good hand' either playing poker or playing the market...

Another heads up. You can trade in your ibkr or td account directly in the Blocks software from Worden.

http://tinyurl.com/52kefg

No one has used this?

RE: rising yields play (DXKSX, TBT).

2nd_ave and others holding such funds: does your bet imply that the next big move in DOW will be to 14000 rather than to 11800? It seems to me that if a down move occurs, then bonds will rise and yields will fall, as it usually happens.

While I do agree that yields will most likely be higher 6 months from now, I would rather enter this trade after a multi-week weakness in the market rather than after a multi-week strength, because short-term bonds move opposite to stocks. Am I missing something in my logic?

DavidV

That watch list of retailers that Bill recently gave us is up strongly today almost across the board.

NYU grad - Blocks

I went to Worden's seminar on the product, and have been playing with it. Simple things are hard to figure how to do, unlike TC-2007.

I'm sure its very powerful once you get the hang of it. And worden's customer support is very good.

I just wish they had made it a bit more intuitive.

DavidV

No you're not missing anything. A number of us entered rising yield plays awhile ago when there was market weakness and money went to bonds; (plan on adding on next weakness below 12K).

Others like 2nd perhaps may be playing this shorter term where you have TLT strengthening, so a reversal play of TBT or something similar may be in order for a day trade or overnight if that's what one prefers.

Thanks, Seamus -- it looks like after reading this site for over a year I am starting to get a hang of how the market works. :)

Now for the trading side of things: if you expect to see DOW below 12000, they why not sell your rising yield fund now and buy it after the next serious market weakness? Or are you holding it now as a hedge on your shorts?

DavidV

Jock,

thanks for the feedback. since i am new to both tc 2007 and blocks, i am thinking about trying out blocks. and it seems easier to me only because of the drag and drop nature of the interface. And my conversation on the phone with customer service re-iterates your comment on their service.

Looking to put some skin in the game so i dont lose the desire to keep up with the markets. but for the 1st time in my life i am building a trading plan before i ever make my 1st trade, and will be focusing on only cara 100 and ibd 100 stocks and will setup scans of conditions for rsi, stoch, and macd as primary indicators.

Who among you got on the good ship Crystallex this morning? Where is our own Jogyp? Mikenyc! Hello to you my friend. I admit I am a bit of a one-trick pony, but hey...Ya can't switch horses in the middle of the stream. Ok, enough of this witty wordplay, I'm through horsing around.

Before I sign off for the day, a quick horse joke:

A young jockey and his stable lass girlfriend make the decision to get married. Everything is planned and the couple intend to honeymoon in Italy for a week. The marriage goes without a hitch and the couple set off on their honeymoon. While checking in the lady behind the desk asks 'We have two suites available for you, would you like the bridal?' 'No thanks says the jockey I'll just hold her ears till she gets the hang of it!'

Shark, I did! I'm one that got on the good ship Crystalexx this morning as well as friday! I'm still on it! Good joke by-the -way.

Gus.

David V

Keeping it short. Nothing wrong with trading in and out as the opportunity arises.

Although I may think something, there’s no guarantees things will turn out exactly like planned. Initial purchases were when interest rates hit a low and provide a nice basis; don’t know if we’ll return to that rate level again. Sure, I guess interest rates could go to zero like Japan did, but I don’t think so with the inflationary signs I see out there.

Initial purchases were scaled and I plan on scaling some more if and when the opportunity comes. Having a scaled, initial position provides a hedge and also a position in case the T-O-G comes sooner, rather than later. I plan on having some skin in the game already at a lower price than others as they jump into the fray.

I may consider possible short term rising yield trades for one personal account but not for the other 10 or so I oversee. Of course, “if the facts change, . . . . . . “

Shark,
You can call me Eight Belles. I'm in KRY fairly heavy at $3.75.

To whom it may concern,

http://boombustblog.com/

This guy is basically preaching to the choir. He has a project on his blog as follows:

This is a DRAFT of part 4 of Reggie Middleton on the Asset Securitization Crisis – Why using other people’s money has wrecked the banking system: a comparison to the S&L crisis of 80s and 90s. As was stated in the earlier parts, I periodically have third parties fact check my investment thesis to make sure I am on the right track. This prevents the "hubris" scenario that is prone to cause me to lose my hard earned money. I have decided to release these "fact checks" as periodic reports. This installment covers consumer finance, an aspect at risk in the banking system that both overlooked and underestimared, in my opinion.

I urge discourse, conversation and debate on this post and the entire series. To me, it is necessary to make sure the world is as I percieve it.

The Current US Credit Crisis: What went wrong?

1. Intro: The great housing bull run – creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble – A comparison with the same during the S&L crisis
2. Securitization – dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble – declining home prices and rising foreclosure
3. Counterparty risk analyses – counterparty failure will open up another Pandora’s box
4. You are here => The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
5. To be Published: Credit rating agencies – an overhaul of the rating mechanisms
6. To be Published: An overview of my personal Regional Bank short prospects

Good Reading!

Fred,

If I buy a stock and it recrosses my purchase price by more than a penny or 5 I always sell. I do so because there's no way to know how far it'll drop and you can ALWAYS buy it back, if not cheaper, then a few cents higher, but either way it's a better deal. Crystallex, let history record should they receive their permit and go to $11, was recently a 50 cent stock. And the day of permit will be, after the first 1/2 hour, a selling oppty. Unload em on the way up. 4, 5 , 6 bucks, all these are good prices. This is one gold mine where you don't want to be left holding the shaft.

David- nothing wrong with your logic...the problem is that trading on logic seldom yields results in the market, at least not on your timetable...i used to think of the market as a fairly neutral platform where we all took our best shots at picking stocks based on research and sound judgments about future trends...but if we're all reading the same research reports and sounding out other traders about where things are going, who's going to end up with the gains? if you instead think of the market as a playing field where each and every trader is trying to stay one step ahead, then your goals become a little different...dr. cosa's opening post with mark hulbert's contrarian approach to trading is a perfect example...if you trade counter to the crowd (which can include some of the best minds in the business), you can often come out ahead in the short-term...another example is trading RRPIX in 2003-4-> with the radio announcing mortgage rates at 40 year lows, i thought it would be a no-brainer to take a LT position in the low twenties and target the thirties...one look at the 2003-4 chart will tell you RRPIX ended up frustrating any LT holders, and i gave up trying to figure out if/when rates would rise...so the bottom line here is: i think rates will go up, but i don't know when-> in the meantime, i'll game the volatility as best i can...

Re: ¥/$ Trade

Looks like the ¥/$ trade is on stable footing, since the 13-week EMA forms a support on the weekly chart. Won't know until the end of the week how it looks, but I'm pretty optimistic.

Re: Silver Spot

Silver spot did us all a favour providing us with a sure sign that credit has returned to the precious metals sector by advancing against gold. Dumping precious metals on the markets has a stange effect on levels of hard currency in the system, where any excess supply is soaked up easily with currency, so the market then turns to credit methods for price speculation, which is probably the next step here.

F6

shark,
KRY: I kept my shares for a long time hoping for the permit, but was lighening up on kRY during the pump and dump highs recently. I sold the last batch at .94 on April 30.
Cramer was right about KRY from the beginning.

Will not buy KRY or GRZ ever.
I am now loaded up with WGW/ECU/UXG/VALGF all underwater.

[Bill Cara note: Actually, Cramer recommended KRY and I said I was selling. Then I changed my mind after meeting professional management. Then Cramer said he was recommending a sale. Not long after that, the promoters decided to terminate professional management and I pulled out. The issue is that somebody will eventually develop that phenomenal gold resource. Depending on whether or not you are in or out of the room with Pres. Chavez, I suppose you know the answer. Unfortunately, I don't.]

wouldn't it be something if mcewen buys KRY for a few pennies/share when it bottoms, finally gets the permit, and starts producing a few million ounces a year when gold prices hit 2000/ounce...

ALOHA !!

This whole debt thing with Fresnillo, the new London IPO that splits the Mexican major producer Penoles is scary. Essentially they end up with $2bil from the IPO which after paying off debt leaves them with $100mil! YIKES!!! Then the CFO says they do not intend to stay away from debt ... Sounds like DEBT is their business not MINING!

Hey Mr. CFO of Fresnillo ... $100mil doesn't get you JACK these days for a mine!!!! Are you sure you're a mining company CFO and not a dotcom CFO?

Anyone here buying this IPO? This CFO has convinced me not to buy! HA!!

"Go to the debt markets ..." I'll bet you do Panama Red!

READ ON:
The company is trying to raise over $2 billion with its recent initial public offering on the London Stock Exchange that split Penoles' base metal and refining operations off from Fresnillo's precious metals business.

After paying down debt and other costs, Fresnillo will have $100 million to invest in the expansion, spending $50 million for new explorations. Five million of that will go to explore sites in Peru and Chile.

Chief Financial Officer Mario Arreguin said Fresnillo was eyeing new acquisitions and possibilities for future joint ventures.

"We are launching with zero debt, but that doesn't mean that we are going to stay with zero debt forever. If we see an interesting opportunity for an acquisition we can go to the debt markets and raise money," Arreguin said.

Link: http://tinyurl.com/6ylcxx

ALOHA !!

Goldman Sachs May 9th session on TOCOM net short position did ZERO ... NADA !!! Still at 10,911 ... Still waiting!

Re: Short Positions In Gold

Best place to keep tabs on the short position in the gold near futures contract is on jsmineset.com. Dan Norcini gives a very good intraday analysis and weekly analysis.

Its my opinion that because of the use of ex-party agreements in the gold sector between central banks, bullion banks, large gold miners and the COMEX, (and now streetTracks ETF) that a continuous effort at price fixing occurs to salvage a large notional derivatives position which exceeds the short position by a factor of many times. (that would probably mean not necessarily to hold the price down exclusively through the use of fraudulent gold leases, but to pump up the price as well.)

These overwhelming long/short positions which are never resolved in gold only make large adjustments during unprecedented price moves. Only very few commercials can engage in playing both the long and short side, so the gold market is under the auspices of commercials, it goes without saying. The difficulties come in when more and more investment capital enters the gold sector, thus the price rises as the fundamentals show little change.

You can track the whole seasonality and comex long/short position and price chart of many markets in one place:

http://www.timingcharts.com/index.php

From what I'm hearing from the top commentary in gold sector is that seasonality will not be a huge factor this time around, and that an out of season rally is not out of the question. Oil markets have accomplished the same, so I don't see why this is impossible in the gold sector.