Since our last posting on the topic, the Gold Stock Indicator has moved up +6.65% (found here).
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Category Archives: gold
Warren Buffett Leverages Up on Inflation Hedge
On February 14, 2013, Berkshire Hathaway and investment firm 3G announced a deal to buy H.J. Heinz (HNZ) for $28 billion, or $72.50 per share. Naturally, Warren Buffett, not being one to get the short end of any stick, is investing only $4.4 billion in Heinz common stock and another $8 billion in preferred shares yielding approximately 9%. The rest of the purchase is being financed through investment group 3G and bank borrowing.
According to the Wall Street Journal, Warren Buffett “…has previously expressed disdain for private-equity buyouts that employed excessive leverage.” However, as the details of the acquisition have unfolded, it becomes apparent that the leveraged nature of the transaction is on par with the deals that Buffett has spoken out against. So what is the motivation of Warren Buffett to engage in such a transaction? In this case, the allure of an inflation hedge that performs much better than gold in high inflation environments and that is proven to succeed after the high inflation period ends.
In the past, we have been outspoken on the matter of investing in food processing companies instead of gold and gold stocks if you want to beat inflation. On December 17, 2008, we pushed the idea that Sysco Corporation (SYY) is an inflation hedge that will beat gold and gold stocks. Our closing remark were, “…if you're of the mind that inflation is coming down the road, with all this liquidity being injected into the economy, then SYY might be a good "long-term" hedge against inflation (found here).”
In a December 1, 2010 article we re-iterated that value of inflation protection provided by food processors by comparing ConAgra (CAG), to Newmont Mining (NEM) during the gold bull market from 1974 to 1980. This was a time when ConAgra exceeded Newmont Mining by 10 times. Again, this was within the gold bull market from 1970 to 1980 (found here).
One article published as recently as September 20, 2012 was titled “Gold Stock Investors: To Beat Inflation Look to Food Processors, Producers and Distributors (found here).” In that article, we said, “As an alternative to the ‘mines’ of precious metal stock investing, we’ve recommended investing in food processors, producers and distributors that have a history prudent of dividend increasing policies to take advantage of the expectations of high inflation down the road.”
We cannot emphasis enough the fact that there are vastly superior alternatives to gold and gold stocks if you want to beat inflation. Additionally, investment in companies like Heinz will be richly rewarded even as the period of inflation comes to an end. This will not be the case for gold and gold stocks, as found out by gold permabulls in the period from 1980 to 1999. This explains why Warren Buffett would be involve in the Heinz transaction, it is the appropriate alternative to buying gold or gold stocks if runaway inflation is expected down the road.
Source:
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Matt Wirz and Ryan Dezember. Berkshire Stomachs Leverage for Heinz Buy. Wall Street Journal. February, 14, 2013. http://blogs.wsj.com/deals/2013/02/14/berkshire-stomachs-leverage-for-heinz-buy.
Downside Targets for Gold
The prevailing controversy, among gold bugs, is whether or not gold stocks have bottomed. As our Gold Stock Indicator has indicated, so far, gold stocks have a long way to go before reaching lows similar to what occurred in 2008, on a relative basis. This debate about gold stocks only arise out of the fact that they have fallen so much while the price of gold has been “stable.”
Comments Off on Downside Targets for Gold
Posted in downside, Edson Gould, gold, speed resistance line
Gold Stock Indicator
The end of the week performance of our Gold Stock Indicator has brought us within striking distance of the “stage 2 buy” indication.
Richard Russell Review: Letter 554
Dow Theory Letters Issue 554 was written on February 7, 1973. At the time, the Dow Jones Industrial Average was indicated to be at the 968.32 level. This was at a point prior to the Dow Industrials declining –40% while the Dow Transports declined –37% to the late 1974 lows.
Gold Stock Indicator
We rely heavily on our Gold Stock Indicator for signs of when to buy gold stocks. The reason for this is because we found the alternatives, the Gold/XAU and XAU/Gold ratios, to be highly deficient. These two ratios were thought to be the bedrock of indications on when to buy and sell gold stocks. According to well known analyst John Hussman, the Gold/XAU ratio has the following indications:
Gold and Natural Inclinations
The dialog below is an interaction between one of our subscriber.
Gold Stock Indicator
Based on our preliminary work, we believe that gold stocks, as represented by the Philadelphia Gold and Silver Stock Index, will reach our long-term gold stock sell indication between July 15, 2013 and November 25, 2013.
This is our best estimate based on the current trajectory of our Gold Stock Indicator. As we get closer to the dates, we will be better able to project the gold stock long-term sell indication with what we believe to be a certain level of accuracy.
This estimate is subject to change if the short-term gold stock buy indication (green diagonal line) is broken to the downside which would bring us back to the long-term gold stock buy indication. The scenario that could easily break the downside trendline is a general stock market decline. Although Dow Theory indicates that this is a possibility, we're waiting for the appropriate confirmation either up or down.
The best example of where the stock market is right now is reflected in the chart below, from our September 21, 2012 Dow Altimeter:
Royal Gold (RGLD) Speed Resistance Lines
In the chart below we’ve provided Edson Gould’s Speed Resistance Lines (SRL).
What is interesting about the above chart is the following:
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Point A1 to point A2 declined –60%
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Point B1 to point B2 declined –40%
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Point C1 to point C2 is a projected decline of –55%
The SRL for Royal Gold at $44.62 doesn’t seem outlandish given what has already occurred in the previous declines from prior peaks. The X marks the first decline after a “minor” parabolic move that was later exceeded on a larger scale to point A1, B1 and C1. Additionally, the X reflects the minimum retracement from the top and has provided consistent support for the price for RGLD.
We’d consider buying RGLD if it declines to either of the support levels of X3 or C2. The movement of RGLD has been consistent with the price of gold (GLD) which is in stark contrast with gold stocks as represented by the Philadelphia Gold and Silver Stock Index (^XAU), as indicated in the chart below.
Posted in Edson Gould, gold, Gold Stock Indicator, RGLD, Silver, SRL