Category Archives: Silver

Thoughts on Gold

Posted on January 28, 2012 by | Leave a comment
A reader says:
“There's a reason Gold is the hottest in the world.Investors are simply losing faith in ALL fiat currencies. Hence, they areturning to one thing that has always been real money - GOLD!”
Our Take:
We don’t know about the far distant future of gold,governments and profligate spending. However, we've always enjoyed a historical perspective on the topic of “realmoney.”  We’ve pulled a few quotes fromRichard Russell’s Dow Theory Letterson the topic of “real money” in the same vein as described above.
“The US is on a treadmill to disaster via the creation ofdebt. In time (and the time is moving very rapidly now) the debt will destroyalmost ALL forms of investments. Gold will withstand the destruction, becausereal money is never destroyed.” 
Dow TheoryLetters.  Issue 736. August 7, 1978. Page5.
“Coming up in a month, a year, a few years (I can’t time it)is the BIG PROBLEM, the problem that I’ve warned about for a long time. How doyou get people to hold paper “money” when they have increasing doubts about itsworth? The answer: you must make it CONVERTIBLE into real money-gold.”
Dow TheoryLetters.  Issue 766. September 26, 1979. Page1.
“My job now seems to be to try to save my subscribers fromthe deceitfulness and greediness of our own Government. So I talk about thetechnical position of gold, of where WC are, of whether gold is still a buy andwhether it will take 900 or 1000 paper dollars to buy an ounce of real moneysay six months or maybe even three months from now." 
Dow Theory Letters.  Issue 774. January 16, 1980. Page 7.
“‘How can the Government ever be bankrupt if it is able to createmoney?’ The answer is that the Government could only be bankrupt if no onewould accept that money. And of course, that possibility is the reason why manysurvivalists will ‘never be without some kind of a position in real money -gold.’” 
Dow Theory Letters. Issue 805.March 25, 1981. Page 3.
“Why could gold be bullish? Two opposing reasons: first,with a potential crisis in the world monetary system, people turn to real moneyas an insurance policy. Gold is real money. Second. With unbearable deficits facingthe US over coming years, politicians will be tempted to ‘print’ (monetize)some of those deficits (and suppose Edward Kennedy gets in in ‘84).”
Dow TheoryLetters. Issue 841. August 11, 1982. Page 6.
Now, we’re not suggesting that the ultimate consequence ofprofligate spending isn’t coming.  Additionally,we’ve made a call for a secular bull market (as opposed to a cyclical bullmarket) in gold on September28, 2010 and silver on September5, 2009 .  However, much of thearguments during and after the peak in the price of gold are the same as today. 
Additionally, nothing has changed that was said about profligatespending at the peak in the price of gold in 1980 or the period from 1981 to1999, a time when the price of gold was in a declining trend.  Therefore, we have little to help us distinguish the difference between huge government spending when gold is rising and when gold is falling.  We're sticking to the view that Dewey and Dakins' assertion that gold vacillates in a 50 to 54-year cycle is right on target (our 2009 review of their work here). 


We’re opting for the view that goldexperiences good times and bad rather than the view that our nation is comingto an end.  After all, the redemption ofour gold, as with all forms of insurance, is not something that we look forwardto.

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Posted in Dow Theory Letters, gold, Richard Russell, Silver, Simmons First National

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Dow Theory Applied to Silver?

Posted on December 20, 2011 by | Comments Off on Dow Theory Applied to Silver?

A reader asks:

“How do you relate Dow Theory to the Silver market?”

Our response:

Charles H. Dow was first an economist, then a commodities expert and finally a stock market analyst. Before Charles H. Dow co-founded the Wall Street Journal, he was better known for writing the “Leadville Letters” for the Providence Journal. The “Leadville Letters” reported on Colorado’s silver mining boom in 1879. After co-founding the Wall Street Journal, the lessons learned in the silver mines ofColorado were found to have application on Wall Street.

Charles Dow was keenly aware of the importance and correlation between commodity prices and stock prices. Many of Dow’s articles in the Wall Street Journal were focused on the movement of commodity prices and all costs of production that went into commodity prices from shipping to the finished product.

As an example, Dow made the following observation:

“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period.”

Much of Dow Theory is based on Dow’s observation of the price action of commodities and then later applied to stock prices. The application of Dow Theory to the price of silver, gold or almost any other commodity is bringing Dow’s work back to its roots. In fact, Dow’s observations in commodities and then later applied to stocks is the basis for much of the modern fundamental and technical analysis that is done today, which includes the quest to determine the “value” of a company and the uses of Fibonacci numbers.

Dow Theory is applicable to all prices that are subject to the whims of market forces. Dow Theory also accounts for manipulation and hoarding. Dow Theory attempts to account for what can reasonably be expected of price action in the not too distant future.

Sources:

  • Dow, Charles. Review and Outlook. Wall Street Journal.February 21, 1901.
  • Bishop, George W. Jr. Who Was the First American Financial Analyst? Financial Analysts Journal, Vol. 20, No. 2 (Mar.-Apr., 1964), p.26-28.
  • Bishop, George W. Jr. New England Journalist: Highlights in the Newspaper Career of Charles H. Dow. The Business History Review.Vol. 34, No. 1 (Spring, 1960) p. 77-93.
  • More on Dow Theory from NLO

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Posted in commodities, Dow Theory, gold, Silver

iShares Silver Trust (SLV) Update

Posted on December 17, 2011 by | 1 comment

The iShares Silver Trust (SLV) ETF has fallen in line with our assessment from May 5, 2011.  However, it is times like these that we get nervous about our ability to believe that the price action of SLV will continue on a forecast that was presented over six months ago.  Back in May, we said the following:

“…we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at [or] below line B (blue line B).”
Currently, the “blue line B” is around $24.31 and rising as time passes.  In our May Dow Theory interpretation of SLV, the price fell right through line B in 2008 without any hesitation.  We’re not so certain that such action will occur this time around.  As long as SLV can hold above the Dow Theory fair value of $28.15, there is a good chance silver will be able to rebound in a meaningful fashion.  However, closing below $28.15 (again) could be a confirmation of the downtrend.    
Many precious metal enthusiasts are arguing that what happened in 2008 was an outlier event for silver and therefore is unlikely to happen this time around.  It is hard to argue against such a view. However, it is difficult to get the period from 1974 to 1976 out our mind (visual here) when gold fell 50% and gold stocks fell 66% in the middle a gold bull market.  
Below is our updated chart of SLV reflecting the most recent price action:
The Punchline: If you like the idea of investing in silver, then a buying opportunity should be at/or below the blue line B ($24.31).  However, don’t go all in, just in case the dashed blue line does materialize at $17.

 

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Posted in Dow Theory, gold, iShares Silver Trust, Silver, SLV

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Richard Russell Review: Letter 713

Posted on October 26, 2011 by | 2 comments
This review of Richard Russell’s Dow Theory Letters is dated November 9, 1977 when the Dow Jones Industrial Average was at 818.43 and the Dow Jones Transportation average was at 206.56.
  
Dow Theory
The first topic addressed by Richard Russell is Dow Theory.  On this topic, Russell says the following:
“THE PICTURE: As far as I’m concerned, as far as my studies of the Dow Theory are concerned, a valid primary bear market signal was given when, on October 24 [1977], the Transportation Average confirmed the prior bearish indications of the Industrials. There are always those who cry, ‘The signal was late, it was too late!’ But no competent Dow Theorist in history ever waited for an actual bull or bear signal before taking action! For instance, we bought stocks in December, 1974 before the 1975 bull market signal, and we sold our stocks in March and April of this year well ahead of the October, 1977 bear market signal. We bought and sold on many clear indications, and the final Dow Theory signal merely confirmed what we had suspected and had acted upon.”
First, we’d like to address when a bear market signal is most likely to have occurred after the bull market signal that was confirmed in January 1975. From our perspective, the bear market was signaled on October 5, 1976 for the Transports and October 8, 1976 for the Industials when both indexes fell below the late August 1976 lows.
For whatever reason, Russell acknowledges that the call was late but doesn’t confirm how late he was.  Looking back at the October 16, 1976 issue of Dow Theory Letters  (Letter 678), in the first issue after we believe the bear market began, Russell makes no reference to the dual violation to the downside by both indexes.  Russell does allude to the Transportation Average level of 200.88 which he believed the market to be “weak” if the index fell below such a point.  On October 16, 1976, Russell said the following:
“On the other hand, if the 200.88 level is broken, I would take this as a sign of unusual weakness, and I would take an even more cautious stance towards the market (which means selling more stocks and upping the bond portion of your portfolio even further.”
Naturally, there is a high level of inconsistency in suggesting that he would lighten up on his stock holdings if the Transportation Average fell below 200.88.  In the November 9, 1977 issue, Russell claimed that at the time the Transports fell below the indicated level he “sold our stocks in March and April of this year well ahead of the October, 1977 bear market signal.”
Although done in hindsight, our interpretation, almost a full year ahead of Russell’s call of a bear market, would have sheltered the investor from 3 times the loss.  This is consistent with our Dow Theory bull market indication in July 2009 and our more recent bear market call on August 2, 2011 (all NLO Dow Theory Bull Market articles) contrasted with Russell’s many bull and bear misinterpretations from March 9, 2011 (as partially outlined here).
The difference in Dow Theory Bear Market interpretations to the March 6, 1978 low:
Date
Transports decline
Industrials decline
Russell:
10/24/1977
-1.20%
-7.43%
NLO:
10/8/1976
-4.89%
-22%
Ironically, Russell says the following of those skeptical of the Dow Theory bear signal on October 24, 1977:
“…others said that if it was indeed a bear signal, then probably the greatest portion of the market slide was over anyway. Two days after the bear signal, the market rallied sharply, as if in disbelief.”
Since Russell’s call of a bear market was in fact long after the majority of losses were incurred, he only furthered the skepticism and misinformation of a useful tool for investors and businesses alike.  From the March 6, 1978 low to the April 27, 1981 high, the Dow Industrials increased by 37.87% while the Transportation Average increased 119.71%.  Alternatively, the Dow Industrials increased 23.17% and the Transports increased 117.55% after Russell’s indication that a bear market began on October 24, 1977.
Steps to a Dow Theory Bear Market signal:
  • July 14, 1976 Transports hit new high 231.27 but unconfirmed by Industrials
  • Sept. 21, 1976 Industrials hit new high at 1014.79 but unconfirmed by Transports
  • Oct. 8, 1976 both indexes fall below the late August lows-Bear Market begins
On page 3 of the DTL, Russell starts a Q&A with a question that has a very interesting answer:
“Question: Suppose we get a rally that turns out to be a huge advance? Then what, Russell?
“Answer: We have a number of ‘fail-safes’ that work on either the bull side or the bear side of the market. The one I’m thinking about in particular is my study of the three moving averages of the Dow. At this juncture, the 13-week MA is a whopping 71 points below the 50-week MA, and we would need a crossing to get a major bull signal. Furthermore, the 4-week MA (short-term MA) is at 814, 29 points below the 13-week MA (intermediate-term) which is at 843. We need a crossing of the 4-week MA above the 13-week MA merely to get a ‘buy-alert.’ That would take time. So in the absence of a full over-sold bottom, I would say, ‘Skip any rally that may be forthcoming, or wait for the Dow’s moving averages to cross.’”
There is a concern that we have regarding this section of Russell’s letter.  First, a “fail-safe” provision should address what actions to take if investments don’t work out.  Being out of stocks altogether isn’t investing nor is it working towards compounding, an overarching, albeit conflicting, theme in Russell’s work.  Therefore, Russell’s “fail-safe” observations based on a moving average requires reacting to a lagging indicator which compounds the delay in taking advantage of investment opportunities.  In fact, using such an approach causes investment activity, or lack thereof, to be made at the worst possible time.
In general, the use of moving averages for buy indications seems to be in contradiction to Dow Theory.  As pointed out earlier, moving averages are lagging indicators whereas the use of Dow Theory is supposed to act as a leading indicator.  Although Dow Theory provides bull or bear market indications not buy and sell recommendations, it can be effectively used to navigate market gyrations.  Based on the performance of the markets after Russell’s call of a bear market, it is clear that the mixing of moving averages and Dow Theory led to conflicting ideas of market direction that allowed Russell’s “Great” Depression bias to become the default reaction.
Treasuries
On page 4, Russell gives a quick blurb that had been overlooked for a long time in the mainstream media until recently.  Russell says the following:
“I might also mention that if the public became wary of the banking system, there could be a major move out of bank deposits and into Treasury bills.”
This has been the story of our experience in the market since 2008.  Furthermore, as the European Union struggles with their less than integrated banking system, demand for Treasuries grows.  This is in stark contrast to the belief that gold is king when there is a banking crisis.  We believe such a view is a holdover from when countries propped the price of gold with a gold standard.  The decline of gold and gold stocks in 2008 shows that there is another horse in the race for financial “safety.”
Gold & Swiss Franc
Russell points out something which seems extremely relevant to any investor in gold and that is the relationship between gold, gold stocks and the Swiss franc.  Russell says the following:
“Now here’s what nobody (or let’s say very few people) know.  If I asked you “How’d you like to own Swiss francs at the early-1974 price?”  you’d probably jump at the chance.  Why would you jump?  Because the Swiss franc has been a hot item, a glamour currency.  Look at my next chart (bottom of p.5).  Note that the Swiss franc was about 31 cents in early-1974.  Gold at that time was $166 per ounce.  All right, the franc is now 45 cents or about 45% above its early-1974 price, in terms of dollars.  But gold is roughly the same price as it was in early-1974!  Now what the hell makes the Swiss franc better than gold?  The irony is that the Swiss franc is highly valued because it has such a high level of gold backing.”
Nothing could be more instructive than the review of the price of gold, gold stocks and Swiss francs during what was perceived to be a gold bull market. Few gold bugs will acknowledge the amazing decline in the price of gold from early 1975 to the low of 1976.  The decline was nearly 50% of the peak price and lasted nearly two full years.  Likewise, the Barron’s Gold Average lost nearly 66% from the high achieved in 1974 to the low near mid-1976.  The Swiss franc, on the other hand, remained in the a narrow trading range or moved higher.
Russell was correct to question “…what the hell makes the Swiss franc better than gold?”  Although Russell never mentions it, by pointing out the “uncharacteristic” rise of the Swiss franc at the time, we gathered that the activity of the Swiss franc implies that it is an indicator for the longer-term price of gold.  Because we’ve pointed out in many previous articles the fact that gold isn’t always the safe haven that it is fabled to be, when the next big decline in the price of gold occurs we will be watching closely the action of the Swiss franc for any indications of investment opportunities in gold stocks.  We have constructed what we believe to be a reliable indicator for the best time to buy gold stocks that are constituents of the Philadelphia Gold and Silver Stocks Index.  The action of the Swiss franc will act as a confirming indicator when the index is near a new low.
More Russell Reviews:

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Posted in Barron's Gold Stock Average, Dow Theory, gold, Letter, Richard Russell Review, Silver, Swiss Franc

The Coming Precious Metals Dividend War

Posted on October 3, 2011 by | Leave a comment
On September 9, 2009 we wrote an article titled “Silver Should be the Focus.” In that article, we cautioned readers to “be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out their dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be ‘head to the exits.’”
The first salvos of the coming war to attract investors to precious metal stocks have be initiated.In April 2011, Newmont Mining (NEM) started what they deemed “… the industry's first and only dividend policy linked directly to the realized gold price…"Naturally, this isn’t the first time that gold linked dividends has taken place, but it sells really well to those unfamiliar with gold stocks and their dividend policies.On September 19, 2011, Newmont Mining (NEM) announced a further enhancement of their “first ever” gold linked dividend policy with the following changes:

 

“The enhanced policy will continue to link the quarterly dividend rate to changes in the gold price but will also provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000. At average realized gold prices below $1,700 per ounce, the current dividend policy remains unchanged. Newmont's quarterly gold price-linked dividend payments are based on the Company's average realized gold price for the preceding quarter.”
Not to be outdone, Hecla Mining (HL) announced on September 20, 2011 that they would have a dividend that is linked to the price of silver.Hecla’s silver-linked dividend policy is as follows:

 

“The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.”
Newmont Mining (NEM) and Hecla Mining (HL) are soon to be joined by a crowded field of precious metal companies that are going to progressively up the ante.It will soon be indistinguishable as to who has the most sensible dividend policy and who has a compounding “money” losing machine.The race to offer attractive dividend payments has help from an unexpected source.
Unlike past precious metal bull markets, gold and silver stocks have stiff competition for investment capital in the form of gold and silver ETFs.In fact, more money is being plowed into the combined gold and silver ETFs than the stocks that have actual claims on getting the metal out of the ground.This presents a challenge for precious metal stocks that would normally issue shares in acquisition of other gold companies or expand their operations.In order to get the share price up, a competitive environment of dividend increases will lead many companies to ruin in an effort to attract new investors.
As described in our 2009 recommendation silver, one gold or silver company is going to “jump the shark” and make their dividend payments in the actual metal.When that time comes, it will be fair warning to protect your positions, though this may be indistinguishable to ebullient gold bugs at the time.
The single best dividend policy that we’ve seen among gold stocks, was held by Homestake Mining [HM] as describe in our October 31, 2010 profile of Homestake (found here).By 1933, Homestake had a 53-year history of continuous dividend payments.Not surprisingly, Homestake was among the 2% of gold stocks that rose in value from 1924 to 1932 due, in part, to their amazing dividend policy.
Because we’re in the early stages of a gold bull market, there is little attention being paid to the quality of the dividend policy.Gold and silver linked dividend policies appear advantageous when the price of the commodity is going up.However, such a policy can imperil a poorly managed company as the average price declines.
The most effective antidote to becoming collateral damage in the coming dividend war will be to buy the gold and silver stocks that are members of the Philadelphia Gold and Silver Stock Index or the Amex Gold Bug Index.Ironically, institutional support, by being the member of an index, will allow gold and silver stocks to survive hard times where others will unnecessarily falter.
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Posted in dividends, gold, HL, Homestak Mining, NEM, Silver

iShares Silver Trust (SLV) Debrief

Posted on May 5, 2011 by | Leave a comment
On April 14, 2011, we provided what we believed to be the downside target for the Philadelphia Gold and Silver Index (XAU) in anticipation of the current decline that is taking place using Edson Gould’s speed resistance lines (article here).  Although appearing to be very similar, there is a distinct difference between Gould’s resistance lines and Charles Dow’s 1/3 support levels.  Gould’s lines have support levels based on 1/3 of high while Dow’s support levels are based on 1/3 the difference between the prior bottom and the most recent high.

 

In this review we’re going to tackle the trading pattern of the very controversial iShares Silver Trust (SLV). In the chart below we have drawn the Dow Theory support levels where the price of iShares Silver Trust (SLV) is likely to revert to as part of a normal reaction.  As a point of clarification, according to Dow Theory, a bear market does not begin until the index or stock falls by at least 1/3 of the prior rise.  In the case of (SLV), today’s closing price at $33.72 heralds what is sufficiently below the first support $34.52 and should be considered to be a bear market. 

 

Although this could be considered a bear market based on Dow Theory, we only need to look back to 2008 to know how quickly and viciously a bear market in precious metals can begin and end.  The precious metals bear market of 2008 crushed the XAU gold and silver stock index with a 68% decline in eight months.  During the same time, the iShares Silver Trust (SLV) declined slightly more that 55%.  

 

Bear market or not, some observations are worth considering.  First, in the chart below, the overall pattern of the price decline in (SLV) for the Dow Theory indication numbered 1 (in green) is very similar to the current decline represented with the Dow Theory indication numbered 2 (in blue).  Since Dow Theory works on a relative basis, once initiated at a major low, the signals provided are not confused through the distortions of large or small numbers.  Headlines about SLV having declines of historic proportions are grossly exaggerated if there is no comparison on a percentage basis and compared to prior declines.

Second, at the beginning of each run at point 1 and 2, the price of SLV bounced off of the middle line B (also known as the 2/3 support line) before going parabolic. 

Finally, the decline from each peak was rapid and vicious.  One-third of the prior rise was wiped out in a matter of days after the peak.

 

 

What remains is a high level of uncertainty for (SLV) going forward.  However, in general, we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at below line B (blue line B).  However, we wouldn’t jump in at the slightest move below line B.  Instead, we’d like to see the price decline to the dashed blue line at $15.41 or below.

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Posted in Dow Theory, Edson Gould, gold, iShares Silver Trust, Silver, SLV, XAU

Sundry Items

Posted on April 21, 2011 by | Leave a comment
  • Biogen Idec (BIIB) and Teva Pharmaceutical (TEVA) are doing a dance as both are members of the Nasdaq 100 index. As one stock is at a new high the other is reaching a new low. The two-step that is being done by the stocks is quite amazing. Back in October 30, 2009, we pointed out that the concentration of biotech stocks at a new low meant that they were possible takeover candidates. From that list in 2009, GENZ and CEPH were actually tendered buyout offers. 3 of the remaining 5 biotechs have had gains of 40% or more since then. The remaining two stocks, Amgen and Gilead Sciences, are essentially at break even. BIIB has been the leader in terms of price appreciation with a gain of over 100% since October 30, 2009. At that time TEVA was near a new 52-week high. However, BIIB’s recent success is actually impacting the performance of TEVA since both companies are involved in the development in MS drugs. TEVA is now on our new low list for the Nasdaq 100 and should be consider as a top acquisition candidate for your portfolio. Anyone who bought BIIB based on our watch list from October 2009 should now consider securing a large portion of the gains and possibly funding the purchase of TEVA with the proceeds.
  • Our September 5, 2009 article titled “Silver Should be the Focus” recommended that anyone interested in investing in gold should instead put there investment funds towards silver. The chart below reflecting the silver (SLV) and the gold (GLD) ETF demonstrates the accuracy of our recommendation and highlights what we believe is likely to come. Those interested in determining an entry point should reference our latest article on April 14, 2011 highlighting the downside targets for precious metal stocks based on the Philadelphia Gold and Silver Stock Index (XAU).

  • The results are in and our article titled “A Comparison Between Dividend Strategies” has demonstrated, so far, that the New Low approach has returned 19.52% while the list of stocks we compared ourselves to has returned only 1.39%. We believe that, although the two list have similar companies, the quality and timing has made the difference in performance. As a note, we only made the comparison because the author of the other list indicated that it was for the purpose of trading. In our view, stocks that can be considered for trading are worth comparing since we only aim for 1-year performance.

Please revisit New Low Observer for edits and revisions to this post. Email us.

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Posted in biib, GLD, gold, Silver, SLV, sundry, TEVA

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Richard Russell’s Miscue

Posted on April 6, 2011 by | Leave a comment
On the Dow Theory Letters (http://www.dowtheoryletters.com/) site yesterday, there was an interesting admission by Richard Russell. Russell said:
“I mistakenly took the vicious decline of 2007 to 2009 as a turn in the tide and a bear market.”
This comes as a shock since most market veterans would say that when almost every market, foreign and domestic, declines by 30% or more then it would be sufficient to label it as a bear market. When the gold stock index (XAU) declines 62% along with almost all other commodity indexes then a reasonable person, lacking any other term for it, would call that a bear market.
Instead of being a bear market, according to Russell, the decline from 2007 to 2009 was simply a “…correction in an ongoing bull market.” As I attempted to process this thought, I only wonder what Russell would re-characterize the stock market decline in Japan (from the 38,000 to 8,000 level) as. Dow theorists like Hamilton, Rhea and many others are very clear on what constitutes a bear market. Russell’s assertion that 2007 to 2009 was simply a “correction” was in complete contradiction to his prescient call of an eminent bear market in Barron’s in November 2007. Nor does Russell’s latest missive add credibility to his prior claims that the rise in the market from the 2003 low was a bear market rally.
To top off Richard Russell’s wild claim that a year and a half decline of over 40% in global equity price was only a “correction” is the fact that he omitted any reference to Dow Theory having any role in his sudden realization that he was wrong about his belief that we were only in a correction rather than a bear market. Russell credited his not so secret Primary Trend Indicator, Lowry’s Selling Pressure Index and Lowry’s Buying Power Index. Apparently, Dow Theory plays a small or non-existent role in a publication that is titled The Dow Theory Letters.
By inference, not crediting Dow Theory for his change in thinking suggests that Dow Theory doesn’t work. However, the NLO team has been adamant that up to this point, Dow Theory has indicated that we’re in a bull market and that a bear market has not been signaled since the July 23, 2009 bull market indication. This is in stark contrast to Russell’s back and forth calls of a bull and bear market as early as January 2009.
So what is Russell’s remedy for his error in judgment for the last 2 years? In today’s note (April 6, 2011) Russell says, “If this market is going to turn primary bearish, I would want to see an orthodox Dow Theory bear signal.” Wait a minute, as the market was rising Russell arbitrarily misapplied his version of Dow Theory and now he thinks that he’ll turn bearish when he receives “…an orthodox Dow Theory bear signal.”
As an attempt to salvage some sort of credibility Russell says, “In the meantime, all is not lost. Gold is at new highs as are the gold ETFs, and silver is at a 31-year high.” This comes after Russell said on March 1, 2011 that if the Dow Industrials fall below 11,800 then investors should sell all stocks “including gold stocks." Well, on March 16, 2011, the Dow fell to 11,600 leaving anyone who believed Russell’s commentary on March 1, 2011 in the lurch.
The NLO team is disappointed since Richard Russell has been the primary inspiration for our work in Dow Theory and critically analyzing financial markets. In addition, we’d rather have Russell retire as a legend with a legacy that will continue to inspire. However, Russell’s latest work comes off as sloppy and requires significant willingness to view his work as entertainment, at best.
 
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Posted in Dow Theory, gold, Richard Russell, Silver

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On the Brink of a Secular Bull Market in Precious Metals

Posted on September 27, 2010 by | 2 comments
In our “Commentary on Gold” dated November 11, 2008, we made some outlandish claims about the lack of performance by three undisputed experts on gold. One claim that we made was that “…when the price of stocks fall so too does the price of gold, and to a greater degree, gold & silver stocks.” This was said after the precious metals and the XAU and HUI indexes had already hit their final lows on October 24, 2008 and October 27, 2008 respectively. We demonstrated our claim through research performed by David Marantette which showed that from 1975 to 2001, declines of 10% or more in the Dow Jones Industrial Average resulted in larger declines in the gold stock indexes and the price of gold.  We completed the research by providing the data from 2001 to 2007.
The point of our December 9, 2008 article was best summed up in our closing paragraph:
“The long term trend in gold and silver stocks as demonstrated by the Philadelphia Gold Stock Index (XAU), which was initiated in November 2000, will eventually head permanently higher. The continuation of that trend will be among the key indicators that the bear market in stocks is at or near an end.”
Our overall assertion was, and is, if precious metals and their stocks continue heading higher so will the general stock market.  If the stock market starts to collapse then so too will the price of gold and silver and to a greater degree gold and silver stocks.
When we wrote our earlier pieces on precious metals, gold enthusiasts argued that the physical metal and the gold stock indexes are completely unrelated and therefore it doesn’t make sense to compare the two, not realizing that we weren’t comparing them at all. Other gold enthusiasts countered that with the price of gold falling only -29% from the March 2008 high investment in that area was justified considering that the Dow and S&P 500 had fallen over -35% in 2008, not realizing that losing less money isn’t the reason why people invest. Not liking the outcome of the data, because it only covered the period from 1975 to 2007, some said that it didn’t go back far enough.To respond to the critics about our data, we gathered prices of gold and silver stocks from 1924 to 1933. That data demonstrated that gold and silver stocks got hammered during that period. Below we have included a previously unpublished Gold Stock Average of the 13 precious metal stocks (out of 21) with complete price history from 1924 to 1933.

Gold Stock index 1924-1933

As you can plainly see, when you exclude the performance of Homestake Mining, the value of the gold stocks fell 76.47% from their peak in 1925 to the bottom in 1932.  This performance is in line with the decline of the Amex Gold Bug Index (HUI) from March 14, 2008 to October 27, 2008; which has 16 precious metal stocks in it.  In the chart below, you can see that the HUI index and the Philadelphia Gold and Silver Index (XAU) fell 70.56% and 68.15% respectively,  within the 8-month period.

Few people will readily agree that all the deflating of the financial system has been expunged from the markets. However, when compared to the deflation that took place from 1924 to 1932, first reflected in the gold stocks and later the entire stock market,  it becomes very clear that the general stock market decline of over 50% and the eight month decline of the gold stock index on such a large scale signaled the end of the deflationary period. For investors, one area we think that holds the most promise is in silver.

On September 9, 2009 we wrote an article titled “Silver Should be the Focus.”  We indicated that if there were a need to participate in the run in precious metals, silver would be the best investment/speculative choice.  At the time, silver closed at $16.36 an ounce.  On Friday September 24, 2010, silver closed at $21.46 with an increase of 31.17%.  During the same period of time, the price of gold increased 30.61%.  So far, the precious metals appear to be in lock step with each other since our last article on the topic.  However, since the bottom in the market on October 24, 2008, the price of gold is up 82% with the price of silver is up 142%.  Although these are considerably large increases in value in a very short period of time, compared to past price increases the current moves are in their infancy.

The most pressing matter for the precious metals market right now is confirmation.  So far, the price of gold and silver has exceeded their respective 2008 highs.  However, the corresponding stock indexes, the XAU and the HUI, have not yet confirmed the trend.  If the trend is confirmed then we will have received the indication of the beginning of a secular bull market in gold and silver.  In our Richard Russell Review posted on July 4, 2010, we outlined Russell’s significant detail on the importance of confirmations.  Although our analysis shows how Russell got the interpretation incorrect, it is well worth re-examining this article since it outlines exactly how to utilize both indicators (price of gold and gold stock index) for confirmation of the trend.
Below is the HUI index with what appears to be the third attempt at the 514.89 level.
 
Although not likely, failure to breach the 2008 peaks for the XAU and the HUI index could mean very hard economic times ahead.  Alternatively, going above the previous peak, which seems much more likelier, may mean that we’re entering the early stages of higher interest rates and inflation.  It is necessary to keep in mind that higher inflation and higher interest rates won’t initially wreck havoc on the economy.
Most investors have the tendency to remember only the periods at the extremes, the real estate bust, the real estate bubble, the dot com bust, the dot com bubble, the gold bubble and the gold bust, skyrocketing interest rate, the current zero interest rate environment.  In every instance, the recollection of such periods is rooted in the final stage. However, what is more important is the slow transition that takes place from trough to the next peak. 
In the case of inflation, the slow transition was the innocuous period, saved for a world war, from 1932 to 1966.  Unfortunately, most investor over concentrate on the period from 1973 to 1980 due to the exaggerated moves upward.  The transitional period brought many cyclical and one secular bull market in the Dow Jones Industrial Average. It is possible that as our inflation rate climbs the Dow Jones Industrial Average could experience a bull market similar to the period form 1949 to 1966.
According to the chart below, periods of inflation coincided or preceded extremely large moves in the stock market.  The period from 1940 to 1947 had a 74% increase in the CPI while at the same time the stock market doubled in value.  Naturally the argument is that the stock market only managed to beat inflation by a small amount over that period.  The reality is that the response by the Dow Industrials was to go from the 100 level in 1941 to the 1000 level in 1966.

Looking at the chart above, it is hard to believe that the CPI increase of 200% in the 1970's would follow the pattern of previous high inflation periods with stocks increasing 10 times in each instance.
While we watch and wait for the confirmation of the new high in the price of gold and silver with the XAU and HUI indexes by breaking above their 2008 highs, our overall assertion still is that if precious metals and their stocks continue heading higher so will the general stock market.

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Posted in gold, gold bugs, Homestak Mining, HUI, Richard Russell, Silver, XAU

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Silver Should be the Focus

Posted on September 4, 2009 by | Comments Off on Silver Should be the Focus
I watch with glee as Yahoo!Finance includes a price quote for gold in the Market Summary section on their home page. After all the financial turmoil that we've been through since the introduction of the internet, when did Yahoo!Finance realize that a gold quote was necessary? The obvious answer is, "When the public demands it."

Well, when the public finally demands the price quote of gold on their finance homepage, it is probably too late to participate in gold on a level that could be considered meaningful. After all, at nearly $1000 an ounce, there isn't going to be a stock split in the price of gold. Or is there? (I've been pondering this possibility lately) In any event, gold is fast becoming an expensive asset in a world full of correspondingly deflating alternative "assets." What to do? What to do? Get out there and do your research on silver!!! That's what you do!!!

I say do your research on silver because if I told you that, regardless of the Hunt Brothers cornering the silver market in the 70's, the price of silver always outpaces gold on a percentage basis by a ridiculous margin, you'd probably laugh in my face. But as you should know, silver is the "poor man's gold" and coincidentally, there are more "poor" men than rich men can afford to buy.

When I first bought gold and silver back in 1996 (in bulk and never purchased again), I knew that I was getting a bargain. When I exchanged 75% of my gold for silver in 2008, I knew I was committing highway robbery. I've always noted that "gold bugs" were blinded by the historical significance of the yellow metal, while at the same time claiming that they were investors who used gold as a form of insurance against government mismanagement of paper currency.

The real deal is in the price of silver. While gold has run up 259% since I purchased it, silver has gone up only 266% in the same period. This means that silver hasn't appreciated as much as it historically should relative to the price of gold. Which begs the question, what should we expect silver to do relative to gold? I have my own calculations for the future price of gold and silver. But more importantly, let's look at what history has to offer us.

I like chopping everything into halves. This means that if the Hunt Brothers' cornering of the silver market brought the price of silver to $50 then the real price probably should have been $25. From this vantage we now have to choose a starting point. Where did the price of silver start out?

For illustrative purposes, let's start with the bottom of 1932 and compare silver with gold. At the low in 1932, silver was priced as low as $0.24 an ounce. Gold, on the other hand, was fixed at $20.67 per ounce. At the peak of the market in 1980, gold was selling at $800 an ounce while silver was selling at $50 an ounce. During the period from 1932 to 1980, gold went up 3,770% while silver went up 20,730%.

Gold bugs, ever clinging to their religion, would argue that silver was cornered so the $50 figure was a fraud. Gold bugs would also claim that if gold was allowed to freely float during the crisis of 1929-1932 then gold would have been much higher than the price of silver in 1932. These arguments demonstrate a lack of knowledge on how commodity markets work, basic economics and history in one fell swoop.

For the aforementioned reasons, I will calculate the change of silver from $0.24 to $25. Despite halving the figure, silver still achieves an astounding 10,316% increase from the low of 1932. Any way you slice it, the ratios are completely disfigured and in favor of silver. I could have started my pricing point in the 1950's, 1960's or the 1970's and the distortion would be the same but that would be an exercise in futility when talking to a gold bug. Their retort is always the same, "what about this?" or "You're being selective" or "You're biased" or etc. etc. etc. ad infinitum...

Back to me and my silver holdings, when the price of silver has moved in step with the price of gold, on a percentage basis, then I know that silver is underpriced as a precious metal. With this in mind, I converted a majority of my gold holdings into silver. I'm an investor, therefore I don't want to get myself caught up in the religions debates about gold.

So, if (note the size of the if) you're considering taking the dive into gold then move on to the alternative with every bit the attribute. I suggest that you avoid the numismatic varieties of silver. Instead, aim for junk silver of the half dollar denominations. Again, only buy precious metals as part of a balanced diet of physical real estate, stocks, bonds and cash.

In my opinion, gold and silver stocks are perpetual options on the price of gold and silver. Therefore, precious metal stocks are great for speculation but poor investment choices. Be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out their dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be "head to the exits."

If you've read my blog at any length then you already know of the Dividend Achievers that have beat gold and silver stocks without the added risk. However, if you're a hardened equity speculator, you could nab select gold and silver convertible preferreds. Gold and silver equities aren't my first choice but now you know some of the options available to you.

A Note of Caution for All Precious Metal Investors
As the price of the precious metals get higher, the less likely you'll get the widely quoted price when trying to cash in. Precious metal dealers, being business folk, will not be willing or able to take the risk of buying back your gold and silver at the highest quoted price. Therefore, even though gold was at $800 and silver was at $50 back in 1980, investors who tried to cash in at those prices were being turned away by dealers. This will be one of the signs that we're at a top in the market for precious metals.

When you read the following articles on gold and silver, you need to understand that I have a vested interest in the topic. Therefore, I theoretically should say things that only support the investment positions that I retain. Unfortunately, I don't see (revealing my limitations) the value of the philosophy of "whose food I eat, whose song I sing." Additionally, it would be no contradiction that I would explore and write about the breadth of both sides of the topic of precious metals investing. Touc.

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Posted in gold, gold bugs, precious metals, Silver, Silver Standard