Saturday, September 09, 2006

Falure to launch

Oh, how cruel the PM market is. It teases you with a breakout, gets you all worked up, then, WHACK…

So the trouncing of the PM complex continued on Friday. Gold spot lost a further $8.40 to end below $610, while the HUI ended at its 50 dma of 340. What happened? Wasn’t I trumpeting the great breakout heralding a run to 390-400? For that matter, wasn’t every other gold advisor and gold website bullish?

Well, therein lies the problem. On June 13, when day gold dropped over $40 and the PM complex bottomed, there were plenty of advisors with even lower targets. In other words, there was real fear in the gold market. Today, there is no shortage of momentum players jumping on the gold bandwagon, owning in part to the simplicity and effectiveness of the HUI:Gold model. By definition, the popularity of a trading model means a dearth of traders taking the other side of the trade.

Even after the loss in the last three days, I can’t detect any real fear in the PM stocks, which can only mean more downside to come. I’m beginning to think the HUI:Gold model has had its time in the sun and a simpler buy-and-hold with well placed entries at bounces off major moving averages may be the right way to play the gold bull from now on.

Deflationary talk
I still have faith in the long term PM bull, but that is not to say I refuse to examine the other side of the argument. I don’t see disinflation as a real threat at this point in the cycle so that leaves deflation as the most damaging outcome. Could a falling gold and CRB be signaling deflation? One induced by the implosion of the housing market? Given the 30 trillions global housing bubble it certainly sounds plausible. However, I’m placing (a limited amount of) confidence in the collective response of world central bankers. For now, I continue to see a deflationary recession as a possible but very unlikely outcome, so that any weakness following a deflation scare will be taken as a buying opportunity.

At any rate, gold (the metal), being money without obligation, should do quite well in a deflationary environment. Gold stocks, especially junior and exploration ones, on the other hand, may get trashed with the rest of the market. (Nice picture in Word format, from the Long Wave Analyst) That’s why I think there is room for physical bullion and CEF (or GLD, SLV) in every PM portfolio.

About market manipulation
Whenever gold drops a large amount, talks about market manipulation by the plunge protection team (PPT) invariably surface. I generally don’t pay much attention to them, nor do I have strong convictions one way or another. I just find such conspiracy theories not constructive to my own trading/investing at best, and signal a lack of personal accountability at worst. At any rate, a buy-and-hold on the dips approach seems the best answer to such manipulations (if they exist) if fundamental economic laws should in the end prevail.

Not investment advice; please do your own due diligence. Good luck and be safe!