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Finance & Stock Groups Forum Index » Stock Investments » Gold's Behavior During A Bubble
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| Author |
Message |
| Don Tiberone |
 Posted: Thu Nov 27, 2008 4:05 pm |
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Guest
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Gold stocks now up over 20% in November since Bob Hoye recommended
them in late October.
http://www.321gold.com/editorials/hoye/hoye112708.pdf
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
Gold Sector Update
NOVEMBER 25, 2008
GOLD’S BEHAVIOUR DURING A BUBBLE
• Gold shares were expected to decline with the financial markets into
dislocating
conditions expected to culminate in November.
• Gold's nominal price in dollars was likely to decline as most of the
panics would occur
with the dollar rising against most other currencies and most
commodities.
• This was based upon the course of significant events though previous
great bubbles
and their consequent contractions. The following page of charts shows
the pattern for
gold's real price through the biggest manias, including the first one
in 1720. Within
this, the gold premium which was at 118 in August 1873 fell to 106 as
the crash ended
• Typically, gold's real price declines through a financial mania, and
just as typically
gold shares underperform the stock market.
GOLD’S BEHAVIOUR DURING A POST-BUBBLE CONTRACTION
• Typically, gold's real price increases during the economic and
financial contraction
• More specifically, we used the behavior of the yield curve and
credit spreads through
the 1929 and 1873 manias as a model for the path that would define the
eventual
collapse of our bubble. This expected that the key reversal to
adversity would occur
close to June 2007. The reversal in the yield curve was accomplished
in that May and
spreads reversed in that fateful June.
• Of interest is that the real price of gold, as represented by our
Gold/Commodities
Index, reached a high of 255 in June 2003. Then as that boom launched,
the index
began a cyclical decline, which reflected diminishing profitability
for gold producers.
Rising commodities relative to gold reflects basic mining costs rising
relative to
• The most reliable indicator of the end of a mania has been the
change in the yield
curve. It was significant that this was also the cyclical low for our
index at 143 in May
2007. With November's panic, it increased to a high of 339. We thought
that this
measure of gold would double on its cyclical bull market, which has
further to run.
• This has been indicating that operating costs have been falling
relative to the price of
gold and it should soon begin to drive earnings up, as earnings for
most sectors remain
under the pressure of falling prices.
The rise in the real price also increases the valuation of gold
deposits.
SUPPLY, DEMAND AND OTHER SUPERSTITIONS
• Although gold is an essential part of the yield curve, no
traditional supply/demand
research on gold has ever anticipated the beginning of a classic
financial contraction.
• Mainly, conventional analysis seems to be tedious gossip about what
central banks are
doing with their reserves, what's happening with the Souks, Indian
wedding seasons
and the monsoons. Marketing and treasury departments at big mining
companies turn
gossip into reports so that the CEO can appear to be well-informed to
the board of
directors and the media.
• Equally tedious has been all the finger-pointing about
"conspiracies" as an explanation
about why gold and silver are not conforming to the dictates of
traditional fundamental
analysis.
• For two decades the World Gold Council has focused upon jewellery
consumption as
the key to gold's price trends. Indeed, such demand grew strongly
during this, as well
as the new financial era that blew out in 1929. Interestingly, this
consumption was
essentially overwhelmed by the decline in investment demand that is
one of the
features of a financial mania. Producers suffered poor operating
margins. The real
price typically declines and then with some irony the wonderful demand
for jewellery
slumps as the real price goes up in a crash. The point being is that
in the real world
analysis of jewellery consumption can be misleading – especially
during a financial
mania and its consequence.
• Then there is macroeconomic research. This uses hundreds of Fourier
equations to
project gold prices, which seems to go over well with the treasury
departments of the
big mining companies. The more popular services will provide three
price forecasts.
One is a moderately rising trend line, another rises less steeply, and
the third declines.
This saves both modeler and subscriber from making a judgment call.
Moreover, the
accounting departments don't so much care whether the method is
reliable. Any price
will do, so long as it is for the year-end.
OUTLOOK FOR GOLD STOCKS
• Gold shares had been likely to decline as part of the typical fall
crash, which would
likely clear around mid November, and our advice since late October
has been to
cover shorts in silver stocks and to get long the gold sector.
• A new bull market for gold shares has been expected to start in
November and run for
a few years.
• This has been expected to encompass the whole gold sector, including
exploration
stocks.
• Based upon previous post-bubble contractions, this could run for
around 20 years. Of
course, the usual business cycle would prevail, with the gold sector
doing well on the
recessions.
GOLD/SILVER RATIO
• Beyond being something to trade, the gold/silver ratio has been a
reliable indicator of
credit conditions. It declines during a boom and does its greatest
service when it
typically signals the contraction by increasing. The key move in 2008
occurred with
the turn up in May from 46. This was with the reversal in the credit
markets and the
technical break out at 54 in August anticipated the fall disaster.
Often during the more
acute phase of a panic, silver can dramatically plunge relative to
gold.
• With the break above 54 our target on the full contraction became
around 100. That
level for the ratio was reached with the banking crisis that ended in
late 1990, when
the last of the 1980 adventures in crude, gold, silver and real estate
were finally
• From a high close of 84 on October 28 with that panic the ratio
declined to 71 with the
stock market rebound to November 5. The next rise with the next panic
was to 83.5
on Friday, November 21, and the ratio can decline for a few months as
the financial
markets recover in the first quarter.
MECHANISM
One of the most fascinating aspects of great credit manias is that all
six since 1720 have
occurred with a senior central bank with the dangerous prerogative of
issue. Each bubble was
identified by the street as such until our era of asset inflations.
Perhaps our financial
establishment has been so ignorant of the dynamics of a mania they
were unable to make the
On the latest example, as late as December 2007 the advice was that
nothing could go wrong:
"The truth is that Fed governors, together with their crack staff of
Ph.D
economists and market analysts, are as close to an economic dream team
as we are
Gregory Mankiw, New York Times, December 23, 2007
So despite the inability of our policymakers to forecast another
financial disaster such as
initially discovered last January, confidence remained that a full-out
panic could be prevented.
The fall crash was remarkably similar to it counterparts in 1929 and
1873.
Historically, at the peak of each mania the establishment took credit
for the prosperity, and
then found scapegoats in the bust. The mechanism seems to be at the
boom the central banks
seem to be in control, but the truth is that once prices of the
speculative games turn down,
power is immediately shifted to Mister Margin. In past examples, this
overwhelmed
policymakers and continued until the contraction ran its course.
The notion that "liquidity" was driving prices up was dead wrong, as
soaring prices fostered
the most aggressive employment in leverage in history. And as much of
this involved being
long the hot items against cheap money in dollar and yen terms is was
natural that as forced
liquidation started it would be accompanied by a rising dollar and
yen.
Typically, one of the features of a post-bubble contraction has been
the senior currency
becoming strong relative to most commodities, and currencies for most
of the time. This
seems due to the flight to the unique liquidity found in treasury
bills in the senior currency as
well as in gold. This has been working out.
In so many words, the investment demand for gold has been soaring as
the wildest creation of
credit in history has been contacting. Once a mania is over
traditional liquidity always
disappears and the role of a rising real price of gold seems designed
to increase production,
which eventually increases real liquidity in the global financial
system.
Our review covers three hundred years of history and while there is no
guarantee that the
pattern will continue to work out, there is no guarantee that it
won't.
It is appropriate to be fully positioned for a great bull market in
the gold sector.
• The basic theme has been down in a boom and up in a bust.
• Typically, the post-bubble bull market can run for 3 or 4 years.
• Typically, this has been within a 20-year bull market.
• Historically, we have used the CPI as recorded in the senior
currency.
• For convenience, we currently use our Gold/Commodities Index. |
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| Uncle_vito |
| Posted: Fri Nov 28, 2008 8:02 pm |
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Guest
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Don:
Wish you wouldn't run copies of articles in your posts for several reasons:
1) Article runs down my monitor screen and off the bottom. I have to
scroll up to skim read the article
2) Takes too long to read. I am very busy and cannot read these long
winded articles that these clowns right because it is there job to fill
media columns.
3) Most of these guys are wrong anyway. Why read them.
Vito
"Don Tiberone" <s_knight8@my-Deja.com> wrote in message
news:d732e300-e854-4ffb-831f-056d0272c3e5@l42g2000yqe.googlegroups.com...
Gold stocks now up over 20% in November since Bob Hoye recommended
them in late October.
http://www.321gold.com/editorials/hoye/hoye112708.pdf
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
Gold Sector Update
NOVEMBER 25, 2008
GOLDS BEHAVIOUR DURING A BUBBLE
Gold shares were expected to decline with the financial markets into
dislocating
conditions expected to culminate in November.
Gold's nominal price in dollars was likely to decline as most of the
panics would occur
with the dollar rising against most other currencies and most
commodities.
This was based upon the course of significant events though previous
great bubbles
and their consequent contractions. The following page of charts shows
the pattern for
gold's real price through the biggest manias, including the first one
in 1720. Within
this, the gold premium which was at 118 in August 1873 fell to 106 as
the crash ended
Typically, gold's real price declines through a financial mania, and
just as typically
gold shares underperform the stock market.
GOLDS BEHAVIOUR DURING A POST-BUBBLE CONTRACTION
Typically, gold's real price increases during the economic and
financial contraction
More specifically, we used the behavior of the yield curve and
credit spreads through
the 1929 and 1873 manias as a model for the path that would define the
eventual
collapse of our bubble. This expected that the key reversal to
adversity would occur
close to June 2007. The reversal in the yield curve was accomplished
in that May and
spreads reversed in that fateful June.
Of interest is that the real price of gold, as represented by our
Gold/Commodities
Index, reached a high of 255 in June 2003. Then as that boom launched,
the index
began a cyclical decline, which reflected diminishing profitability
for gold producers.
Rising commodities relative to gold reflects basic mining costs rising
relative to
The most reliable indicator of the end of a mania has been the
change in the yield
curve. It was significant that this was also the cyclical low for our
index at 143 in May
2007. With November's panic, it increased to a high of 339. We thought
that this
measure of gold would double on its cyclical bull market, which has
further to run.
This has been indicating that operating costs have been falling
relative to the price of
gold and it should soon begin to drive earnings up, as earnings for
most sectors remain
under the pressure of falling prices.
The rise in the real price also increases the valuation of gold
deposits.
SUPPLY, DEMAND AND OTHER SUPERSTITIONS
Although gold is an essential part of the yield curve, no
traditional supply/demand
research on gold has ever anticipated the beginning of a classic
financial contraction.
Mainly, conventional analysis seems to be tedious gossip about what
central banks are
doing with their reserves, what's happening with the Souks, Indian
wedding seasons
and the monsoons. Marketing and treasury departments at big mining
companies turn
gossip into reports so that the CEO can appear to be well-informed to
the board of
directors and the media.
Equally tedious has been all the finger-pointing about
"conspiracies" as an explanation
about why gold and silver are not conforming to the dictates of
traditional fundamental
analysis.
For two decades the World Gold Council has focused upon jewellery
consumption as
the key to gold's price trends. Indeed, such demand grew strongly
during this, as well
as the new financial era that blew out in 1929. Interestingly, this
consumption was
essentially overwhelmed by the decline in investment demand that is
one of the
features of a financial mania. Producers suffered poor operating
margins. The real
price typically declines and then with some irony the wonderful demand
for jewellery
slumps as the real price goes up in a crash. The point being is that
in the real world
analysis of jewellery consumption can be misleading especially
during a financial
mania and its consequence.
Then there is macroeconomic research. This uses hundreds of Fourier
equations to
project gold prices, which seems to go over well with the treasury
departments of the
big mining companies. The more popular services will provide three
price forecasts.
One is a moderately rising trend line, another rises less steeply, and
the third declines.
This saves both modeler and subscriber from making a judgment call.
Moreover, the
accounting departments don't so much care whether the method is
reliable. Any price
will do, so long as it is for the year-end.
OUTLOOK FOR GOLD STOCKS
Gold shares had been likely to decline as part of the typical fall
crash, which would
likely clear around mid November, and our advice since late October
has been to
cover shorts in silver stocks and to get long the gold sector.
A new bull market for gold shares has been expected to start in
November and run for
a few years.
This has been expected to encompass the whole gold sector, including
exploration
stocks.
Based upon previous post-bubble contractions, this could run for
around 20 years. Of
course, the usual business cycle would prevail, with the gold sector
doing well on the
recessions.
GOLD/SILVER RATIO
Beyond being something to trade, the gold/silver ratio has been a
reliable indicator of
credit conditions. It declines during a boom and does its greatest
service when it
typically signals the contraction by increasing. The key move in 2008
occurred with
the turn up in May from 46. This was with the reversal in the credit
markets and the
technical break out at 54 in August anticipated the fall disaster.
Often during the more
acute phase of a panic, silver can dramatically plunge relative to
gold.
With the break above 54 our target on the full contraction became
around 100. That
level for the ratio was reached with the banking crisis that ended in
late 1990, when
the last of the 1980 adventures in crude, gold, silver and real estate
were finally
From a high close of 84 on October 28 with that panic the ratio
declined to 71 with the
stock market rebound to November 5. The next rise with the next panic
was to 83.5
on Friday, November 21, and the ratio can decline for a few months as
the financial
markets recover in the first quarter.
MECHANISM
One of the most fascinating aspects of great credit manias is that all
six since 1720 have
occurred with a senior central bank with the dangerous prerogative of
issue. Each bubble was
identified by the street as such until our era of asset inflations.
Perhaps our financial
establishment has been so ignorant of the dynamics of a mania they
were unable to make the
On the latest example, as late as December 2007 the advice was that
nothing could go wrong:
"The truth is that Fed governors, together with their crack staff of
Ph.D
economists and market analysts, are as close to an economic dream team
as we are
Gregory Mankiw, New York Times, December 23, 2007
So despite the inability of our policymakers to forecast another
financial disaster such as
initially discovered last January, confidence remained that a full-out
panic could be prevented.
The fall crash was remarkably similar to it counterparts in 1929 and
1873.
Historically, at the peak of each mania the establishment took credit
for the prosperity, and
then found scapegoats in the bust. The mechanism seems to be at the
boom the central banks
seem to be in control, but the truth is that once prices of the
speculative games turn down,
power is immediately shifted to Mister Margin. In past examples, this
overwhelmed
policymakers and continued until the contraction ran its course.
The notion that "liquidity" was driving prices up was dead wrong, as
soaring prices fostered
the most aggressive employment in leverage in history. And as much of
this involved being
long the hot items against cheap money in dollar and yen terms is was
natural that as forced
liquidation started it would be accompanied by a rising dollar and
yen.
Typically, one of the features of a post-bubble contraction has been
the senior currency
becoming strong relative to most commodities, and currencies for most
of the time. This
seems due to the flight to the unique liquidity found in treasury
bills in the senior currency as
well as in gold. This has been working out.
In so many words, the investment demand for gold has been soaring as
the wildest creation of
credit in history has been contacting. Once a mania is over
traditional liquidity always
disappears and the role of a rising real price of gold seems designed
to increase production,
which eventually increases real liquidity in the global financial
system.
Our review covers three hundred years of history and while there is no
guarantee that the
pattern will continue to work out, there is no guarantee that it
won't.
It is appropriate to be fully positioned for a great bull market in
the gold sector.
The basic theme has been down in a boom and up in a bust.
Typically, the post-bubble bull market can run for 3 or 4 years.
Typically, this has been within a 20-year bull market.
Historically, we have used the CPI as recorded in the senior
currency.
For convenience, we currently use our Gold/Commodities Index. |
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