SUMMER GOLD FINDS COSMIC FAVOR

© Henry Weingarten Last Updated:
     
ONLY GOLD IS AS GOOD AS GOLD
Our BIG play for 2005 is that gold will break out to $480 to $500 by this summer.  Traditionally, geopolitical uncertainty, war and global economic sluggishness have been good for gold companies. Years ago, we were one of the first to suggest that Gold was more than just an inflation and safety metal (a status it lost after the first Gulf war), but also is a currency.  Today, it is widely recognized that gold acts like a currency and that a weak US dollar is good for gold. It is also widely recognized that a further decline in the US dollar is inevitable. Finally, gold is still very much out of favor.  For contrarian investors, this also adds to the risk/reward profile of owning gold.

GOLD IS AN INFLATION METAL
While gold acts much like a currency, it should not be ignored that it remains the traditional safe haven inflation hedge. Remember when just a few years back the financial press feared $400 gold as a “canary in the mine” barometer of inflation. Yet for how long has it been over $400, while US government statistics until recently failed to measure signs of real inflation? Today the signs of inflation are loud and clear to anyone who eats, drives, visits their doctor, buys a home, pays for college, etc. The CPI has been significantly understating inflation for years. Bill Gross of Pimco is quite correct in pointing out the CPI con job. It understates inflation (the cost of living as well this year as last year). That perception will soon change, as I see it no later than the summer of 2005. These days I am not alone in considering gold the cheapest long term protection against both inflation and/or an eventual US Dollar decline. Thus I believe virtually EVERY investing portfolio should have 10% gold or similar hard asset allocation in 2005.
 

FUNDAMENTALS
The most often mentioned reason to buy gold is further dollar weakness. Equally important is that fact that new participants are entering the market, e.g. the recent launch of several exchange-traded gold funds. Longer term, our forthcoming view of a 2006 Bear market, especially the second half of the year, is also likely to be fundamentally positive for gold. These are extraordinary times, where geopolitical risk and outlook continue to outweigh normal stock market considerations. Remember: Life jackets, Deadbolts, Smoke and Fire Alarms etc. do NOT provide you with Financial security. Liquidity, Global Diversification and hard assets such as gold DO offer some protection.

Gold demand continues to grow faster than its global mined supply. It is strongly rising in emerging economies, especially India and China, which are becoming two of the largest gold consuming nations. Higher mining costs are also helping to drive up the price of gold. Additionally, forward gold producer hedging continues to be unwound at a strong pace.  The biggest risk intermediate term is the potential of further central bank selling.  We believe this will continue to be restrained by current European Central Banks agreements at least until mid 2006, as well as partially offset by some Asian Central Bank buying. 
Bottom line: By the summer of 2005, EVERY investor will want some exposure to the gold market, just as they wished they had to the energy market in 2004/2005.

The fundamental reasons for owning gold today are fourfold:

1) US Monetary Policy of easy money, which has also resulted in a Real estate Bubble.
2) US Fiscal Policy: While investors cheered income tax reductions and believed it to be a stock market positive, longer term there is no such thing as a free lunch.
3) US Government Spending is Out of Control.
4) US Foreign Policy: Imperialistic, unilateral wars are inflationary.
Summary: all of the above is GOOD FOR GOLD.

The Process of Elimination: A Speculation on Gold and the Credit Cycle
" Capital flows into gold under one scenario only: when the lack of investment returns elsewhere, the desire for safety, and the ascendance of a risk-averse psychology at large converge. In other words, investors come to gold through a process of elimination. It is an odyssey of discovery and realization that investment vehicles thought to be potentially rewarding are in fact filled with hazard and adversity."

Seasonal Strength lies ahead: Jewelers are the biggest users of gold, accounting for 68 percent of world demand in 2004. The fourth quarter is the strongest quarter due to Diwali, Christmas and other end of year festivals when jewellery gifts are common. Intermediate term, this often results in a golden Christmas Rally. Shorter term, the gold sector typically stages a rally in late summer and early fall according to a Merrill Lynch - in 14 of the past 16 years, gold has climbed an average 9.7 percent from July 16 to August 12.

Our investing advice calls for a modest 10% gold/commodity hedge with a monthly accumulation April, May and June.  As of July 2005, we recommend buying gold as a Summer 2005 trade [First Buy July 1 $429].

Our Current Fair Value for gold is $450 as a currency. As an inflation metal, we calculate gold’s Fair Value to be $500.
April 1, 2005 gold closed at $425. You do the math.


TECHNICAL
Gold has been in a secular bull market since making its 22-year low four years ago on April 2, just under $257. Short term, gold’s technical action in 2005 to date has been neutral to bearish. We believe this picture will change dramatically before the summer.
Gold has broad support in the 420-425 area; it has overhead resistance 450-460. Assuming it is broken on the upside, then $480 to $500 is the next natural gold target.
NOTE: In June Gold begun trading above its 200 Day Moving Average. See below for more good technical news:
Gold “buy” signal pops up
"The ratio of the dollar gold spot price to the Philadelphia gold & silver index or XAU rose above 5.0 in May 2005. This signal has historically returned an average of 38.4% for stocks in the XAU index after one year."
Three Signs of a Gold Bottom
"1) The divergence between the XAU gold stock index and Gold reached an extreme level
2) Commercial futures traders are covering short positions
3) Major support levels have held"
Euro Gold 350!
"€350 is a far greater boon for gold than even $500 in dollar terms."
Four Reasons Gold Stocks are about to rise
1) Gold is Going up Now Against All Currencies
2) Long-term XAU Chart Spells Breakout
3) Gold Stocks Are Outperforming Gold
4) A Breakout for the XAU Appears Imminent

ASTROLOGY

While there are some positive indicators in the US Dollar horoscope in Q2 2003, both the XAU and COMEX horoscopes are very positively configured for the summer of 2005. Looking further out, in 2006 we are forecasting that Gold will also outperform, while for 2008 we project it could be somewhat of a home run. Enough said.

What is our long term track record for precious metals? As a sun sign Leo, I have a natural affinity for gold.  Perhaps for this reason, our Gold forecasting record has often been nothing less than stellar. For example, The Astrologers Fund had warned clients a month before the Bre-X disaster.  Years ago, when the gold commodity pit was boring and  “sitting dead in the water”, we forecast a major rally from under $300 to the DAY it would break $400! We forecast that gold would reach $450 by December 2004, and then retreat. We have loudly and publicly proclaimed our $480-$500 August Gold break out rally for 2005!
 
HOW TO MAKE MONEY IF OUR FORECASTS ARE CORRECT

Historical cycles show that a strong gold rally ignites the major producers first. Soaring microcap gold exploration plays then follows this. Just as IBM and GE are the Dow bellweathers, Newmont (NEM) is the key proxy for gold. Given gold’s small market capitalization, NEM would be the first big money portfolio play.  Along with the gold ETF (GLD), Barrick Gold (ABX) and Placer Dome (PDG), it is where much of the BIG Wall Street money will go. Currently the stock price of the bigger gold companies have already factored in a gold price of $450. Hence there may be more short term upside in the metal itself. However, once gold moves into the $480-$500 range, the reverse will be true and the gold company stocks will outperform.  A lot of more aggressive hedge fund money will move into midcaps such as Glamis Gold (GLG), Meridian Gold (MDG), and Nova Gold (NG).   Should any of this be allocated to small caps?  The answer obviously varies according to individual portfolio risk/reward parameters.

If I am right about August gold (Futures) break, this time microcaps will fly as the public will enter the market.  However, as the first quarter is often a seasonal high for many gold microcaps, we recommend some caution here.  I would wait until Gold is at least $440 before a strong commitment to gold microcaps.
If you prefer the adventure of finding buried treasure, then there are nearly 1000 mining exploration or development stage companies on the TSX alone. Note: In general, I prefer Gold stocks with mines located in countries having minimal, or no, political and currency risk.

No sector demonstrates the advantages of illiquidity better than the gold share market. In a rising gold market, small- and mid-cap gold stocks tend to produce a much bigger bang than simply buying gold itself. When gold breaks through $450 an ounce on route to new multi-year highs, small cap gold stocks (as a group) are likely to perform much better than either the big cap XAU stocks or the metal itself. However, investing in junior resource companies can be especially risky. To minimize some of this risk, don't overload your portfolio with junior mining companies. I recommend buying over time a diversified basket of 5 small cap companies, all together totaling no more than 5%-10% of an overall aggressive portfolio.  If you are sporting a large portfolio, then a 10 small cap gold basket would reduce risk.  Note:  You may wish to choose a mixture of early state exploration companies (highest risk/reward) with a strong exploration upside ["bonanza"] potential with near production/early production (lower risk) ones. Again this depends on one’s personal risk/reward profile.

SUMMARY

·    Gold was last above $500 in mid-December 1987 and we project it to test $480-500 as early as July 2005. If so, this time small cap junior gold companies will shine as the Majors and Midcaps have already done.
·    As a portfolio hedge, we recommend at least 10% gold. [This was increased to 15% in June 2005 for many of our model portfolios.] This would be done conservatively with a mixture of physical gold (GLD)* and gold majors ABX and NEM. If you have more tolerance for risk, look to midcaps such NG.
·    We recommended that gold be accumulated on weakness over April, May and June [XAU 84-78, $425 to $418]. As of July 2005, we recommended Summer gold additionally as a trading buy under $425.
·    If you love to gamble and desire Las Vegas style investing excitement, buy a group of 5-10 microcap stocks that are likely to soar should the public becomes as excited about gold as they have about energy. For a current list of small cap gold companies that we are watching, please visit my seasonedspeculator.com website.

Our long term recommendations remains the same: just continue to accumulate GOLD as time goes by.  Gold is cheap insurance against both inflation AND a future declining US Dollar!  It is also likely to resume its traditional "safe haven" status as well by 2006.


IN THE NEWS

Pierre Lassonde, the president of Newmont Mining (NEM), the world's largest gold mining company expects gold prices to hit $525 an ounce by the beginning of 2006. Lassonde noted that he thinks the U.S. dollar will lose another 15 percent of its value in June 2005 versus other currencies. I agree.

"Based on historic ratios between gold and oil, gold should now be over $500 an ounce. Or the price of oil needs to come down to $40 to $42 a barrel." Frank Holmes, chief investment officer, U.S. Global Funds
HW: This makes a bet on yellow gold a better one from a risk/reward perspective than black gold.

Q&A

READER: I don’t understand how you can expect gold to explode with Saturn moving into Leo in July.
HW: Saturn can also equal 1) scarcity and 2) reality. Acting as a commodity, Gold will rise as it responds to the same scarcity issues as have other commodities, such as industrial metals and petroleum.

GOLD WEB LINKS

WSNW Subcribers should frequently review our premium S: Gold post.
* US citizens please note that the IRS considers gold a "collectible" like art, gems or wine collections. Therefore, unlike stock investments, on which most pay 15% long-term capital gains after holding for one year or more, capital gains on collectibles (and on GLD) are 28%.