With the stock market hitting record highs, gold has been taking a back seat. But that may not be the case for long… Gold is coming alive.
We are firm believers in going with the flow. The flow for gold is still up, but after a stellar 12 year bull market run, this market is telling us to have patience and to also continue taking advantage of weakness to accumulate at better prices.
Gold’s reluctance to fall is most interesting. After rising 660% since 2001, it has fallen less than 20% from the highs. That is, after reaching its record high 1½ years ago, it quickly fell to its low. That low was tested in the Summer of 2012, and it was tested again a couple of weeks ago as gold neared this low (see top Chart 1A).
This low is key today for both gold and silver and we’re watching these levels closely… $1536 and $26. If gold and silver can weather the storm by staying above these levels, they will come out smelling like a rose.
GOLD DEMAND REMAINS STRONG
This is why central banks continue buying gold. They added 534.6 tons of gold to their reserves last year, the most since 1964. Plus, the World Gold Council also reported official holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000.
India has been the largest buyer and its January gold imports jumped 23% from a year ago. China is launching its first ETF backed by gold, and its new Shanghai gold exchange has become a full on exchange. China’s been a major gold producer over the last four years and it’s also been importing more gold, so much that it’s surpassing India.
TECHNICALS LOOKING GOOD TOO
As we’ve often explained, gold tends to move in intermediate cycles and that’s been the case since the 1970s. This repeating A through D cyclical pattern is identified on the chart.
The As and Cs coincide with intermediate rises in the gold price and the Bs and Ds coincide with declines. For now, the gold price is in a B decline.
This B decline started last October and during these past five months gold lost 12+% from the $1796 high to the $1572 low. This decline has been longer, yet it’s been normal compared to prior B declines. The worst one was in 2009 when gold fell over 13%.
As you can see, gold’s leading indicator is currently at a low area (see Chart 1B). This strongly suggests that gold is oversold and it’s looking for a bottom. In other words, this chart is telling us that gold’s next direction is far more likely to be up, rather than down.
Chart 1A also shows gold clearly below its 23 month moving average for the second time in the 12 year bull market. The last time was during the 2008 financial crisis. But as long as gold stays above the prior D low at $1536, all is well.
On the upside, if $1536 holds and gold stays above $1590, it could jump up to the $1660 level, and the B decline would then most likely be over. Once $1660 is clearly surpassed, a new C rise will be underway and these tend to be the strongest intermediate upmoves.
Gold’s next stepping stone resistance levels before a record high could be reached are the $1750, $1800 and $1903 levels. Gold would be flexing its muscles, however, above $1800, a level it’s failed to overcome since Sept 2011.
On the downside, however, if gold falls below $1536 we could see sharper down moves before the lows are seen. If this happens, we could possibly see the $1300-$1450 level tested, in a worst case scenario. But we don’t think that’s going to happen.
By Mary Anne & Pamela Aden
Courtesy of www.adenforecast.com
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com
Just as every coin has two sides, every data point that doesn’t meet expectations usually has an upside somewhere. For instance, although the gold price has fallen with the strengthening U.S. dollar, the yellow metal is appreciating in Japanese yen. So when negative news about the economy came out this week, along with the U.S. Labor Department reporting that the country added only 88,000 jobs in March, investors found reasons to be encouraged.
For one, the Federal Reserve is apt to maintain its stimulative easing course and keep interest rates low. With inflation above the current interest rate, a negative real interest rate increases the attractiveness of U.S. dividend-yielding stocks and gold. I believe both investments will continue to be viewed as the safe havens of the world.
The news that the U.S. is not recovering as expected may also repair some of the damage done to gold by research firm Societe Generale. Its bearish report asserted that because of expected rising interest rates, a strengthening U.S. dollar and a recovery in housing and jobs, gold’s bull run would end.
The ongoing European debt saga will likely drive gold as well. Many people, including CNBC’s Amanda Drury, have been asking me why gold did not respond on news of the seizure of bank deposits in Cyprus. Going back more than four decades, the yellow metal historically has experienced a seasonal drop this time of year, yet today’s trading behavior does not reflect the fearful conditions ideal for a gold rally.
As a result of this perplexing situation, some highly respected gold experts have tossed around the idea that the price of gold may be manipulated. Mineweb’s Lawrie Williams writes that when the European markets open, gold and silver fall, but climb when the U.S. market opens. This is “a pattern directly contrary to that which had been seen pre-Cyprus,” suggesting that the precious metal “needs to be kept in its place more than ever lest a move into it by the big bank deposit holders really precipitates banking Armageddon.”
We’ve seen plenty of evidence that central bankers in the developed countries intend on continuing their easing policies, driving up balance sheets. Take a look at the rise in the balance sheets as a percent of GDP from the largest developed countries. The European Central Bank (ECB) tops the list, with the balance sheet approach half of its GDP.
Williams says central banks need to continue to print money to “maintain the pretence that the global economic situation is under control, which it surely is not,” says Williams.
This opinion is echoed by my friend, Ian McAvity. In his Deliberation on World Markets newsletter, he says “the orchestrated reopening of Cypriot banks creates two euros despite claims to the contrary.” Most importantly, the fact that “gold did not surge on these developments for the second most important currency teetering on the brink adds weight to the case for surreptitious central bank interventions,” says McAvity.
McAvity says “surreptitious,” CLSA’s Greed & Fear Author Christopher Wood calls it a “grandiose monetary experiment” which may be “unprecedented in recorded financial history.” He believes that there is an “outright embrace of the eroding distinction between monetary and fiscal policy” and instead of moving away from its unconventional easing policies, “the central banks are moving further and further away from the exits.”
But there is a much more important issue that has been raised because of Cyprus’ and the eurosystem’s “startling inequality of treatment,” says CLSA’s Russell Napier. He questions whether the eurosystem works in a political sense. He writes:
“If … people of the system believe that the euro’s sustenance necessitates the use of arbitrary power, resulting in unequal treatment, then they will conclude that the euro system is not worth having. The loss of democracy and the rule of law will outweigh whatever economic benefits euro membership may bring.”
An avid sports enthusiast would translate this “loss of democracy and the rule of law” to a game where the referees are making unfair calls, adding rules and changing boundaries to control the outcome.
Americans express this loss as having freedoms taken away, however, the primary difference between the U.S. and the European Union is the fact that Americans elect their officials.
British politician and leader of the U.K. Independence Party, Nigel Farage, warned about the dangers of non-elected socialist Brussels bureaucrats 18 months ago. In a video that went viral, Farage berated the council, calling the euro a failure and pointing out that unelected officials without “any democratic legitimacy” had removed elected officials in Greece and Italy from office like Agatha Christie kills off characters in her murder mysteries.
I met Farage in 2011 when I was at a CLSA conference in Hong Kong. I was pleasantly surprised that we shared professional backgrounds, as he was formerly a metals trader. I liked him when I met him and respect his courage for speaking out against the injustices.
Gold investors, keep in mind that gold coins and gold jewelry are not “get-rich-quick” schemes. As I talked about in my interview with CNBC, gold is like car insurance. No one wants a car accident, but just because one hasn’t happened, doesn’t mean you drop your policy.
In a Low Yielding Environment, Seek Dividends
I often say that money goes where it is treated best, and Russell Napier’s following comment rings true today: “Perhaps nothing changes human behavior more profoundly than the arbitrary and unfair acts of authority.” The factors that will be driving markets in this low yielding environment and governments’ questionable policies is for investors to find investment that offer a return OF their money, not return ON their money.
And the tranquil oasis of choice will likely be large, dividend-paying U.S. companies, many of which pay higher yields than the 10-year Treasury.
Take a look under the hood of the S&P 500 Index to see how important dividends, along with buybacks, have become to the overall index. This chart, created by Professor Aswath Damodaran of the “Musings on Markets” blog and republished by Business Insider, graphs the powerful twin engines of dividends and buybacks as a percent the S&P 500.
During the early years of the new century, both dividends and buybacks made up less than 2 percent of the overall index level. During 2004 through 2007, they began making up a larger part of the index, climbing to a 12-year high in 2007. That was the same year the S&P 500 hit an intraday record high of 1,576.
Now, over the previous four years, these figures have been increasing once again. Companies have been buying back their stock at record levels. In 2009, buybacks only made up 1.39 percent of the index level; by 2012, buybacks grew to comprise more than 3 percent.
To a lesser extent, dividends have increasingly made up more of the index level, increasing from 1.97 percent in 2009 to 2.19 percent last year.
Companies have become focused on the return-on-capital model, such as revenues-per-share and earnings-per-share, which may reflect the way CEO compensation has changed over the past two decades.
Previously, executives primarily received option grants, which incentivize them to focus on the short-term stock price.
However, as you can see below, while the percentage of CEOs receiving options has been declining slightly, the percentage of CEOs receiving restricted stock grants has jumped considerably. This means that the executives’ interests are more in line with shareholders’ and are incentivized to think about total return and dividend payments.
In today’s inv
estment environment with low yields, savvy investors will continue to look for safe havens and better yielding alternatives, with the fortunate recipients being gold and dividend-paying stocks.
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By Frank Holmes,
CEO and Chief Investment Officer