Sunday, January 24, 2010

The US Markets and Gold

3 weeks into 2010 and already things are getting interesting. Going into the year, the market seemed confident of a strengthening recovery, an easy Bernanke reconfirmation, a universal revenue beat this earnings season and health care reform. Now it seems that all those things are up in the air. Bernanke will most likely still get reconfirmed but the doubt around Time magazine's "Man of the Year" and Wall Street's Messiah is a smack with a lead pipe to the knees of what is already a "shaky" recovery at best. Revenues were not an across the board beat with the financial stocks taking the brunt of it, as Meredith Whitney had warned, saying "I'm more bearish than ever.": the woman who predicted the demise of Citi, using good old fundamentals, put a buy on Goldman Sachs at near 140, and a sell at near 200, coupled with a downgrade on expected earnings for 2010 for the firm and other bank stocks (again using good old fundamentals, which despite the "experts' like Cramer who said about her call; "she's just thinking like a trader, I made some money now sell", the stock promptly fell from those levels and has not returned). Meridith Whitney is batting 1000 on financials, and the market simply refused to listen.

Now to top things off, with the recent Republican win in Massachusetts, The passing of the health care bill that got railroaded through the Senate on Christmas Eve by our Nobel Peace Prize winning President, may be in question. ( Much like the last President to receive the Nobel Peace Prize while still in office, Woodrow Wilson did Christmas Eve of 1913. Any one guess what disaster that bill created? Yup, the Federal Reserve.)

As a result of these things, and in my opinion being long over due, The market on Thursday has broken an uptrend line that has been in place since April and tested in July, November and December. This can be clearly seen on the daily chart of the S&P I have provided. A look at the weekly confirms the same but also provides a longer term picture that depicts that the market up until Wed, was more overbought than it was when the S&P first hit 15,000. MACD begins to look like top of a waterfall ready to plummet. CNBC is rejoicing that this is the correction everyone has been looking for for months. Ladies and Gentlemen, the rally from March till December was the correction. This is no bull market, just the Mother of all bear market rallies. This however has left the markets oversold in the shorter term leading me to believe a rally and a test of the trend line will soon take place. A failure will only confirm what I already know.

This of course comes at the same time that our president has announced his "War with Wallstreet". Disgusted with banker bonuses while the country has a 10% unemployment rate, Obama is determined to squeeze as much taxes from the only people in the country making any money so that his administration can continue to spend like drunken sailors. A second crash in the market will leave them with no profit to tax forcing him to look the other way while the public screams for "Stimulus Package #2". And they WILL get it.

What we must not forget is that Politicians will ALWAYS vote for inflation. Nobody wants a depression, no one will get reelected then. Ben Bernanke's father lost all of his money in the depression. This is why he has spent his entire life studying it. He will NOT have a depression on his watch. (although he might not be able to help it) This will give way to QE forever, and 0% interest rates for most of our life time. Inflation to the extreme.

Interest rates can be a funny thing. 0% interest rates spark inflation. At the realization that there is inflation, the market will demand higher interest rates on government bonds to protect themselves from it. The rule of 7 and 10 states that at 7% interest money (or debt) doubles in 10 years. At 10% it doubles in 7. In other words at 7% , our national debt of nearly 12.5 trillion dollars will become 25 trillion by 2020. 25 TRILLION DOLLARS!!! (This of course is assuming that in that 10 years we don't borrow another penny. If so it will ONLY be 25 trillion. Unlikely) Then, the federal reserve will need to print more money to cover the higher interest on the debt. The printing of money will lead to inflation, which will lead to higher interest rates, which will lead to increased debt, then more printing than higher inflation. In Short, 0% begats inflation, begats higher interest, begats more debt, begats printing money, begats inflation. (You can continue this formula to your heart's content, after all the government will.)

Before moving on to the Gold market and the dollar, I would like to comment on the housing market. For almost 100 years the inflation adjusted average home value in America has been at about $100,000, which is in today's prices 90 oz of gold or 7,700 oz of silver. The current price of the average home in America is $200,000 or 180 oz of gold or 15,000 oz of silver. At first glance you think "hmm $200k ain't bad." but put that in terms of 15,000 oz of silver and I'd rather invest in the silver any day. I find this interesting because there is loads of talk about the silver:gold ratio and the gold:dow ratio, but no one talks about home prices in terms of the metals. It of course is my long standing and long term belief that gold and silver prices are going much higher, but this also leads me to believe that home prices have yet to bottom and are at least in the short to mid term headed lower. (any at all thoughts and comments on this will be greatly welcomed and can be sent to me at

In the Forex markets the "short the dollar" trade that took months to become overcrowded leading to the end of the year squeeze that we saw has taken weeks to reverse. At this point its hard to find a dollar bear. I think the panic over Greece is overly hyped and unwarranted. If things get bad enough, the logical scenario will simply be for Greece to leave the EU. (either willingly or not.) There you go, that should make the EURO much more appealing, which lost months of gains in a matter of weeks and as a result is drastically oversold to the dollar which is drastically overbought on the dollar index. The dollar's recent failure to better the 200 day MA would have me believe resuming the original trend will once again take place. But enough about technicality's. I always say to "take your technical analysis with a grain of fundamentals" so lets talk fundamentals. Greece and California share one common thing; there debt ratings are both "junk" status. The difference is that while Greece is responsible for 3% GDP of the EU, California is responsible for 13%, over 400% more of America's. Who really should you be worried about? Now, I'm not saying buy the Euro what I'm saying is any and all dollar bulls now are missing all the fundamentals of that trade and focusing on what is only a technical picture, a blip in the grand scheme of things and are, to put it simply, just wrong. Period.

As for the gold market, action recently is beginning to look oddly reminiscent of the sell off that double bottomed at $865 in April. The total lack of interest in gold recently coupled with the conditions of the dollar and the broader stock market leads me to believe that a rally is not only logical, but imminent. We all know that fear of inflation and weaker dollar will equal higher gold as people seek a safe haven for there money, but fear of depression will push gold higher than fear of inflation, as can be witnessed through the past few years. At about 4pm on Friday the Dow Jones moved closer and closer at the close to it's lowest levels, while gold's response to this was moving closer to it's best levels. The dollar stayed flat. Fear of a "Double-dip" recession will rocket gold much higher than any 1% loss on the dollar index could. In the longer term, I was hard pressed to find a larger more dynamic chart formation in anything ever, than the cup and handle that gold has been working on for the last 30 years. I included a chart with target for it as this is more impressive than any chart formation I've ever even heard of. The estimated target, strangely enough is $1650, the same as Jim Sinclair's million dollar bet for Jan 2011.

In regards to the gold shares, it has long been a view of mine that gold stocks are drastically undervalued. It has also been a long standing view of the markets that gold stocks are drastically overvalued. I consistently here people say that they can't seem to fathom why Newmont mining is selling for over 30 some odd times earnings. But it is and it has been for quite some time now. I can't seem to fathom why their shares are selling for only double digit numbers. This is simply because I evaluate gold stocks differently than the market. The market evaluates gold stocks based mostly upon the all important worthless U.S. dollars they make. I evaluate gold stocks by how much gold per share I own when I buy them. Newmont mining, with 90 million ounces of gold in reserves, subtracting average cost to mine it (We'll round and say $500/oz) comes to more than a 1/10 an ounce of gold per share. The ultimate question is who will be right when it's all said and done. I have 100% certainty it will be me. In the longer term, when the market is more concerned with owning gold than part of a dollar profit, gold shares will have in my belief an astronomical gain.

But that's in the longer term. As for the short term, in May 2009, gold hit $990/oz. The HUI index hit 404. Here we are now in mid January 2010, and gold is $1100/oz, 11% higher than it was then, and the HUI index? 404. 0% higher. The HUI is not only holding on what has been good long term support, but it has maintained the up trend that has been in place since this time last year. My conclusion? Gold stocks aren't just on sale, there on the clearance rack. This is an overwhelming vote of lack of confidence in gold moving higher by the overall market.

In conclusion friends, my analysis tells me that this is one of the best buying opportunities for gold, reminiscent of $905 and $865, a clear sell signal for the market. Gold shares run the risk however of being sold off if the market moves lower too much too fast so keep your margin well at bay and as Jesse Livermore said,

"Be right and sit tight."

-Jonathan M Mergott

Sunday, January 10, 2010

Next stop 1275

Eek. Some of us are still writhing over that loss of $65 in one day. Those that bought at the top and followed the crowd that is. You, you've been buying under $1000 for months, so 1100 is still a gift. No Worries, were about to make more money.

Remember when gold last hit 905, and nobody gave a rats ass about the gold market? It was down every day and I was screaming "BUY"!!! that was the last pullback before finally blowing through 1000. We are there again. We will go now at least back to 1225, most likely onward to closing in on 1300. The money lies in the usual suspects. IAG, TRE, GSS. Also look at FRMSF.PK or Same stock first majestic silver. This is gonna go to 7 in a short amount of time.

We will see 1275 by the end of February. I believe 1500 by fall and 1700 by this time 2011.

This isn't just about profits any more. The inflation train is coming fast and hard. It will be an act of divine intervention if we do not see the beginnings of severe hyperinflation within 2 years. You can assume this to be as much fact as is the ground your standing on. You MUST do something about this. The actions taken by our elected officials will destroy the middle class leaving only the super rich to subsidize the super poor. The rich will always have the advantage to you. Most of the middle class will be dragged down. Some will be pulled up. It will be determined on one thing only. Gold, You either have it or you don't. Get ready to have gold be the topic of conversation again for the next few weeks, till everyone buys at the top and losses money. Then it will do nothing. When everyone is talking about apple again we will repeat the process.