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The unusual behavior of gold lately is prompting much talk of a new phase in gold's 11 year bull market. From Jim Sinclair's math gauging a stronger climb beginning whenever the price crosses $1764 to David Nichols' monthly fractal forecast putting gold into a 64 trading day growth cycle into early October that he says will be the strongest yet in the entire bull market.

I won't go through all the technicals (you can see some technical analysis on gold at my blog) but suffice it to say that the math and geometry seem to be agreeing from independent means of analysis that a bull market phase change is occurring.

These cold, calculating methods are showing the result of a phase change in the hearts of investors. There is a big change in psychology that I believe has occurred over the last 3 years. This involves the basic question, "What is money?" Well, it's that green and gray stuff passed around or the electronic equivalent, you may say. But is it? That's what we used to think back in 2007. Is that what they're thinking over in Europe today? If you consider the reaction of the gold stocks in 2008 as compared to now, there is a vast difference. We've had the same rare 3 to 5 standard deviation market crash, but the gold stocks back then were annihilated along with all miners. But now they are being treated with so much more respect than the stock market. Why? It is because there is a fundamental change as to what is money. This change in view, among investors anyway, has important implications. We know that among those in government, it is an emerging issue.

In the Congressional hearings back in July where Ben Bernanke was being grilled by House members, we had this exchange between Ron Paul, who is part of a growing movement to abolish the Fed, and Bernanke, our current Fed chief:

Paul: "Do you think gold is money?"

Bernanke: (after a long, confused silence, as if he'd never considered such a question) "No. It's a precious metal."

Paul: "Even if it's been money for 6,000 years? Somebody reversed that and eliminated that economic law?"

Bernanke: "Well, you know, it's an asset. ...

Paul: "Why do central banks hold it if it's not money?"

Bernanke: "Well, it's a form of reserves."

Paul: "Why don't they hold diamonds?"

Bernanke: "Well, it's tradition...

"Tradition"? So it's like Sadie Hawkins Day? Well, I think Ben Bernanke may be out of touch with what we the people are coming to view as money. There is a paradigm shift going on from viewing gold as something your financial adviser has always recommended as 5% to 15% of your portfolio as a measure against the end of the world, to a view of gold and silver as a new means of exchange in a stable new world. This is well documented in the article over at The Daily Reckoning "Monetary Reform: The Beginning of the Beginning" by Charles Kadlec:

Fundamental reform of the world’s monetary system has begun. It is way too early and too amorphous to be front-page news. We are only at the beginning of the beginning of a popular effort to restore gold backed money to the center of economic activity.

They are circulating petitions in Switzerland, the avant-garde of stable finance, in the next few weeks about the Swiss National Bank repatriating all its gold holdings within the country and accounting for over 20% of the bank's assets.

This all is a clear departure from the view of gold as a "tradition" as the Fed Chairman expressed. And it is not just a government issue. It is becoming an investment issue that you need to be on the right side of. Abolishing the Fed, as Jim Rogers has been pleading for over the years, used to be a minority viewpoint, especially among market participants. But it is rapidly becoming a serious market reform option. Rogers keeps pointing out that before the Fed, we had sharp panics and down cycles, but the big and the incompetent had their property taken over by the survivors, and life went on - with much more market stability. Mismanagement wasn't continually financed by the banking system. This is aptly expressed by the following statement featured on CNBC this past Friday:

Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

This sounds very much like the currency/bail-out debate that has sprung up since 2007 - the driving force behind the 3 year change in behavior of the gold stocks mentioned above (who said it? Jim Rogers? It was that rogue investor Thomas Jefferson).

If we are indeed at the beginning of a reform back to a gold linked currency, what is the best way to invest in it? Well, the first impulse is to buy gold to the exclusion of everything else. There just isn't enough gold to back all our currencies, and it would drive the price much higher even if the backing included silver and other commodities. But the reform suggested above would likely take place in phases over many years, and maybe a better way to invest is to pay attention to the cycling that historically takes place between gold and the gold stocks.

The miners tend to either over or under-perform the metal in 4 year cycles. Gold stocks typically are about a 3:1 leverage factor on the price of gold, so catching an up cycle is certainly an advantage. In the four years since 2007, the miners have under-performed the metal. This has been aggravated by the introduction of gold bullion ETFs, a big source of competition to mining stocks for investors who don't want to buy gold futures contracts.

But many worry about some of these paper bullion alternatives and their ability to stay linked to the metal price. Gold miners give the 3:1 leverage on the metal (better if you pick wisely) and will always be linked solidly to the metal. Over this recent market debacle, they have staged a strong out-performance of the broad stock market. They look like they are ready for a multi-year cycle of out-performing the metal as well. Production costs for the miners have risen, repulsing investors. But they have risen from around $500 to a $600 to $800 range (pushing $900 in South Africa) while gold has climbed much more in percent over this time. The chief antagonist to the miners is the price of oil. But it has risen to about the $100 area where further climbs put the brakes on the economy, drop oil back down, and invite more easy monetary policy - good for gold. The miners' valuation relative to the gold price is at historic lows.

But as I discussed in my article "The Problem With Gold Stocks" you can't analyze them with cash flow curves, valuation ratios, and all the stuff I like to use. The miners perform in line with the recoverable gold they have in the ground and the prospects of getting it out - in other words, mining. Unfortunately, we investors have little skill in mining. You can lean on the knowledge of experts, but they all have one big shortcoming - they don't have the critical internal knowledge of a mining company (if they're obeying the law).

I have come to lean heavily on "IH". I look at technical condition, debt, and so on, but the most important single number I consider is the IH - the Insider Held percent of the shares. You can freely and legally get these numbers, and they represent not only the opinion of the very best experts in the field, but the very best experts on any one gold field. And when this opinion prompts them to put their money where their knowledge is - well, that is the most important opinion to me. I recently did an informal compilation of insider interest on about 60 gold miners that trade in the US under the US insider rules to see how strong a performance correlation exists with no other number than simply the IH. Here is what I found:


This was done in September of last year and looks at IH versus the previous year's stock performance. The results surprised me in that they were not very dependent on market cap. They all seem to have a performance abyss that they fall into if the IH drops below about 6%. This is a very crude study, but larger data sets and longer time frames would probably show enough correlation to make IH a prime number to consider.

Currently, some nice IH choices: (numbers from Thomson Reuters)

NSU

Nevsun Resources

20.00%

(stable)

ANV

Allied Nevada Gold

30.00%

(decreasing)

NG

Novagold

24.00%

(stable)

LODE

Comstock Mining

40.00%

(strongly increasing)

MDW

Midway Gold

15.00%

(increasing)

UXG

US Gold

24.00%

(stable)

Source: Gold's New Phase and Monetary Reform