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As a contributor to the New Low Observer (http://www.newlowobserver.com/about-this-site), we intend to give new insights on a low risk approach to trading in dividend paying stocks for tax deferred accounts. The New Low Observer (http://www.newlowobserver.com/about-this-site) is not intended for... More
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  • Your Essential Review On Gold Stocks 3 comments
    Mar 8, 2013 1:17 PM | about stocks: GLD, GDX, GDXJ, ABX, NEM, AEM, IAG, NUGT, DUST, GG, GORO

    Gold, and to a greater degree gold stocks, typically decline whenever there is a general stock market decline. We have examined the price of gold and the fluctuations of gold stocks as far back as possible. From our experience there have been few instances when gold, and especially gold stocks, have parted ways when the overall market declined.

    The following are our Seeking Alpha articles on gold and gold stocks:

    "Why Gold Will Decline More than the Markets" (found here: http://seekingalpha.com/article/106544-why-gold-will-decline-more-than-the-markets) from Nov 18, 2008. In this article, we cite the work of David Marantette, author of the Goldstock Letter, who argued that when the Dow declines -10% or more gold and gold stocks are likely to decline by a greater percentage. The data covers the period from 1975-2007.

    "Gold - Not the Safe Haven People Think it Is" (found here: http://seekingalpha.com/article/109880-gold-not-the-safe-haven-people-think-it-is) from Dec 9, 2008. Due to the outrage at the first article, and claims that gold did well in the "great" Depression, we examine the performance of gold stocks from 1924 to 1933. We included the high and low prices from Poor's (predecessor to Standard and Poor's) of gold stocks from 1924 to 1933 to show that gold stocks got hammered at the same time that the Dow Jones Industrial Average got crushed. In fact, the decline in gold stocks began in 1925 rather than 1929 for general equities and ended at the same time in 1932.

    "The Lessons of Homestake Mining in Gold Bull and Bear Markets" (found here: http://seekingalpha.com/article/234105-the-lessons-of-homestake-mining-in-gold-bull-and-bear-markets) from Nov 2, 2010. The gold stock from which all other gold stocks myth springs from, we examine exactly why Homestake [HM] was unique as a gold major in its ability to succeed where other gold stocks haven't. We point out government and internal policies that helped [HM] be the exception rather that the rule. Unfortunately, those who wish to propagate "stories" about gold stocks doing well in the "great" Depression usually hoist [HM] as the token gold stock.

    There is one period that gold stocks did act as non-correlating asset and that was the period from 1972 to 1974. While the Dow Industrials were going down by -40% gold stocks made a massive move up as represented by the Barron's Gold Mining Index. We believe this was due to the recent actions by the Nixon administration closing the window on gold thereby allowing gold to find its equilibrium, subsequently gold stocks followed along. Unfortunately, from 1974-1976, gold declined -50% and gold stocks got crushed to the tune of -66%.

    We hazard to bring up the 6 month period from March 2008 to October 2008 when gold sank -30% and gold stocks declined -68%, since those in denial, and not knowing history,claim that it was an anomaly.

    Our article titled "A Strategy is Needed For Lagging Gold Stocks" (found here: http://seekingalpha.com/article/304922-a-strategy-is-needed-for-lagging-gold-stocks) introduces our Gold Stock Indicator specifically designed to address the very question that you have, determining when is the most ideal time to buy and sell gold stocks.

    Our Gold Stock Indicator provided the following buy recommendation of DUST on February 8, 2012 (found here: http://seekingalpha.com/instablog/242682-new-low-observer/293271-gold-stock-indicator-points-down). Subsequently, DUST increased +54% by the time we recommended selling DUST and recommended preparing for a buy indication of NUGT on April 4, 2012 (found here: http://seekingalpha.com/instablog/242682-new-low-observer/474131-gold-stock-indicator-nearing-a-buy-signal-for-nugt).

    The purpose of our Gold Stock Indicator is to circumvent the common misconceptions of holding and hoping when it comes to gold stocks, at the same time avoid periods of substantial decline in gold stocks like that of November 2010 to the present.

    As we've said many times before, gold stocks can be easily gutted IN THE MIDDLE OF A GOLD BULL MARKET as outlined in our previous work.

    • In the following link accessible to subscribers of our site, we outline our specific plan of action based on our Gold Stock Indicator. Continue reading...

    Disclosure: I am long NUGT, IAG, NEM.

    Themes: Gold Stocks Stocks: GLD, GDX, GDXJ, ABX, NEM, AEM, IAG, NUGT, DUST, GG, GORO
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Comments (3)
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  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    Gold is not the same as "gold stocks." Gold did great during the Great Depression since by definition its 75% increase in nominal value can hardly be considered anything but great, especially in comparison to the stock market.

     

    Nixon closing the gold window in 1971 did not affect gold. Gold forced Nixon to close the gold window. De Gaulle recognized the opportunity to purchase gold below market price from the U.S. Treasury, and so France was one of, if not the first foreign countries to exercise that option. The cumulative effect was draining U.S. Treasury gold reserves, so Nixon increased the official price of gold several times and eventually closed "the gold window."

     

    Gold had been trading freely and independently of the U.S. fixed price for decades before 1971. The U.S. and U.K. (and other countries) colluded to suppress the price of gold when it started to exceed the official U.S. price in the mid-1960's. This operation was sometimes called the London gold pool. They failed multiple attempts, which led to the aforementioned opportunity for foreign central banks.

     

    The creation of gold bullion coins (specifically intended to trade near the spot price of gold) starting with the Krugerrand in the 1960's, and the change in U.S. law in 1974 allowing citizens unfettered access to own gold, likely did affect gold. But Nixon's 1971 move was most definitely a response to foreign central banks, not a cause of gold market action.
    9 Mar 2013, 04:21 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2030) | Send Message
     
    Author’s reply » Greetings AgAu,

     

    Thank you for taking the time to comment on our work. Regarding your thought:

     

    "Gold is not the same as 'gold stocks.' Gold did great during the Great Depression since by definition its 75% increase in nominal value can hardly be considered anything but great, especially in comparison to the stock market."

     

    The only reason gold "...did great..." during the "Great" Depression is specifically because the government artificially supported the price. That is hardly a justification for why gold did well. It is truly amazing that an argument for gold could hinge on the periods when gold was fixed, rigged, propped or manipulated by government decree. Where is the logic in that?

     

    The rest of your comment hinges on and navigates around the closing of gold window in 1971. A non-event and the first semblance of reality in the U.S. gold market.

     

    CBs around the world accumulate gold for only two reasons:

     

    1) People are fooled into believing that there is more stability in the currency simply because a government has gold. All governments use gold to [A] legitimize their currency and [B] later debase. For some reason, people are fooled by the bait-and-switch every single time.

     

    2) The more gold a government has the better able they are to justify their excessive printing of paper money. The race for gold in a central bank vault is for the purpose of more printing of dollars, yen, yuan etc. Those with less gold are criticized and quickly fall out of favor. Those with more gold are allowed to debase until it is too late. Happens every time, yet investors in the marketplace fall for the exact same ruse every time.

     

    Since gold is THE tool of CBs to legitimize their effort to issue currency, it is hard to believe that people support the idea of gold as the cure to the profligate issuance of currency. This from my most recent read on the topic:

     

    "Four leading merchants, advised by Minomura, agreed that in order to inspire public confidence in the paper money it should be distributed together with the familiar gold and silver currency when it was put into circulation...Such was the precarious beginning of Japan's modern currency system (source: Roberts, John. Mitsui. 1973. page 91.)"

     

    Anywhere in the world, gold and silver is the pawn of governments to issue paper. Sadly, the religious high order of gold marketers who defend gold and rail against government manipulation are handmaidens to the cause of more paper. Worse still, a gold "standard", if ever implemented, ironically imposed and enforced by a government, is the purest form of manipulation on par with price controls.

     

    Now, in regards to gold stocks, again, history is clear on that topic as well. This explains why gold stocks have been hammered in the middle of a gold bull market. Sadly, the reality of what happens to gold stocks is purposely ignored or dismissed despite the insurmountable evidence.

     

    Our work on this topic has been presented far in advance to educate investors so that their investment in this arena is done with a more complete understanding of the risks. Our approach stands juxtapose to those who have continually recommended buying gold stocks from the beginning of the decline in December 2010 (in the XAU and HUI gold stocks indexes) to the present.

     

    Without a strategy, seemingly rational people that invest in gold stocks will succumb to the conspiracy talk when they are getting financially wiped out by buying into a decline based on fear and selling into the rise without a plan.

     

    Thanks again, AgAu. Hope all is well.

     

    Best regards
    10 Mar 2013, 01:19 AM Reply Like
  • blueice
    , contributor
    Comments (3006) | Send Message
     
    Hail NLO!

     

    Thank you again for retelling this story...Boy, did I get quite a history lesson when I read it the first time...

     

    In the 2008 & 2009 bear market, Au and the miners joined the market decline, albeit with less losses, still cost those investors 30% especially the miners.

     

    I hope this piece is wide read for the sake of PMs investors...
    17 Mar 2013, 11:01 PM Reply Like
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