Mining Stocks May Be Leading Gold (Even) Higher
Based on the November 11th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
One of our favorite authors, Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute and author of “The Black Swan: The Impact of the Highly Improbable,” wrote about this topic last week in The New York Times.
He states off the bat that he has a solution for the problem of bankers who take risks that threaten the general public. It’s very simple – eliminate bonuses.
“I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.”
He notes that more than three years since the global financial crisis started, financial institutions are still acting irresponsibly. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. Taleb says that it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008. He writes that it is time for a “fundamental reform”:
Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever...
The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.
Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called “black swan” events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters.
Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust.
It will take time for the plot of this play to reach the denouement. There will be plenty of twists and turns, but the star of the show – gold – should continue to shine and push mining stocks higher.
To take a look at gold and silver mining stocks’ performance for the upcoming short term, let’s start this week’s technical portion with the Euro Index (charts courtesy by http://stockcharts.com.)
In the very long-term XAU gold and silver miners’ index chart, we still do not see a move to the level of previous highs. However, the index is well above the lower border of the very long-term rising trend channel so the outlook is still bullish at this time. No other important signals are seen here this week.
In the long-term HUI Index chart, the short-term trend appears to be up similarly to the situation in silver and gold despite a move down on November 9th. Gold stocks moved to the 580-level resistance line and bounced back subsequently which seems to have verified the recent breakout. An additional rally is quite likely from here on. The RSI level is far from overbought. At this time, the RSI appears to indicate room for an additional period of rally in the index.
In the short-term GDX ETF chart, the short-term trend continues to be bullish. Last Wednesday’s decline was stopped by the 38.2 Fibonacci retracement level based on the September to early October decline and the miners appear to have verified a move above this level.
Prices are above the rising trend channel and this is bullish for the short term. Strong volume was seen on last Wednesday’s decline but this is not a bearish sign here. In early and mid-October, as well as early November, high volume levels were seen as local bottoms were reached. The next moves were to the upside.
The situation now seems to be consistent with what we wrote on November 11th in our essay on the bullish outlook for gold:
(…) the short-term trend for gold remains up and Wednesday’s price decline was truly quite small in relation to the size of the recent rally and the daily upswings of the past week. This is a sign of strength especially when considering that the dollar was moving higher as well. It appears that the outlook for gold continues to be bullish for the short and long term.
Summing up, the trend for mining stocks continues to be bullish as is the case for gold and silver. Last week’s declines appear to be insignificant in terms of the bigger picture.
To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.
Thank you for reading. Have a great and profitable week!
* * * * *
Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?
Sunshine Profits provides professional support for
Gold & Silver Investors and Traders.
Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-up for a free weekly trial to see if the Premium Service meets your expectations.
All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.
By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.