“Civilized people don’t buy gold.” – (Charles Munger, Berkshire Hathaway Inc.)
For a while this department was called the Gold and Silver Sector, giving recognition to the problems left over from the speculative surge to April 2011. With what seems to be the start of a new bull market, the appropriate title is used again.
Is it a new bull market?
As noted, the dismal slide in gold stocks accomplished one of the worst oversold conditions in a hundred years. Actually at 24 on the monthly RSI, it was the second worst with 1924 at 22 being the worst. Other examples at 25 to 27 occurred in 1942, 1948 and 2008, which is the full list.
Also noted in mid May was that once the condition registered the rally was virtually immediate. The low was 39 in mid May.
Let’s put this in perspective. GDX set a good momentum high at 64 in April 2011, but it was not in the order of the momentum high for silver. The next high for the GDX was at 66 in September with the same 70 on the RSI.
Our point has been that as the selloff on gold’s completed it would be equivalent to the overbought for silver a year ago. Some sort of symmetry.
Technical measures of the plunge suggest a new bull market. The rise out of the middle of May has had two constructive corrections. But, a large test of the lows and subsequent advance would confirm a new bull market.
Let’s look at the fundamentals–not of the supply/demand analysis, but in what influences profitability.
The world has likely started a cyclical recession, which means a cyclical bull market for gold’s real price. One proxy is our Gold/Commodities Index, or GCI. This rose to 499 with the crisis that ended in September and slumped to 419 in mid March. The test was successfully completed at 421 in early April and it has rallied to 464 this week.
This also needs a bigger test to conclude the possibility of a cyclical advance.
There could be some new developments in the tech sector, but the gold industry is the only sector with a track record of doing well when most of industry and commerce is suffering post-bubble pricing pressures. Such pressures show up as positive pricing for the gold sector.
Our advice in early April was to begin to accumulate into weakness.
Our advice to Mr. Munger is that civilized people should abhor an experiment in unlimited government funded by central bankers with unlimited ambition.
BOB HOYE, INSTITUTIONAL ADVISORS