Wednesday, October 21, 2009
Why the Colonel Stopped Buying Gold
*** BREAKING NEWS *** Oil pops to $82.06 and gold to $1065.2 as the US Dollar drops to a new 14-month low of 74.99 (.DXY) (10:23 AM PDT)
*** BREAKING NEWS *** Copper has topped the elusive $3.00 level (December Contract, COMEX)
It is 5:50 AM, grab a cup and let me explain my headline before you think I'm having a senior moment. For someone to announce they are no longer buying gold in a community that derives a sizable revenue from local gold mines is probably as welcome as spring mud in Bean Flat. I understand that sentiment and before you haul me off to the landfill let me explain my position.
If you buy and hold gold for five years or more and don't give a flip about market dipsy-doodles, you can probably buy gold at any time, at any price. The long term prospects for a weakening dollar and rising gold price are quite sound. In a moment, I'll direct you to an article that will give you bunches of reasons to follow the yellow brick road.
That is, of course, my problem. It seems everyone is buying or selling gold and that makes me more than a little nervous. I can't turn on the TV lately without some shill yelling at me to buy gold coins or gold bars or gold trinkets. There are other ads urging me to stuff gold jewelry and wedding bands into mailing envelopes for CASH, CASH, CASH! The talking heads yak endlessly about the worthless greenback and the manifold virtues of GOLD, GOLD, GOLD!
The Colonel may be dead wrong but my contrary nature won't allow me to follow this crowd into the movie theater. Just to prove I'm an ornery cuss, I started buying the US Dollar Index (USDX or .DXY or "Dixie") last August and continue to buy a little more each time it hits a new 52-week low. Lately, that has been about every other day. We talked quite a lot about the Dixie last week; Whistling Dixie...What is a Weak Dollar?. I'm still holding on to a gold position but did take some profit north of $1000/oz.
Goldman Sachs (the smartest kids in the class or smartest devils depending on your viewpoint) has warned recently about the weak dollar mantra and related commodity rally. Michael Holland, president of Holland & Co in New York recently summarized the Goldman view to Reuters:
"You could say Goldman are looking at the commodity markets and saying a number of commodities have come a very long way and it's probably time for them to be pulling back."
"It looks like, for most people, the dollar is just a one-way trade now," Holland said. "Goldman probably feels differently as they have been around for too long, and been too successful in the commodities trade, to know there is anything such as a one-way trade." (Reuters, 10/16/09)
The Colonel actually likes to have one foot on either side of a trade. As I stopped buying gold and started to accumulate the Dixie, I also started to pickup commodity-sensitive names to hedge the weakening dollar. Here is how my Dollar trade sets up with portfolio share and gain(loss) for each element:
Weak Dollar side:
Energy Canada (ECA) 12.5% share, gain 15.7%
Harry Winston Diamond (HWD) 4.0% share, gain 24.4%
Potash Corp. of Saskatchewan, Inc. (POT) 9.8% share, gain 10.59%
San Juan Basin Royalty Trust (SJT), 4.6% share, gain 50.0%
SPDR Gold Trust (GLD), 4.9% share, 12.7% gain
Strong Dollar side:
DB US Dollar Index Bullish Fund (UUP) 60.5%, 2.1% loss
Total Portfolio 100%, 4.4% gain
The Colonel likes Canadian companies because you get a built-in US dollar hedge (ECA, HWD & POT). I'm quite happy to settle for a small net gain (4.4%) until the market direction becomes more clear. If commodities dive, one takes profit on the dollar weak-side; when (and if) a dollar rally tops, one takes profit on the strong- side. If commodities and the dollar crash together, get out of Dodge pardner!
Oh, here is that article on why I'm wrong and crazy as cattle on locoweed:
Gold at $1250+ within 6 months - hold on to it! (Gold Report,10/21/09)
I can understand why gold may reach $1250 but the ole Colonel will return to see this movie when the theater is a little less crowded. Stay tuned.
By the by, oil briefly crossed into $80 territory yesterday.
Enough hedging, let's walk the walk:
4-WD is OFF - the VIX or "fear index" is below 25, smooth markets expected in the near term (what's this?)
Yellow light is ON for possible adverse regulation/legislation (mercury emissions)
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Oil is up $0.58 in early trading to $79.70 (December contract); Gold is up $1.8 to $1060.4 (December contract, most active); Silver is up $0.102 to $17.660 (December contract); Copper is up $.0400 to $2.9720 (December contract); Molybdenum remains steady at $13.625.
The DOW is down 31.06 points to 10061.13; the S&P 500, down 3.66 points to 1094.25. The miners are happy:
Barrick (ABX) $38.64 up 2.09%
Newmont (NEM) $46.65 up 1.44%
General Moly (Eureka Moly, LLC) (GMO) $2.86 up 1.42%
Freeport McMoran (FCX) $80.72 up 2.65% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are happy-pappy, (a "tell" for General Moly):
Nucor (NUE) $46.48 up 1.80% - domestic steel manufacturing
ArcelorMittal (MT) $39.42 up 0.84% - global steel producer
POSCO (PKX) $117.01 up 1.54% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 1.24% to $1,284,260.49 (what is this?).
Headline Photograph by Mariana Titus