April 23, 2013
Gold: The End of an Era, or Market Manipulation?
Gold prices tanked in a big way beginning about 2 weeks ago. In my last newsletter I wrote that gold appeared to be trying to put in a bottom, and provided a good low-risk entry point, meaning if I were wrong we would know after only a small loss.
The breakdown in gold beginning Friday, April 12th was breathtaking in its sharpness. Gold was down over 11% in two days creating one of the clearest technical breakdowns in memory.
Technical analysis is done using the charts and graphs that appear like a foreign language to those not familiar with them. Basically a technical breakdown says “Get out of the way! No one knows where this decline is likely to end.”
Gold has seen a spectacular rise over the past 10 years, and that rise ended with an unsustainably steep uptrend in 2011. Up-trends like that are called parabolic rises in polite terms or blow-off tops in market terms. They simply cannot continue without entering the realm of tulip mania, and history is most unkind to investments after blow-off tops. Most give back all of the gains since the historic uptrend began. All of them.
Consider the tech-heavy Nasdaq 100 stock index that was at 804 in April of 1997, rose to 4,704 on March 27, 2000 and once again hit 804 on October 7, 2002. It gave back everything made in the go-go years of the late 90’s. Everything.
I probably don’t have to give details of the recent real estate crash that knocked real estate prices back to levels not seen since the 1980s, well before the recent run-up in prices. More than 20 years of gains were given back.
But that couldn’t happen to gold, could it? Actually it did once recently. In the late 1970’s gold entered a historic uptrend that carried it to over $800 per ounce in 1980 before dropping all the way back down to $265 in the year 2000. Gold took a 66% loss and gave up almost all of the gains of its historic run in the 1970s. Silver was even worse.
Will gold prices do the same this time? Of course no one knows, but as George Santayana said, “Those who cannot remember the past are condemned to repeat it.”
But what has caused the recent decline is also an interesting question. The manner of the decline suggests wholesale dumping of gold, which begs the question “who is doing the dumping and why?” Most professional traders don’t dump holdings, they spread sales over long periods so as to not “move the market” or drive the price down before they are finished selling.
The whole thing smacks of market manipulation.
Contracts selling 500 tons of gold were placed on Friday, April 12th according to an article published by John Mauldin. That is a lot of gold. About 16 million ounces, if you are counting. Over $24 billion worth if you prefer to count in dollars. This begs the question, “who has that kind of money?”, which narrows the field of potential sellers, considerably.
Also consider that the manner in which the gold was dumped drove the price down by over 11% in two days. This cost the sellers around $1 billion in losses that could have been avoided by more judicious selling over a few weeks, perhaps. This raises the question, “who has $1 billion to give up so easily?”
And who has an interest in having gold not go up any more? Or, since the price of gold moves opposite to most paper currencies, who has an interest in seeing their paper currency not fall any more? Interesting question, isn’t it?
This issue could be the prelude to major happenings in the financial world so I will be watching it and reporting more as it is revealed.
Scottsdale Office
Mental Floss
Q: The best burglar proof idea this year?
A Slice of Life
Shriners are known for having fun and help kids.
On May 4th the Yavapai County Shrine Club will be raising money for the Shrine Hospitals with its annual golf tournament at Prescott Country Club. If Shriners have impacted the life of your family or someone you know, consider helping by becoming a $100 “hole sponsor” or playing in the tournament – it is a scramble so it is designed more for fun that serious competition. Please call the office at 778-4000 for an application if you would like to play or contribute.
About that same time the Shriners will be selling bags of oh-so sweet Vidalia onions for $10 per bag. If you would like to reserve a bag of onions, just call the office at 778-4000 and I’ll make sure you get one. Again, all proceeds go to support the Shrine Hospitals that treat children that have burns, orthopedic problems or cleft lip with no cost to the family.
Thanks for your help.
How’s the market doing?
For the past week or two, stocks have dipped sharply then rallied back several times. Volatility is what this is called. It is too early to know if last week’s action is a short-term event or part of a longer term topping pattern. Figuring that out will take more time as we observe the relationship between up-legs and down-legs to determine the markets direction.
Our proprietary Safety Net Indicator, which is based upon changes in volatility, has been flirting with a sell signal this past week, but hasn’t exactly kissed it on the lips. As a result, my discipline is telling me to be being patient as the market chooses its direction.
Right now the market is going sideways, but has clearly lost its upward momentum. Whether the upward momentum will re-establish itself or the market will roll over to the downside is still up in the air. Stay tuned.
The old price highs, such as the S&P 500 Index’ 2007 high at 1565, tend to provide a lot of resistance the next time there is an attempt to break through those levels. The reason is that the many investors who didn’t sell at the previous highs and kicked themselves as they rode a large and painful decline to the stock market bottoms of 2008-09, now see a chance to show they aren’t going to let that happen again and sell near the level of the old top. It is akin to the generals always fighting the last war instead of the current one.
Emerging Markets are really in bad shape. China has been stair-stepping down steadily for 3 months, and is still well below 2011 highs. During the financial crisis of 2008, China’s economy provided stability for the world. With their economy, as well as other emerging market economies weakened by the severe recession in Europe, we may not have the luxury of other strong economies to lean on if another financial shock comes along.
The bond market continues to strengthen as the stock market struggles. Money coming out of stocks has to go somewhere, and bonds are a logical choice. For this reason, stocks and bonds continue to move opposite to each other. This is good for traders who can move back and forth. However at some point, the stock market will begin to go down because interest rates are rising, pushing bond prices down, and then there will be no place to hide. I‘ll let you know when I see that beginning to happen because it will be very significant when it does.
Trade Orders
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If you choose to leave instructions on the phone or email, be sure to follow up with a phone call so that we can verify your order has been received as you intended.
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By this time of the month, you should be receiving your monthly or quarterly statements from the custodian of your accounts. These statements are not printed by Hepburn Capital to provide you an added level of protection, but it is important that we ensure that you are receiving them.
If you have not received statements on accounts that we manage for you, please call our office at 778-4000 so we can resolve the issue.
What’s Going On In Your Portfolio?
The only change in portfolios recently was our sale of gold on the morning of Friday, April 12th after it caused a small loss (about ¾%) to our model portfolios.
As of this writing on April 21st, the Flexible Income model now holds municipal funds, which has strengthened nicely after softening in March. Also floating rate funds, diversified bond funds, a couple of high dividend real estate stocks and about 12% cash.
The Shock Absorber Growth model holds medical, real estate, banking and Australian stock funds, a couple of diversified growth funds and 12% cash.
Adaptive Growth and Adaptive Balance funds own a blend of both of these models.
Municipal Income accounts are fully invested in high yield muni funds.
Our Spotlight Strategy
Shock Absorber Growth
With our Shock Absorber Growth strategy, we strive to provide growth in all markets from a blend of both long and short equity investments.
We first select the strongest of about 40 different stock market segments, sectors and regions, and then select the most complimentary inverse funds to use as a Shock Absorbing hedge for those investments. The HCM Safety Net indicator is designed to warn of sudden potential declines, in which case stock market exposure is quickly reduced.
