Gold Scents

We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they “catch on”. It took 18 before they noticed the tech bubble.

Once they do start to “get it” we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000.

At gold’s top, half of your neighbors will be buying gold (not selling like they are doing now).

At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.

At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals.

At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins.

At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

At the top the population will believe that we have to go back on a gold standard. By the way, a gold standard never stopped any country from debasing its currency. In ancient Rome they clipped some of the gold out of the coins. Roosevelt confiscated and arbitrarily revalued gold in the 30’s. A gold standard will not prevent a government from trying to get something for nothing by debasing the currency.

At the top stocks will be universally hated and gold universally loved. In reality, stocks will at that time, represent true value. Much more so than a shiny metal with virtually no industrial uses.

At the top smart money will eventually come to their senses and realize that true value (profitable companies making the necessities for life on Earth) are being given away for pennies on the dollar to purchase a shiny metal that really has no intrinsic value.

Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?

In today’s video on gold, we share with you the 4 instruments that we are looking at and share with you our projections for the spot gold market. Click Chart to view the video

by Tyler Durden

The closing of gold at an all time high price did not prevent GLD from purchasing 1.9 tonnes of gold on the last 24 hours. The ETF increased its gold holdings NAV from 1306.1 to 1308. The all time record high holdings of the precious metal represent a 7.5% increase in the tonnage of gold held in the past month alone, which increased by 91 tonnes, or 7.5%, from  1217 tonnes. As the chart below shows, we have entered into a parabolic purchasing period for not just GLD, but for all other precious metal ETFs, which struggle to keep their NAV at 1. In fact, if those who claim that ETF are among the primary sources of gold demand currently, such reindexing is now creating a positive feedback loop, whereby daily record gold prices are forcing the ETFs to purchase more and more gold to retain a mandated NAV, which in turn is leading to even higher prices on the margin. The accumulation blow off phase has begun, and with a variety of ETFs announcing either shelf or follow on offerings, with the proceeds to be used to buy gold, it is only a matter of time before the actual price blow off follows. A more suitable question is why, if the purchasing of gold has picked up so much, has the gold fixing not followed?

By Jordan Roy-Byrne, CMT

Escalating sovereign debt problems in Europe has prompted some to wonder if another “Lehman” type collapse is on the horizon. As a result, some precious metals observers have grown cautious, fearing a replay of the events of two years ago. While it is always prudent to be cautious with an extremely volatile sector like the gold stocks, the facts illustrate major differences between their fundamentals now and in 2008.

Most notably, the real price of Gold is rising. The real price of gold tends to lead the HUI/Gold ratio and it also provides a positive omen for the gold stocks. We’ve noted in past missives how a simple analysis of Gold/Oil and Gold/Industrial Metals can provide an indication of the future direction in HUI/Gold. As you can see from the chart, the recent soft panic has spurred Gold much higher against both Oil and Industrial Metals.

What is intriguing is that deflation is the catalyst for gold stocks while inflation is actually not a positive for gold stocks. The reason is that in a time of deflationary forces, Gold will rise relative to mining costs such as labor, oil and industrial related costs. Hence, gold stocks performed well from 1931 to 1935, in the 1960s, 2000-2006 and recently in the last 18 months. When inflation hits the economy, it eventually cuts into margins of gold companies. Gold was rising in 2007 and 2008 but high oil prices, a very weak US Dollar and economic demand contributed to rising costs.

Moreover, it’s important to note the differences between a credit crunch in the economy and a sovereign credit crunch. A credit crunch in the economy, as we experienced in 2008 tends to significantly impact risk assets such as stocks and commodities. A credit crunch amongst governments has the most impact on bonds and currencies. Gold and Silver, as currencies, will benefit. Hence, in the last few months, even with downward pressure on most markets, Gold has risen while the leveraged Gold plays (mining stocks and Silver) have held up quite well, unlike in 2008.

Going forward, the macro forces will continue to support the gold stocks for at least a few years. As we’ve written in the past, there is little reason to think Gold won’t continue to outperform in the next few years. This means that the gold and silver stocks have an even brighter future ahead.

Unfortunately too many mainstream investors are too scared of the gold stocks to take advantage of the potential massive gains in the years ahead. Hence, we created a service that provides professional support and guidance so that traders and investors can better navigate what lies ahead. Consider a free no risk 14-day trial, which entitles you to our most recent and future updates.

Jordan Roy-Byrne, CMT

http://www.thedailygold.com/newsletter

Fast Market Focus

The August Gold is leaving little “technical” gaps all over the place.  Classical technical analysis suggests that gaps on a chart will be filled. (It doesn’t specify when though.)  I will not worry about the gap on the downside being filled and instead, focus on the upside.
Should the Gold attempt another high, I will tentatively focus on the 1267.0 area to initiate a short position with an initial profit objective of perhaps the 1257.3 area.  If the Gold moves up rather soon, I could imagine a $20 – $30 fall from its highs, similar to the one from 1254.5 down to 1223.1.
That’s why it’s so hard to buy a dip or stay on a trend- the corrections can be pretty deep.

I prefer to sell to someone who wants to buy at semi-outrageous new highs and ride his ‘slap on the wrist’ down a little ways.  I’m more comfortable when I’m on the other side of someone’s trade when I believe they are most likely doing the wrong thing. (In this case, chasing the market).
Long term Trading is a whole ‘nother ball game.
The 60 minute bar chart below is making an ‘upside down’ bear arm formation (thought you’d heard ‘em all, huh?). Translation: The formation is bullish. Bear Arms can produce big moves from where the shoulder turns.  In this case, since it’s an upside down Bear Arm, we could see a move (perhaps rapid) well beyond the recent highs of 1254.5

By Jordan Roy-Byrne, CMT

The following is a brief snippet of Wednesday’s 16-page update. Go here for more information on our service and a free 14-day no risk trial.

Gold

Gold remains on track (as far as our template). Here is the potential bullish outcome. The longer Gold holds above $1160 and that trendline, the more likely the bullish outcome.

Sentiment remains supportive. See the GLD put-call below. Also, public opinion from sentimentrader.com is 69% bulls. Interim tops have occurred at 75% while significant tops at 85%. Consolidation for another month or two would leave public opinion near 60% bulls.

Gold Stocks

This is an interesting juncture for the gold stocks. There is enough evidence to make a case that the recent low will hold.

Note that the bullish percent index is at 45% (neutral to slightly oversold). Note that the 7-day GDX put-call is at a level consistent with bottoms. Note the put-call spike on Friday. Consider that gold stocks are performing well in real terms. Also consider that the HUI has twice recently held above both the 100 & 200 day-MA’s.

Initial support is 425-430, with very strong support at 380-400. Initial resistance is now 470-475.

Here is the GDX put-call data we referenced above.

Jordan Roy-Byrne

http://www.thedailygold.com/newsletter

By: Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

Proper planning with your finances is incomplete until you consider the endgame consequences of your investment decisions today. So, what are the tax consequences of selling gold, gold ETFs, and gold stocks?

There’s lots of conflicting and inaccurate tax information on the Internet about this. We know of one site that claims the sale of silver Eagles is exempt from capital gains tax due to some obscure law (not true). So, let’s nail down the current tax rules for selling gold in the U.S.

[The following information pertains to U.S. taxpayers only and is not intended as nor should be considered personal tax advice. Always consult a financial planner and/or tax professional before investing.]

►The IRS considers gold a “collectible” and will tax your capital gains at a 28% rate. This designation includes all forms of gold (other than jewelry), such as…

And the same designation and rules apply to silver, platinum, and palladium.

►“Reporting” requirements can be confusing. It is true that precious metals dealers aren’t required to report certain small sales to the IRS – but that doesn’t relieve you of the obligation. If you sold one gold or silver coin to your local dealer, he is not obligated under current regulation to report the sale. But selling at a profit requires you to report it and pay 28% tax on your gain.

Keep in mind that the Patriot Act obligates a dealer to report any “suspicious customer activity.” Therefore, don’t expect a wink from your dealer if you proclaim you won’t be reporting your sale or ask him to “book” only half the coins you sell him. There are people sitting in prison who’ve tried this.

►Gold stocks are not designated as a collectible and are therefore subject to the standard capital gains tax rates like all other stocks.

►Gold jewelry sales are not reportable. This makes the Heirloom Collection an attractive consideration and an excellent diversification maneuver (for both financial and romantic reasons!).

►We wouldn’t advise making your investment decisions based solely on tax considerations. You should own both gold and gold stocks for different reasons – gold for wealth protection and gold stocks for profit potential.

►There’s a lobbying arm for our industry, the Industry Council for Tangible Assets. Their efforts are mostly for dealers, but their website contains valuable information on this topic.

PFICs: Blessing or Curse?

For U.S. investors, there’s one more tax consideration if you own, or plan to own, a closed-end fund (whether it’s precious metals or otherwise).

For example, the Central Fund of Canada (which holds gold and silver bullion) is considered a Passive Foreign Investment Corporation (PFIC) for U.S. investors. This is a complex topic, but what I learned could save you some dinero now and some hassle later if you own a foreign closed-end fund like this one.

Keeping it simple, if you own CEF, you can qualify for the standard capital gains tax rates, instead of the 28% collectibles rate, if you file a timely and valid Qualified Electing Form, or QEF. There are several options you can take with a PFIC, but this is the most common election.

Even if you don’t sell the fund in any given year, you must file this form every year. If you don’t complete an annual QEF or make one of the other elections, you could get hosed when you eventually do sell because your gain will be considered ordinary income, forcing you to pay interest and penalties on top of the regular tax.

You can hold a PFIC stock for years without paying tax, but if you haven’t made a QEF or other election, you get the bad result we’re describing when you sell. Further, if the PFIC company reports income in a given year, this income is reportable and taxable as regular income that year, even if no stock was sold and even if the stock ended down on the year.

The point here is obvious: don’t blindly buy into a PFIC.

The QEF benefit is clear: you can cut your tax liability up to 46%, the difference between the 15% long-term capital gains rate and the 28% collectibles rate. Yes, capital gains rates are scheduled to rise next year, but this option still reduces your tax liability.

A successful investor is an informed investor, and you should read the prospectus of any closed-end fund before buying. And if you don’t want to mess with the tax hassle, use an ETF instead.
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What ETFs and closed-end funds do we recommend? If you like this kind of fact-based research, you might also appreciate our recent analysis of the best gold and silver ETFs, along with our just-released 2010 Silver Buying Guide. For only $39, you can access all our research and recommendations for one year, risk-free. To learn how the right stocks and funds can give you considerable leverage to gold itself.

Jeff Clark, Casey’s Gold & Resource Report

We released our 2010 Silver Buying Guide last week and the silver price promptly cratered. So does this change our view of gold’s shiny cousin? Hardly.

While industrial uses comprise about half (53%, according to GFMS) of silver’s demand, making it susceptible to bigger falls than gold in a weak economy, it is equally clear silver also responds well to inflation, as well as serious financial “dislocations” (to put it nicely).

There are many examples of this, perhaps the best being the late 1970s. The economy in the middle of that decade was going nowhere, so some investors dumped their silver holdings because demand would supposedly be weak. A big mistake, as we now know, because silver’s greatest advance occurred at a time industrial demand was, at best, flat. Instead, silver rose due to monetary concerns and rampant inflation, giving investors 500%+ returns in the latter part of that decade, with an easy chance for even higher gains.

So if you’re buying silver to protect yourself against inflation and out-of-control government spending, then – as Doug Casey is fond of saying – sit tight and be right.

Still, it might be useful to contemplate how far silver could fall, particularly if you don’t own enough and are looking to add to your holdings.

The following chart examines all the major corrections in the price of silver in the current bull market (2001 to present). I only included corrections greater than 10%, many of which were big and sudden, much like we’re experiencing now.

You can easily see how volatile silver has been. Yet amidst all that volatility, the price has risen 334% from its 11-21-01 low (as of May 21).

Based on this data, we can make some projections. Our recent high in silver was $19.64. Therefore…

These projections cast a wide net, to be sure, but there are still some conclusions we can draw:

Prognosis? Excellent.

Since we don’t know where the next bottom is, one effective way to handle purchases is to buy in tranches. You could place limit orders at a couple different levels.

But we might save the Big Purchase for a true fire-sale price, something greater than the average sell-off. There won’t be a big flashing light that says “Buy Now!” when the bottom forms, but the bigger the drop, the easier it will become to ease into the market.

Easy? Yes, if you have lots of cash (we currently recommend in Casey’s Gold & Resource Report that one-third of assets be in cash). That big stash is going to give you the ability to load up on the cheap.

If you don’t have a significant amount of Federal Reserve notes saved, it’s not too late to start. And I’ll bet you a six-pack on a Tahitian beach you’ll feel differently about this sell-off if you have a big pile of cash waiting to deploy.

The big SALE! may very well be on its way. I hope you’re getting ready for it.

What silver investments are we buying on the corrections? Check out our 2010 Silver Buying Guide, which includes a list of the dealers with the cheapest prices on all forms of physical silver, a brand new silver ETF recommendation, and the two best silver stocks in the world. You’ve got nothing to lose – a one-year subscription to Casey’s Gold & Resource Report is only $39, and you can try it risk-free for 3 months here.