Ricks Picks

Chuck Sees Stock Market, Gold Surging Higher

EST

Here is the latest from Chuck Cohen, a New York-based financial consultant who specializes in gold investments. At bottom is a speculative recommendation of a small but well-positioned mining company.   We should note that we do not share Chuck’s bullishness on the stock market, even though we are quite bullish on physical gold and silver. Also, while Chuck believes inflation is about to explode, we see deflation ruling the economy as long as real estate remains in a possibly permanent funk.  Here’s Chuck

Despite all the dire warnings, I’m convinced the stock market will continue to advance. This has implications for gold, since, as long as shares are moving higher, I am confident that gold will move higher as well. Moreover, the incredible gold fundamentals are about to be reflected in an acceleration in price that so far has been slow, measured and frustrating. At the conclusion I have made another gold exploration recommendation: Moneta Porcupine (OTC symbol: MCUPF).  This company appears well poised for the extremely bullish scenario that I foresee. 

 Paulson  

‘I’m a Contrarian’ 

First, I am at my technical core a contrarian. I have found that the majority of opinions in the media and in polls, especially at major market turning points, tend to be wrong; not always, but fairly consistently. That is why, when we read confident predictions of where the markets are heading, we should read them skeptically, especially when there is some kind of consensus. What we should now realize is that the stock market normally will do what we don’t anticipate it to do. Or as Richard Russell continuously warns, it will do everything it can to take your money. That is why so few really succeed at it. For instance, at the top of the manias that gripped our markets over the past ten years, how many experts warned you to get out? In fact, almost all of the so-called advisory services, economists and investor polls never saw what was coming until it was time for the post-mortem. But of course, I am certain that most of you didn’t fall into these traps. 

Which brings me to the current situation. I read and receive a lot of material from bearish market writers warning that an unimaginable deflationary decline is upon us. Together they suggest the collapse will take the stock market and more pertinently, gold and the mining shares, down precipitously. But amidst some pretty elegant arguments, I think this position is missing some critical technical signs. Here are some of my reasons for believing that we might be heading up, not down. My belief is that is that it will most likely be caused by the massive infusion of worldwide bailouts, and by the recoveries of some of the world economies. I don’t know how it may eventually play out, but it appears as though we are going to have an incredible inflationary binge, especially manifested in commodities. Even given this view, I still expect eventually to see turmoil and chaos down the road. Gold is not going up to incredible heights because the world is getting better. That may seem contradictory, but then again, we are living in extraordinary times. 

What the Rally Means for Gold 

The Friday Syndrome. Recently, Fridays, which tends to be a contrary day, have been unusually weak. If you go back to most of the market’s tradable bottoms, you will see that they were always preceded by poor Fridays, as well as by one or two days when the Dow was down over 100 points or more, such as this past Friday. There is nothing like an ugly day or two before a weekend to scare investors and make them bearish. 

Seasonality: We are now at the end of the year, when stocks have had only one major selloff (in 1973, but it didn’t really collapse until March 1974). The last two months tend to be the best time of the year to be long. 

Persistent strength in commodities: Oil, Copper, zinc, aluminum, nickel and lead have all more than doubled from their lows. Sugar and cocoa have also broken out. Finally, keep your eye on lumber. On Friday, even with the market down, it moved up sharply to its highest level in several months, and with the future months up much higher than the current price. As far fetched as this may seem at this time, this might be presaging a housing recovery. 

Paulson Barometer 

The John Paulson Barometer: This is not a classical indicator, but I’ll go along with the world’s best speculator (up 590% in 2007 and 40% last year). Paulson expects a huge commodity inflation down the pike (below) and I wouldn’t wager against him. Here’s a report on Paulson from Porter Stansberry, whose stunning prediction of the collapse of Fannie Mae and Freddie Mac was featured in Rick’s Picks well ahead of the event. “World’s richest and most successful speculator warns of great inflation,” is how Porter headlined the feature: 

“At a recent breakfast, John Paulson, the most successful speculator of the last 20 years, explained exactly how the great inflation will come to pass. Says Paulson: The banks will resume regular lending – thereby releasing all of the excess money supply into the system – within six to 24 months. Two or three years after that, we will see 12% annual inflation. 

“Paulson is recommending investing in gold. He’s already placed more than $4 billion of his firm’s assets in the metal. Why is Paulson building his position so early if he doesn’t expect inflation to kick in for four years? In a word: Scarcity. Paulson notes, of the $200 trillion of investable assets in the world, only $800 billion is gold. You won’t be able to get much of that $200 trillion into gold at any reasonable price. But that won’t stop people from trying. 

100% Invested 

“Here’s the part that sent a chill down my spine. At this breakfast, Paulson also gave a rare insight into what he’s doing with his personal money. Apparently, his fund offers a special option whereby you can invest using gold. According to someone at the breakfast table, you convert your cash into gold and buy into the fund using bullion. When you cash out, you are paid in gold at the value it is worth that day. Paulson is 100% invested in this style.

“When the world’s most successful speculator would rather be invested in his own fund via bullion instead of dollars… you gotta wonder why you’re still carrying greenbacks in your wallet.” 

Too Cautious for a Top 

Investor polls: Finally, let’s look at the most recent poll results taken this week and notice how bearish or cautious the participants are. The Hulbert sentiment survey this past week showed that after a 2,000 point rally, the market advisors were only recommending a 19.4%  exposure, a remarkably cautious figure and not at all indicative of a major top.  The Street poll: 35% bulls vs. 50% bears; AAII poll: 34% bulls vs. 42% bears. Same story at Bloomberg, which paints a gloomy picture of investors. 

Do these polls appear to reflect an confidence that you normally find at a major top? I don’t see it. What makes this caution so noteworthy is that the market has rallied almost 50%, is off just 4% from the highs including the 250 point drop on Friday, and yet investors seemed to be worried. Contrarily, that is not what one would expect at the beginning of a major collapse. 

How Stocks Connect to Gold 

Because of the connection that gold has persistently held to the stock market, these dire prophesies have extended to gold and gold stocks. As though we gold bugs didn’t have enough trouble, considered pariahs in the mainstream world, we have to worry about another cruel meltdown!? But what if the immediate doom callers are not right, and a commodity rush is at hand? 

Gold’s technicals: Isn’t it amazing how even though gold finally has risen through the $1000 level after a year-and-a-half of consolidation and after three failures to hold the $1000 level, many are still skeptical and the holders are still panicking? Recently, shares of one of the better mining companies, Agnico-Eagle, dropped over 10 percent on record volume following a poor earnings report.  Also, HUI’s relative-strength index has spiked down to a very oversold condition. Gold stocks large and small on many days were down across the board. This is highly unusual and indicative of a very nervous and oversold gold share market. 

Gold/Silver Ratio 

The Gold:Silver ratio: Last week, the gold:silver ratio shot up from about 58:1 to 64:1. If we are in a massive commodity move here, as I have come to believe, this ratio should decline sharply before a top is in.  In an inflationary environment silver outperforms gold but underperforms when there is a drain of liquidity. Therefore, I see this latest jump as very bullish. I wouldn’t be surprised to see the ratio go under 50:1 before danger time arrives. And here is an excellent article on the strange physical gold situation. If correct as I suspect, there is an immense naked short position in the metal. 

Gold eventually will go parabolic: This mathematical curve is still the most significant technical consideration for gold simply because all major cycles sooner or later conclude in a spectacularly insane mania that draws in even the most hardened skeptics. 

A Stock to Consider: Moneta Porcupine 

A new recommendation: Moneta Porcupine (MPUCF). A caveat to buyers: Please put a reasonable limit if you are going to buy. I noticed that a couple of the recommendations had large gaps up which inevitably get filled after a couple of days. Here are some bullish facts about Moneta  (Note: I hold a position in the stock): 

  • in an absolutely prime location; controls about 10% of Destor structure and splays from Timmins to Quebec border, a stretch which has produced 72M/oz to date
  • has gold in the ground: the Golden Highway Project, with 10 distinct zones over a 12km strike, has 2 zones with a 1.15M/oz defined resource (all categories) valued at $17/oz versus regional valuations on corporate acquisition as much as 10 times higher
  • has 6 very prospective and largely under-explored projects (most are 100% owned) along the Destor structure with considerable geological relevance and strategic value
  • has completed a financing in August 2009 and is now hiring key technical team members to activate exploration; initial 10,000m drill program in progress to evaluate several newly defined targets
  • will imminently engage a top-tier independent consulting firm to upgrade NI 43-101 resource estimates and to re-evaluate all other known zones
  • is in a region seeing an upsurge in corporate activity with Lake Shore, and two new entrants to the Timmins camp: San Gold and Osisko, all building up regional positions
  • is under-marketed and the ënewí Moneta management team is not well known (i.e. no significant institutional ownership)
  • Warren Bates, PGeo. of the immensely successful Pelangio Exploration, has recently joined the Moneta Board; other key Board additions to follow
  • has a valuable database of well over 500 drill holes (with digital data) and over 150km of historical drill core at its wholly-owned Timmins field office and coreshack
  • has historically built up property positions via joint ventures primarily with majors but current CEO is NOW undertaking sole risk exploration and development
  • has a healthy Treasury position which means company does not need to issue cheap stock
  • management have significant ownership of company with market float believed to be below 30M shares
  • all properties have good access to infrastructure: all sites have ready access to roads, electricity and existing mills 

Readers who would like a free copy of Chuck’s six-part series on gold should contact him at [email protected].  He is also available for consulting at reasonable rates.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

Comments on this entry are closed.

FranSix November 9, 2009, 9:49 pm

I think the point in watching Japanese markets would be the bull market in the Yen. But there’s another bull market which should be gatherin steam, and that’s Japanese long bond interest rates.

Pieter November 9, 2009, 10:45 am

My last comment in this discussion. Even if there comes deflation, this will still be extremely bullish for gold. You already see the Dow going to 2500, houseprices going to an average of $60.000 and not a lot of buying and selling, this will create an enormous depression, everybody will be insecure, afraid of their jobs, profits of companies will plummet, jobs will be insecure etc. etc. This is deflation, it’s not the little deflation like in Japan, in Japan they didn’t have so much debt. So deflation means insecurity, stress, depression and only one thing that will keep it’s value, gold.

I saw an interesting documentary on Iceland. A guy was interviewed who had a house on a building site; after the crisis building seized. He said that about 40% of home owners borrowed money abroad for mortgages, 80% of the businesses borrowed abroad, everybody was buying big cars, buying stocks. So this guy seemed very wise but then they asked him ‘and your situation?’. He said he bought the house with 50% borrowed abroad and 50% borrowed in Iceland, it was now very difficult and it depended on how his stocks would do how his situation turned out………………………….. We just will be punished by how much we wanted to live for free……….

&&&&&&

Japan deflated even though it had one huge thing going for it that we do not: an insatiable U.S. consumer to keep its export business booming. RA

Pieter November 8, 2009, 10:56 pm

It’s only about one thing, trust, governments can not be trusted and money is only money because of the government. If more and more people don’t trust the government anymore it’s the beginning of the end for paper money, like so many times before and more and more people will start to trade paper money for, some, gold coins. — You’re naive, what you want to call it, if you don’t change a little of your money to gold coins. — This is the heart of the matter, it’s not about inflation or deflation. That doesn’t matter anymore when the house of cards breaks down. I agree that deflation seems the most logical scenario but with governments that will do anything to stop it there’s not a big chance, Bernanke; ‘any determined government can stop deflation by the use of the printing press or now it’s electronic equivalent that can produce almost infinite amounts of money’.

&&&&&&

We can be fairly certain Bernanke didn’t have hyperinflation in mind when he made that foolish statement. RA

gary leibowitz November 8, 2009, 10:18 pm

A simpler reason why gold is rising is the same reason why all commodities are rising. The connection can’t be denied. Why has the eqities market run in step with gold, for the most part?

You can have a good stock market during inflationary times, not during deflation. I can only assume that the market is not expecting deflation to take hold, given that the last time it did was before most were ever born.

The real test will be when equities falls hard again. My money is on paper, not gold. In relative terms the world is just catching up with the problems we have already faced. That means the dollar strengthens agains most currencies and gold speculators get caught in a selling frenzy. We should see some wild swings soon.

FranSix November 7, 2009, 11:36 pm

Thank-you Pieter, but I have been watching the various explanations and theorizing as to why the gold price is rising, and its my belief that its monetary value has lagged its real value in terms of commodities for years, and that gold price rises are a result of adjustments to reflect the narrowing of the spread between the two, or that the gold price adjusts and firms with the deflationary trend in commodities. Of course, the aggregate currency would have to be falling against the level of debt as well as part of this fundamental.

That idea, by the way comes from probably the best source on the internet from somebody who has worked in bullion for years:

http://www.safehaven.com/article-14515.htm

j.boetsch November 7, 2009, 7:10 pm

what does QE stand.for?
J.B.

Pieter November 7, 2009, 10:45 am

FranSix, what monetary value? The only monetary value IS GOLD. It can not be in a bubble against monetary value. You know why gold rises? Because people can’t be trusted and this goes especially for politicians and the government. And who controls the printing or digiting of money? The government and politicians….. Read George Orwell, Einstein, Churchill, Will Eisner, study history, it’s deceit after war after war after war. Gold is gold and it’s even practical when you use money that always can be changed in a gold equivalent, how it was even in the 1950’s and 60’s. In that way we can even use it in a digital age. But that’s for later, after the great turnaround…

FranSix November 7, 2009, 1:47 am

I believe a deflation will set in, but the competitive QE will tend to slow that down. The gold price should not be considered in a bubble until its monetary value greatly exceeds its real value against commodities.

Pieter November 6, 2009, 11:55 pm

Very good piece. When I read the comments I can’t believe that some idiots still fall for that Elliotbathe bulls**t. I fell for it too a long time ago, believe me and help yourself, it’s bull-s**t. I do TA of course and cyclical analysis but only that works.

I am invested in ME for a few years now and will stay invested for a few years more. Got another stock for you, Eagle plains resources, they produce, have gradings of over 1 kg/t, yes a kg, —– drill hole: 10.67m to 11.58m 0.91m 2,397 g/t Au —– serious company, not a lot of stock. And they have a lot of projects… you will be amazed if you check them at their website.

corey November 6, 2009, 10:17 pm

If the scandals involving gold & silver suppression are brought to light, as well as capping the amounts the corrupt banks can short, then there is no wave that is going to be able to measure the move up!!

mario November 6, 2009, 7:51 pm

I wish to share a VERY important point about gov’t stimulus policy related to real estate in China now. I don’t think I need to remind everyone here of the liquidity-based run up in stock market and real estate prices here in China/HK. Here in mainland China, circumstances change with “black swan” announcements by the gov’t all the time and right now the policy exists in the real estate market drastically reducing the 30 to 60% capital gains tax (yes its outrageous) on real estate property sales paid by the seller. But this policy is officially ended at the end of November. Will they extend it or not? Several articles in the SCMP and Asia WSJ indicate serious concerns now about the bubble in the stock market (Shanghai and HK exchanges) and real estate prices in the mainland and HK. You already know from my 3rd quarter Sanya real estate report my vote that real estate prices here have topped out and the most recent newspaper articles agree with the concerns about the “too fast too high” run up in prices. ANY increase in the taxes on real estate sales in mainland China/HK markets along with the tightening of bank mortgage lending which has already started, by the way, will put some water on the fire, so I suggest the end of November policy announcement is very important on top of everything else that is affecting the markets right now . I’m at the heart of these issues with real estate client buyer who are looking at buying property here in Sanya before this capital gains tax waiver policy is canceled. These issues ARE connected to stock market action so that’s why I’m chiming in. Cheers, M

GG November 6, 2009, 7:32 pm

I believe today’s job numbers took a lot of the risk factor of a USD short squeeze away. You can bet that interest rates are going nowhere anytime soon and this bodes well for a lower dollar.

gary leibowitz November 6, 2009, 4:23 pm

His arguments on why Gold will go higher is exactly why I think it was fall rather hard. I believe most Gold investors are hedging against inflation, not a calamity, and certainly not deflation.

He does have history on his side when it comes to seasonality, but that just accounts for the last 2 months of th year. After that it should be straight down.

His assumption that somehow the FED can print enough money to satisfy the credit problems is naive. It was never a question of Fed infusion. In simple terms creditors are not lending and borrowers are not borrowing. The banks have a fiduciary responsibility to lower risk and horde their cash reserves. That is exactly what they are doing. Lets not forget the ominous signs on commericial real estate.

I have stated over 5 years ago that we will repeat the 30’s simply because of 2 reasons:
1- The Fed was on a campaign for 30 years to prevent deflation at all costs by micro-managing rates and supply of money.
2- In that same period of time money was replaced by easy credit.

The combination of th 2 was explosive. I theorized this way before I knew where the asset bubble would form. I just knew it would, given the nature of free enterprise.

We have always gone thru boom/bust economic cycles. This time around the pendulum will swing down from great heights.

As for Gold, I see it as just another bubble created from loose money trying to find a home. If deflation does take hold then there are going to be a lot of shocked gold investors shaking their heads. Historically Gold is not a great investment.

FranSix November 6, 2009, 4:13 pm

There is a possibility that instead of a deflationary depression like the one in the 1930’s, the depression that is said to be occurring is an inflationary depression, which started with the Nasdaq crash and followed through with defacto QE since 2002. We have already had our commodities’ bubble with oil as the prominent commodity, which became a huge bubble, which is now in the process of collapse. Remember, the housing bubble didn’t burst until well into the reflation after Nasdaq, while the 1930’s the housing collapsed along with the stock market.

Instead of a collapse of trusts, as we had in 1929 -1934, we have a collapse of a network of pyramided junk bonds similar to the ‘participating bonds’ used in the railway boom era namely, derivatives. So we may be seeing a similar type of inflationary depression of that era. Armstrong noted that sovereign bond interest rates rose as high as 200% temporarily during the long depression. Faber outlined the benefits of the long depression, in that falling prices and stable wages led to growth in the American economy, which he likens the era to the Chinese economy now.

Central Banks are hoping with QE to avoid high interest rates by devaluing their currencies and keeping interest rates in decline. The interest rate regime to watch, therefore, is the Japanese 10-year bond.

goodsport November 6, 2009, 2:26 pm

Interesting thoughts about the market being undervalued. Good points about the VIX. Differences of opinion are what produce concurrent buyers and sellers. It has been reported that recent Fed auctions have been under-subscribed and that the Fed had been buying up its own debt through JP Morgan and other well connected dealers. Rumors also persist that the Government has also been behind the current stock market run-up, possibly through the alleged plunge protection team (PPT). So might it be plausible that investors and advisors are justifiably concerned about the stock market and that the current run-up is contrived? As for me, I’ll trade the swings and let price and directional changes be my guide.

Senor Cuidado November 6, 2009, 10:06 am

It’s not July.

The trend change on this counter trend rally occurred Oct 22. The next few days will bring confirmation. McHugh has the good EW count. This is the start of the monster C wave grind to lower lows.

We are re-tracking the 1930 sequence of market events and there’s nothing Bernanke or the Chinese can do about it. Great Depression II is on.

DarkestKnight November 6, 2009, 2:29 am

While Gold is undoubtedly in a long-term bull market, I believe there is good reason to anticipate a medium-term top coming soon, not least the impending short-squeeze in USD. Elliott Wave analysis sees the gold:silver ratio surging past the 100:1 mark, rather than drop, indicating to me that gold will hold up better in the coming downdraft than the more volatile silver which will probably take a real pounding in the next 6-12 months.
As for the lack of bullishness at present in the stockmarket, one should look at the current VIX reading- just bottomed at 20 (last seen in late Aug 2008-and we all know what came next) and now broken out above 30 in the last week. That speaks volumes for the current high level of complacency in the market, typical of a major top.
Still, always good to see another side, especially from someone who obviously commands Rick’s respect.



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