Wednesday, August 5, 2015

Gold...We're nearing the point of maximum pessimism. History tells you that is always a good time to get involved.

Bullish on Gold & Silver Bears? A Fistful of Ratios

MARKETS make opinions, writes Adrian Ash at physical gold and silver exchange BullionVault. And right now, the gold and silver markets are making bears out of pretty much every professional trader, analyst and journalist with an internet connection.  "Gold's slump is here to stay," says MarketWatch. "Silver prices will take 20 years to bottom," says this chart-watching trader
Whatever the impact or confusion of irony, silver's latest bull market never got close to its 1980 top in real inflation-adjusted terms, only managing a nominal match near $50 per ounce in spring 2011. Gold took 28 years to break its 1980 peak in Dollar terms, and never quite got there adjusted for consumer-price inflation, as this chart of the ratio shows, before turning south.

US Dollar gold price adjusted for CPI consumer price index
"Seen from the average, however, gold still ended last month some 55% above its long-term mean value for US households since 1970. So on that metric, at least, it isn't expensive or 'cheap' at present."


Basis such ratios then, gold is neither cheap nor expensive right now. Traders trying to call the very bottom might be early. But the long bull market starting 2001 may alternatively just be taking a pause. A long pause yes. But gold did drop almost 50% during the long 1970s' bull market, halving from $200 to barely $100 per ounce during 1975-1976.
 
Gold then shot 8 times higher before making its ultimate 1980 peak. That top came at $850 per ounce. For reference, silver had no such pullback.

When Everyone's Bearish Gold...

US gold mining equities have also taken a beating. High debt levels accumulated during the boom are now weighing on stocks as the US Dollar gold price falls towards the cost of production. Now every man and his bear is calling for gold to hit $1,000 an ounce. And it could well do so. Technically, that is where the next major 'support' level sits, and traders looking to make money on the downside will do their best to get it there. 
So as this US Dollar gold bear market reaches its crescendo, and as the mainstream media puts the boot in about gold's prospects, keep in mind we're close to the bottom with an all-time record amount of punters betting on more falls. 
It's true that you want to see gold rising in US Dollar terms before getting too excited about gold's longer term prospects, but as I showed you we're not too far away from that point. So don't ignore the gold market. We're nearing the point of maximum pessimism. History tells you that is always a good time to get involved.

The world is now sitting on top of the most Financial Time Bombs in history.  Not only do we have the Greek situation in Europe, but Americans now get do deal with the likely default of Puerto Rico’s Bonds and all the fun that brings with it.  Why is this such a big deal?  Well, according to the recent article,  UBS’s Puerto Rico Bond Funds Implode, “Collateral Value” Drops to Zero, Investors Screwed:
DYI Comments:  This is an excellent time to dollar cost average into your favorite precious metals mining mutual fund.  DYI's favorite. of course, is Vanguard's Precious Metals and Mining Fund symbol VGPMX.  Gold is neither over nor undervalued on a secular basis.  Our averaging formula higher percentage amount of ownership "kicks in" when you are below the historical average.  To put it simply scale up when you sense a bargain. Remember this time frame is secular (ultra long term); when gold will move decisively upwards I have no idea and nor does anyone else at least the honest one's.

What I do know is that currently U.S. stocks and long term bonds are priced to the heavens. Is it possible for these two major asset categories to become even more overvalued?  Of course!  Anything is possible but as value players who realize the fastest way to ruin your long term rate of return is by piling up losses.  The easiest and most efficient way to achieve large losses is by over staying in historically overvalued markets with a large percentage of your portfolio.  Yep...that will do the trick every time.  They call it performance chasing; just as dogs chase cars!

My sentiment chart will tell you where we are on a secular basis for our four asset categories.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency
Max-Pessimism *Market Bottoms*Short Term Bonds
Depression MMF
Hope
Relief *Market returns to Mean* Gold

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional
Max-Optimism *Market Tops* Long Term Bonds
Denial of Problem U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

Don't lose your head while everyone

 else is losing their's. 

The Great Wait Continues!
 

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  8/1/15

Active Allocation Bands (excluding cash) 0% to 60%
85% - Cash -Short Term Bond Index - VBIRX
15% -Gold- Precious Metals & Mining - VGPMX
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
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DYI

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