Gold and Gold Stocks During Periods of Deflation and Inflation

I’ve heard more than a few pundits question an investment in gold or gold stocks in the current environment. They point to deflation and the lack of inflation in the foreseeable future as reasons why precious metals should be avoided. Sounds intelligent on the surface but it reveals to this analyst, a lack of any thought and analysis.

We must remember that success in trading and investing often requires a counterintuitive approach. The markets often go the opposite way they should. Here are a few examples. Gold was in a bear market for 20 years despite what can be called a credit hyperinflation in the United States. Gold has performed spectacularly this decade in the absence of the kind of price inflation we saw in the 1970s. Treasuries have risen this decade along with Gold, Oil and Commodities. When has that happened in history?

Now back to precious metals. The main idea for investing in this sector is to protect your purchasing power or protect against inflation. So it makes sense to buy the sector during an inflationary period. Right? A look at history combined with some common sense analysis reveals that precious metals and the producing companies outperform during deflationary periods and in advance of an inflation cycle.

Let’s look at the 1930s and 1940s. The Great Depression initially was a deflationary event but it concluded in inflation. Using the calculator from inflationdata.com, I calculated the change in prices in the 1930s and 1940s. In the 1930s, prices fell 18%, while they rose 70% in the 1940s. But what happened in the markets?

Which gold bug hasn’t seen this chart of Homestake Mining, from http://www.gold-eagle.com. If I remember correctly, its bull market lasted from 1921 to 1937. The stock made a lower low in the early 1940s and wouldn’t surpass its Great Depression peak until the 1960s. The stock performed especially well from 1931 to 1934, during the later stages of deflation and initial stages of inflation.

This is a chart of the Barrons Gold Mining Index, dating back to 1939. Thanks to http://www.bgmi.us. The rectangle shows 1940 to 1950. There was deflation in the 1930s and huge inflation in the 1940s. Yet the gold stocks performed far worse in the 1940s.

It was the commodity sector that prospered most during the inflation of the 1940s. The rectangle shows 1933 to 1951. Chart from TopLine Investment Graphics: http://www.topline-charts.com/.

The reality is that the precious metals complex outperforms AHEAD of reinflation, while the rest of the commodity sector outperforms DURING the ensuing inflation. Gold stocks perform best when their margins are expanding. That can happen when the price of Gold stays flat and cost inputs (oil, steel, labor) fall. It can happen when gold rises and rises faster than cost inputs. When inflation begins to take hold, the precious metals complex has already anticipated it. Inflation raises the cost of everything. As the cost of steel, oil and labor rise, it hurts the profit margins of gold producers. Hence, gold companies outperformed during the deflation and early reinflation of the 1930s, but underperformed during the inflation of the 1940s.

How did the gold stocks do in the 1970s? The aforementioned BGMI index, rose from a bottom of less than 100 to a peak of about 1300. Let’s call it a 14-bagger. Outstanding right? Well, consider that the price of Gold rose from $35/oz to as high as $888/oz. That is a 25-bagger! Gold stocks unperformed Gold despite a rising gold price. Why? Because of rising commodity prices and rising inflation, gold companies didn’t benefit as much as you’d expect. In relative terms, gold stocks were better performers in the 1960s. The BGMI rose very nicely, while the price of gold remained fixed.

In the early 2000s, there was a fear of deflation. As you can see from the chart below, from 2001-2003 gold stocks strongly outperformed gold as well as commodity stocks. Gold bottomed before the rest of the commodity sector and advanced before inflation began to take hold. As inflation began to take hold, the gold stocks underperformed both gold and commodity stocks and even while the price of gold rose from $600 to over $1,000.

Conclusion

It appears the consensus is wrong on both counts. One side says there is no inflation on the horizon, so the precious metals sector isn’t an appropriate investment. The other side says that there will be hyperinflation, so buy gold. Hyperinflation may be good for physical gold but it is deleterious to everything else including society and the political structure. The reality is that the current macroeconomic environment is most advantageous for gold stocks and then gold. However, if and when inflation begins to take root the precious metals complex will underperform and your funds will best be utilized elsewhere. For more on this analysis, visit our website and consider joining our newsletter. Good Luck!

Gold Bullion and Crude Oil Bull Market Turning Point

Gold bullion and Crude Oil are both setting up for a rally higher if they continue to complete the breakouts. Oil looks like the best trade from a quick glance with huge profit potential but its important not to under estimate gold bullion as it can generate big moves even though is has already made a nice rally this year.

Gold stocks look to be finding support and are testing resistance levels from both our trend line and 50 EMA. A breakout to the up side would be very bullish for these golden investments.

Gold Bullion Stocks ? Daily Chart

Gold Bullion Prices

Gold bullion has had a great rally this year but it was tough to time entry points due to the V shaped bounces compared to consolidation style patterns. As you can see on the gold GLD chart below we are seeing a possible bounce which could be the beginning of a new leg higher.

Gold is currently trading at the bottom of our trend channel and trying to break above our resistance trend line. Gold bullion stocks (equities) our out performing the price of gold which is a very bullish sign for higher bullion prices. The momentum MACD is testing the 0 (zero) level which can be support for gold and the stochastic indicator is pointing to higher prices in the near future. I expect we will see gold gap higher at the open on Friday as international traders will push the price higher over night.

Gold Bullion GLD ETF ?Daily Trading Chart

Crude Oil – Continuous Futures Contract

Crude oil futures are trading and trending higher and look to have some legs behind the move. Oil has been slowly trying to bottom and with any luck the next couple weeks we will see a full trend reversal and start to move higher. You can see from the chart below that the momentum (MACD) has been moving higher over the past few months and this kind of divergence is bullish for oil. In the past 2 weeks oil has broken an important resistance trend line. Things are starting to look up for oil.

Crude Oil USO Fund ? Daily Trading Chart

Crude oil is tough to trade because all the funds seem to have contango which alters the price of the fund several percentage points away from the actual price movements of crude oil futures contracts. The USO fund today has made a nice move higher with strong technicals. As you can see on the chart energy stocks are out performing oil which is very bullish. The momentum (MACD) is bullish as well. Oil could find some resistance at the 50 EMA but we will cross that bridge when we get there and hopefully Friday. I can reassess the situation over the weekend.

Gold Bullion and Crude Oil Conclusion:

Gold and oil are both looking very bullish as of today.

The weekly chart of gold bullion although it is down for the week is currently testing the 10MA which is a technical support level and has held many times before when gold is trending higher. We would like to see a bounce in gold which would last several weeks or months.

Crude oil has bullish charts as well but is the flip side of gold. Oil has been moving higher and has broken out to the up side with momentum (MACD) generating a breakout signal. The next few weeks could provide some great buy points for these commodities if the technical?s hold up.

Gold is currently at support which is generally a good buy point and oil is trading at the high but with a new trend line support drawn today it is trading near a possible support level.

Tricom Today ASX Stock Market Report 24-2-09

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The market is down 40 doing a bit better than the 78 point fall predicted by the SFE Futures this morning post the significant 3% plus falls in the US overnight. Property down the most again down 3.2% – Goodman Group down 12% early – had its recommendation cut by Macquarie Group yesterday after a recent profit warning. Results tomorrow. BHP and RIO down 1.6% and 1.8%. Industrials down 2.3% – Wesfarmers and Fosters down having gone ex dividend this morning. AMC and ASX also Ex dividend. Sonic Healthcare down 1.5% early on posting 1H NPAT up 21% to $136.5m. Aristocrat Leisure up 2.0% on the open posting FY NPAT of $101.2m down 59.1%, with final dividend to be 10c (already had a profit warning). Spark Infrastructure Ltd down 1.19% after posting a large fall in FY profit. Financials down 1.9% – Suncorp-Metway down 6% early on posting 1H NPAT of $258m, down 33% on-year with the CEO leaving next week. Macquarie Countrywide posted an in-line 1H NPAT loss of $714.1m with an interim distribution of 4c down 12% on the open. Macquarie Media booked a 1H net loss of $127.3m down 2.7% early. CBA is down 2.5% and underperforming the other banks today having announced they’d buy $2.25bn of Wizard Home Loan’s portfolio from GE, less than the $4bn worth previously suggested. Resources down 1.5% – Energy stocks
generally down on the lower oil price – Origin Energy up 0.3% as their 50.4% owned Contact Energy (NZ) posted in-line 1H NPAT down to NZ$25.1m. Oil Search Ltd posted FY NPAT up 128% to US$313.4m down 0.2%. Australian Worldwide Exploration Ltd posted a 15% rise in 1H NPAT up 1.8%. Gold stocks mixed despite lower gold price – Sino Gold Mining posted net loss of $101.4m for the half up 1.6% early. St Barbara down 1.2% as it completes its share placement of $75m at 41c/share and posts 1H NPAT loss of 41.2m.

Tricom Today ASX Stock Market Report 23-2-09

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The market is down 46 after being down 90 earlier poor performance today underperforming the 3 point rise predicted by the SFE Futures this morning. Property down 2.3% – all the big names down Westfield Group down 3.6% at midday. They have results this week. Caltex down 6.1% on broker downgrades this morning after results down 95% on Friday. All other energy stocks down on the lower oil price Friday. Gold stocks all up on the gold price breaking through the $1000 barrier Friday. Small miners mostly down on lower metal prices. Industrials down 4.6% – Fairfax down, Virgin Blue down, and Transfield Services down on results. Cochlear down nearly 4.4% at midday having gone ex dividend 80c. Macquarie Infrastructure down 7% and Macquarie Airports down 5.3% on suggestions that the Macquarie stable is being shorted whilst Macquarie Group remains protected by the shorting ban on financials  which comes off on Friday week. MQG still fell 14% last week. Financials down 1.3% following a turbulent session in the sector in the US Friday where financials were down 9% at one stage on concerns over the need for Citigroup and the Bank of America to be nationalised. Our Banks all down 1-2% around midday. ANZ down 2.5%.

Tricom Today ASX Market Report 20-02-09

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The market is down 65 underperforming the 13 point fall predicted by the SFE Futures this morning. Industrials down 3.8%. Financials down 2.7% – banks all down following the grim lead in US financials. US Banks hit 17 year low. The NAB’s Ahmed Fahour will quit the board as director. NAB down 3.0%. Gold stocks well down as the gold price falls $1.70 but US gold stocks fall around5%. Newcrest down 6.4% and Lihir down 2.6%. We are still waiting for St Barbara
Limited to come out of its trading halt having done an institutional placement. Fairfax is falling over still, down 2c to 97c. They have results on Monday. This is an all time low. Property down another 1.3% – Goodman Group up 9.7% early on 1H operating income after tax of $215m.Coal stocks doing well with some corporate action between Whitehaven (WHC) and Gloucester Coal (GCL) who are planning a merger to create a $900m coal miner. 1 GCL share for every 2.45 WHC shares.

Tricom Today Stock Market Report 16-2-09

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The market is down 36, down 59 at worst in-line now with the 22 point fall predicted by the SFE Futures this morning. Most sectors down. BHP and RIO down 1.4% and 1.8%. Only energy, consumer staples and healthcare up slightly. Industrials down 3.0% with Brambles down 7% early on posting 1H NPAT of US$195.3m. Challenger up 6.4% on normalised net profit up 3.9% to $105.9m. Gold stocks mixed on the lower gold price. Energy stocks mostly
down despite the 10% jump in the oil price on March contract short covering. PanAust up 8% early on announcing production costs. Financials down 1.1%. Banks mixed. CBA down 4.1% after going ex dividend 113c.

Tricom Today 12-2-09

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The market is up 62 outperforming the 13 point rise predicted by the SFE Futures this morning. Having a strong day after showing great resilience yesterday following a terrible night on Wall Street Tuesday. All sectors bar property up on the open. The resources sector isleading the way BHP up 1.9% and RIO in a trading halt pending results this afternoon and a deal with Chinas Chinalco buying US$12bn worth of assets and making a US$7bn investment in equity. Fortescue Metals up over 6% early on. Energy stocks up despite the fall in the oil price and the decline in US energy stocks overnight. Gold stocks continuing their rally Newcrest and Lihir up 4.1% and 5.7% on another $22 jump in the gold price. Smaller gold stocks doing better than that. Industrials up 2.1% – Coca-Cola posted solid results up 3.5% early on. Fosters pumpingup over 5% at 11am on no news. Other risers include Orica,United Group, Toll, Macquarie Airports on no obvious news. CBA up another 3.0% afterresults yesterday. NAB down again. Seems the switch out of ANZ and NAB into CBA continues with NAB and ANZ seen as most likely to cut dividends. Mining Services sector having a moment as well with Macmahon up 9.5% and Monadelphous up 4.6%. Bradken down 7.5% on results yesterday Goldman Sachs JB Were have cut their earnings numbers by 12% and 35% quoting debt concerns and an uncertain outlook.

Tricom Today 11-2-09

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The market is down 27, doing better than the 80 point fall predicted by the SFE Futures this morning and is down just 1.1% despite a 4.6% fall on Wall St post a disappointing bank rescue plan which made it clear that there is no Obama miracle cure for the financial crisis after all. It has been terribly received in the US and criticized for a lack of detail. It seems the new administration are still making it up as they go along and have no convincing strategy to stop the financial crisis. Resources down 1.8% with metals all down. BHP down 2.8%. RIO up 1.9%. Energy stocks down on the lower oil price. Gold stocks mixed . Newcrest, Lihir and Sino Gold down, but smaller players up. One broker predicts another 3 year bull market in gold. Financials are down 0.7% – banks all down 1-2% early on with CBA up 0.7% and outperforming on the back of 1H results in-line with their profit upgrade last week. CBA will pay 113c dividend which goes ex on Monday. Property down 1.1% as Stockland Group posted a 1H NPAT loss of $726m with 1H revenue loss of $803m . SGP down 7% early on. Westfield down 1.0%.

Tricom Today 10-02-09

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The market is down 37 underperforming the 27 point rise predicted by the SFE Futures this morning. Property down 0.6% with Westfield and Stockland down 1.3% and 5.0% . one broker cut their recommendation on SGP to NEUTRAL from Buy this morning and price target from 400c to 300c ahead of tomorrow.s results. ING Industrial Fund up 9.1% on asset sales. Financials down 1% with the banks all down . ANZ down 2.3%. Diversified financials down . Australian Wealth Management down 7% after it posted a 1H loss of $131m and declared no interim dividend. IOOF Holdings down 4.5% on their half year results. Henderson Group down 2.4%. Industrials up 0.2%. Tabcorp Holdings down 7% as it goes ex dividend. Cochlear up 3% after reporting 1H net profit up 22% and forecasting 20% growth for the FY. JB Hi-Fi up 13% on their 41% increase in 1H profit and 50% interim dividend hike to 15c. Resources down 1.0% – BHP and RIO both down 0.3% and 3.5% with RIO.s chairman elect resigning over a dispute on how to manage their debt issue. Gold stocks all down on the lower gold price . Sino Gold down 5.2%. Small miners mixed on mixed metal prices. Oil stocks mixed on the lower oil price . waiting in anticipation on the stimulus package being pushing through the Senate in the next day or two.

Tricom Today 5-2-09

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The market is down 14, dropping off as the morning progresses – underperforming the 14 point rise predicted by the SFE Futures this morning. Resources up 4.6% – most other sectors down. BHP and RIO up 5.2% and 7.6% early on. Fortescue Metals up 9% on the open. Most the miners up on the strong base metal prices and research from one broker suggesting the iron ore market is improving with BHP saying Chinese dstocking of iron ore had run its course. Gold stocks strong on the higher gold price. Industrials down 4.1% . Lend Lease has placed $302m of shares overnight at 605c and fallen 17.2% to 560c putting the placees over $20m underwater. Qantas. capital raising went through near the bottom end of the placement range at 185c and the price is down 17% to 190c this morning. Placees are just above water. Leighton Holdings up 2.7% on the back of winning a $475m contract in Abu-Dhabi. Banks down between 2-4%. UK banks had a bad night and there are concerns over Obama.s plans for financial resurrection.

Tricom Today 3-2-09

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The market is up 52 well ahead of the 7 point rise predicted by the SFE Futures this morning. Financials are up 3.7% – all the banks flying on a CBA guidance upgrade . CBA up 9% and pulling the whole sector up. Westpac up 7.1%. Resources up 0.2% – BHP and RIO up 1.5% and 33%. Gold stocks down on the lower gold price. Newcrest
down 4.5% after completing their $750m institutional placement. Property tanking . down 4.7%. Stockland Group, CFS Retail Group, Dexus, GPT and Goodman Group all big fallers . all down 9-13%. Lend Lease (LLC) up 4.5% on being selected as the preferred partner to build GBP1.2bn in Birmingham schools. Incitec Pivot had a profits warning and fell 30%.

Tricom Today 2-2-09

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The market is down 20 compared to the 64 point fall predicted by the SFE Futures this morning. Property down the most. Westfield down 6% in early trading having gone ex-dividend toady, now down 4%. Financials mixed. Resources down 0.5% with the fall in metals overnight and on the back of poor US economic numbers. BHP down 1.3% and RIO up 6.8% as it confirms it’s been in talks with Chinalco about the sale of its minority stakes in some of its operations reducing the need for a $6bn rights issue if the deal happens. Fortescue up 13% – on the back of its strong 1st H profit result late Friday – in-line with expectations with a strong cash position and record production. Gold stocks mostly up on the higher gold price Newcrest looking to raise $500 million in a fully underwritten equity placement.

Tricom Today 30-1-09

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The market is down 26 outperforming the 96 point fall predicted by the SFE Futures this morning. Financials down 1.5% – banks down 1-2%. Resources down 1.1% on the lower oil and metal prices. Energy stocks up 0.9%. BHP and RIO down 1.8% and 3.3%. Base metal stocks mixed. Gold stocks doing well on the higher gold price overnight with the flight to precious metals continuing. Newcrest up 2.9% and Lihir up 4.4%. Property stocks doing the worst  down 3.4%. Westfield down another 4.5% and Stockland down 3.6%.

Gold is pushing up consistently now

from www.investmentpostcards.com

On the back of the bullion price increasing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing industry groups for the week. The venerable Richard Russell said: “The [gold] market always does what it’s supposed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic correction in gold is over.

“Gold is pushing up consistently now – the first upside target is to better the 900 level which will take gold above the two preceding peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance corrected. Gold appears to advance more easily now and the gold stocks are going along with the bullion.”

According to US Global Investors – Weekly Investor Alert, David Rosenberg of Merrill Lynch on Friday sent out a research note titled “The case for gold”, explaining that gold’s value is enhanced by declining bullion supply and increasing money supply.

James Montier of Société Générale added: “Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don’t know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”