Thursday, September 18, 2008

Gold Explodes While Many Gold Stocks And Funds Implode

U.S. Global Investors Precious Minerals Fund



Random samples of gold junior stocks.

In a prior post I wrote: I believe gold is a proxy for credit and oil is a proxy for Merrill, Goldman, Morgan Stanley and their hedge fund compatriot's ability to create liquidity.

If you believe the above statement is reasonably accurate, and you should, the fact that gold has recently cratering should be telling you something about the global credit markets. Hint, hint - gold peaked within weeks of global credit's peak. I surely don't consider falling gold or oil as a positive sign for the global economy as is the prevailing view perpetrated in the press. To the contrary as I wrote back in 2006, you should wish for inflation. That's not a commonly held view either as both bulls and bears howled over the last few years at incredible inflation. There never was any inflation in the true sense of the word. What you have witnessed with rising food and energy prices is trickery by the great deceiver, the Satan of economics, deflation. Of course, none of this is anything new on this blog.

In another prior post regarding U.S. Global Investors Precious Minerals Fund, the top performing precious metals fund this cycle, I wrote: Anyhow, I expect the next big move (written in context referring to this fund) to be in 2008. And I expect that move to be down. Of course, I am anticipating fundamental factors leading to this move and I'm reasonably comfortable with these fundamentals developing into a tipping point. It's simply a matter of when. Well, that fund is now down about 60% as shown in the above chart.

This was the year gold was supposed to go to $1600, $2500 or $5000 depending on which gold camp one subscribed to. One had to know gold was doomed on some level when Jim Cramer hopped on board with a price target of $1600 at the very top of gold's ascent. Cramer is seemingly the consummate emotional investor.

As I have said, gold is telling us something and we should listen. Only fools dare not listen to the shiny metal. But, the reality is gold is not an investment. It is a hedge against risk. But, as I have written before, gold is worth no more against the inflation-ravaged dollar than it was forty years ago. Stocks are up what? 90,000% since the Great Depression? Need I say more?

It is nearly impossible for a segment of the gold bug population to redeem themselves with the implosions we see in many of the juniors. Most of the junior gold stocks are down 90-95%. Even the major producers are down 40-60%. Silver is down about 50% and its associated mining stocks have had similar implosions. Platinum and palladium have also imploded. No surprise here since a major theme since starting this blog is that we are in the mother of all commodity bubbles.

So, does anyone care to guess why gold was up so much yesterday? Well, I'm glad you asked. Gold's rise doesn't have anything to do with the durty, durty dollar as many would have you believe. Or that the Fed is printing money as was incorrectly reported. Here's the real reason why gold shot higher yesterday. As those who created this Frankenstein finance realize their monstrosity isn't going to be resuscitated, they are finally having an epiphany many of their incarnations are potentially failing....permanently. And, that their paper hedges were never really a hedge at all. Is there any intrinsic value in a derivative hedge? In this environment paper hedges potentially have zero value. Most definitely serious risk to much less than face value. Buy a car with a derivative? Pay off your mortgage? Buy gold? Trade it for legal tender? How about letting your dog use it for potty training? Bingo! The reality is there always was an eventuality that the only true hedge is the dollar, gold and Treasuries. In other words money equivalents. Yesterday we got a glimpse of reality - Wall Street is pissing on its potty paper. But, in a bit of irony, Wall Street now loves cash. And, as a great punishment, the market is going to make them pay up for it. And, that is one reason why I wrote before markets started imploding my favorite investments are dollar and yen. Cash is king.

In closing, I wrote on here back in 2007 that gold and the dollar could eventually rise in unison. I don't really follow the dollar closely but it has run higher very quickly. Those types of moves aren't typically sustainable. At least without consolidation or retrenchment. But isn't it interesting that the world's best investment in the last year has been the dollar? Even as the U.S. financial system implodes? I still think gold could have further downside risk but be watching in the future to see if the correlation between gold and the dollar changes from inverse to direct. If this does come to pass on some type of sustained basis, the world is likely to be a very volatile place.
posted by TimingLogic at 12:18 PM