Sabre’s Gold Market Reflections
A couple of conclusions I have drawn for the year.
Look at the attached chart. We have Rydex fund flows fairly up to date for the past several years. Here’s something I think is worth mentioning.
11% of The Rydex PM fund is FCX. That has skewed assets in the fund dramatically. So, here is what we can conclude. Based on Charles Bidermann over at Trim Tabs the US Government is the only buyer of US stocks. We have known this to be true for some time but Charles details it all quite well in his latest interview by effectively telling his critics “I was right a year ago when I concluded the government was the buyer.” Insider selling is unprecedented, outflows will reach 100B now in a 33 week time period. Hedge funds have seen outflows as well. so a rising stock market is impossible without government sponsored bank interference.
That means that based on government buying of US stocks and Rydex, there is exactly zero buying of precious metal stocks. I would conclude the only way these stocks have remained bid at all throughout this is two fold, Canadian buying or SPX future arbitrage. (Eliminate FCX from Rydex and fund assets would be near historical lows).
It is very clear based on the chart of FCX that the US government is buying it, while not a dime has gone into Newmont. Stocks do not inexorably rise on 45 degree angles with zero corrections in sectors like HG, but FCX has and continues to do so(the picture is being painted that copper is showing a recovery). This is further augmented by the fact that gold stocks have dramatic corrections every few weeks while there is virtually no volatility in the general market. The general market is well bid, gold stocks are not (9 corrections of 8% or more this year).
I would explain the rise in silver stocks quite differently. I believe that silver stocks are a very small asset class but that the silver market is completely cornered. The action in stocks like HL bears no resemblance to that of the gold stocks. They are rocks up here and not just because they are making lots of money, so are the golds, but they are never well bid. The silver metal market is in all likelihood gone for a very long time and they only way to garner supply is thru the stocks themselves.
So how will the gold stocks rally? I do not believe you will see a large rise in gold stocks until the gold market is ostensibly cornered. For example, I have not seen anyone discuss supply at all. The IMF supplied 400tonnes last year, now what? The Washington Agreement 400 tonnes before that every year for a decade. Now what? There probably aren’t 1000 people on planet earth that can tell you what the gold market is today. These are some serious state secrets that will eventually fall like dominoes. So, when the market becomes tighter, it is then I believe you will see the shares rise but it will not be retail in our lifetimes, as retail has no money. Either large banks or a sovereign will IMO step up and outright acquire a miner and then we will get a glimpse into reality.
Lastly, for whatever reason, gold stock CEOs are either oblivious or have gag orders. It is inexplicable the lack of information coming out of these people and much like the US Congress, they simply do not react well to criticism.
So what to do? Can it go on forever? Until the tightly controlled GDX:GLD ratio breaks out the answer is yes, but like all massive manipulations, sooner or later they blow up. Inevitably someone breaks ranks and the game will be afoot. That is what I am looking for in 2011.
Merry Xmas and Happy New Year
Editor’s Note: Here is a long term chart of the $XAU/$GOLD ratio overlayed with long term interest rates: Gold Stock / Gold Ratio - Monthly
