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Beginning of a Golden Opportunity?


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It was a losing week in the market as most equity indices headed down toward their 50-day moving averages.  The 5-year graph of the S&P 500 is above and on the far right you can see that the index was headed down most of the week.  Below is the NASDAQ, which has a similar path:


The real damage, though, is in the small cap stocks as represented by the Russel 2000 Index:


The small caps are nearing the 200-day moving average, which over the past 5 years has represented a buying opportunity – you can see the red 200-day moving average line in the graph above and note how each time the index drops below it, if you had bought on that dip you would have made some serious money.  Will that be the case again?

It sure seems to me that investors are not as accepting of risk right now  – maybe its because the Fed continues to discuss raising interest rates or maybe its because the economy is really slow or because our large exporting companies are being hurt by the increase in the price of the dollar making their products too expensive in overseas markets.

For whatever reason, this time just seems to feel different – stock trading volume on down days is well above average and on up days well below average.  It just does not seem that buyers are willing to turn out when prices are down, and in fact, the sellers are liquidating out of fear on those down days.  Optimism is always better than fear in the stock market.

However, the real fear in the investment world right now is in Gold:


Gold dropped below $1100 per oz this week and for the first time since records have been kept, hedge funds are short gold future:

hedge fund gold

These graphs courtesy of Zero Hedge blog

hedge fund Gold2

The top graph depicts for you the dollar amount of gold futures that the hedge fund industry collectively has in their investment funds.  The second graph shows you what happened to the price of gold in coming years the last time hedge funds were at their lowest gold position.  Is this is a sign that gold is nearing a bottom in its four year decline?  Or is gold telling us that global deflationary forces are winning the battle against the worlds Central Banks?

From a practical standpoint, the gold miners are reducing production, shuttering mines, laying off employees – in general doing the same thing that the oil industry is doing.  At some point, because production is reducing supply, demand will exceed supply of both oil and gold, causing both to go up in price – at some point.

Earlier this week, gold dropped $50 per oz in one day so we added to our holding of Royal Gold – a unique player in the gold mining industry, it is a company that owns no mines nor mining equipment.  They simply own royalty interests in 37 producing mines and 24 development stage mines – a situation I prefer to having the exposure of mining itself.  Until today, gold continued to fall.

Below is the graph of the price of gold for today – did gold finally bottom?  Is it set to deliver outsized returns like it did after the bottom in 2006?  Will investors be fortunate enough to catch it?


For what its worth, price bottoms are generally a process where the price of the stock/commodity/bond/etc will hit bottom, move higher, fall back to the bottom, then finally start a move up.  If anything, this is likely just the first of the double bottom process with a test of the  low price still to come.

All-in-all, it was a difficult week to be an investor but there were some opportunities to pick up some stock in companies that got hit with news related sell-offs and bounce backs.  The biggest is Cypress Semiconductor:


This is a 10-day chart of Cypress – we bought shares during the big climax sell-off on Wednesday at $11.12, it bounced yesterday up  almost 9% and fell today a bit over 2% for a nearly 7% net gain.

I have a gut feeling that the rest of the year will be market that you have to be very opportunistic, booking profits when you have a chance and buying fear when companies get sold below their real value.  Never a dull moment in the investing business.