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In the world of investing, so many things work better in theory than in practice.
Executive stock options? They are now reviled by investors as a way for management to quietly loot the companies they are paid to steward. When done in excess (which is the rule) they massively dilute shareholders over time. They also encourage short-termism and a fixation on raising the company’s stock price in the short term at the expense of planning for the company’s long-term future.
But before they became popular in the 1980s, they were touted as the solution to the age-old problem of aligning the interests of shareholders and management. Yes, even before the “decade of greed,” managers were seen as being self-serving and as managing the company for their own benefit rather than for the good of the shareholders. But if top executives were shareholders, then there would be no more conflicts of interests, right?
Well, it sounded good…in theory.
Along the same lines, share repurchases have become popular in recent decades as a tax-efficient alternative to cash dividends. Earnings paid out as dividends are taxed twice, at both the corporate and individual investor levels. But when a company uses that same cash to buy back its own shares in the open market, it can boost earnings per share without creating a taxable event.
And unlike dividends, which are generally paid regularly, stock buybacks can be done sporadically as their cash position allows. Management is often reluctant to raise the quarterly dividend because cutting that dividend if conditions took a turn for the worse sends a very bad signal to the investing public. But buybacks can be done quietly behind the scenes and can be stopped at any time without drawing attention.
Again, it sounded good…in theory. In practice, companies tend to have awful timing. They buy their stock when prices are high, but in a market panic when prices are low they are often unable to buy because a bad economic outlook causes them to hoard cash. In the worst cases, they actually have to issue new stock…at low prices that dilute shareholders. Buying high and selling low; this is not exactly a formula for maximizing shareholder value.
But the most insidious aspect of stock buybacks is that they often fail to reduce the number of shares outstanding.
How does that make sense? Simple. The company retires shares bought at full price on the open market to soak up new shares issued at a discount to fulfill employee and executive stock options. It’s highway robbery that is, sadly, perfectly legal.
How bad are the numbers here? Barron’s reported in January that the 500 largest U.S. companies repurchased about a quarter of their equity’s dollar value since 1998. But the number of shares outstanding actually grew more than 7%.
Don’t think that I am against stock buybacks, however. I’m a big fan of them, assuming that the stock is reasonably priced at the time and that the buybacks are actually used to reduce share count. But here, we have a mixed bag.
I recently highlighted three Dividend Achievers that were also reducing their share counts: Wal-Mart (NYSE:$WMT), Microsoft (Nasdaq:$MSFT) and Intel (Nasdaq:$INTC).
I love all three as long-term dividend payers to drop into your portfolio and forget. But of the three, Wal-Mart has been the friendliest to shareholders. Nearly all of its buybacks have gone to retiring shares, and the company has reduced its share count by a quarter over the past decade.
Microsoft and Intel have reduced their share counts too. Microsoft has shrunk its share count by 2.6 billion shares, or 23%, in the past decade. But its share repurchases are bigger than that by nearly half, with the rest being used for stock-based compensation. Intel’s performance on this count is also a mixed bag. But overall, I can’t complain too loudly. Despite some dilution from stock-based compensation, both have still managed to shrink their share count while simultaneously boosting cash dividends.
In any event, the key point to take away from this is that you should take the share buyback numbers you read about in press releases with a good-sized grain of salt. In a vacuum, a share repurchase plan means very little. They must actually reduce share count to be considered “shareholder friendly,” and they should only be implemented when market prices are favorable.
Disclosures: Sizemore Capital is long WMT, MSFT, and INTC
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By www.CentralBankNews.info Uganda’s central bank kept its Central Bank Rate (CBR) steady at 12.0 percent for the fourth month in a row, saying upside inflationary risks had risen slightly but economic growth was below potential, credit growth was weak and the exchange rate stronger, factors that mitigate inflationary pressures.
The Bank of Uganda (BOU), which cut its CBR rate by 1100 basis points last year as inflation eased, said its forecast for “annual core inflation over the next 12-18 months remains largely unchanged at around 5 percent, though the upside risks have increased somewhat.”
Uganda’s headline inflation rate eased to 3.4 percent in February from January’s 4.9 percent due to lower food prices and annual core inflation was largely flat at 5.5 percent from January’s 5.6 percent.
“The monthly core inflation, however, accelerated, pointing to a buildup of core inflationary pressures that may need to be checked, if sustained,” the BOU said in a statement.
The central bank targets annual inflation of around 5 percent.
The BOU said growth in monetary aggregates continued to recover at a modest rate but shilling-denomined loans to the private sector remained stagnant due to high lending rates and the difficulties facing companies.
“Although real output is still below potential, real GDP growth is projected to gradually recover in 2013 and 2014; a projection which is supported by recent trends in the Composite Index of Economic Activity, that point to signs of increased buoyancy in the economy,” the bank added.
Uganda’s Gross Domestic Product expanded by 1.8 percent in the third quarter of 2012 from the second quarter for annual growth of 2.8 percent, down from 3.2 percent in the second quarter.
www.CentralBankNews.info
The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.”
With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09.
All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.
The New York Times declares, “Economic Gloom Starting to Lift.”
Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.
The latest Financial Forecast published Dec. 7, and the latest evidence reinforces the message of the chart’s title. The PPI elevator has already descended to a lower floor.
The Labor Department said its seasonally adjusted producer price index slipped 0.8 percent last month, the second straight decline.
November’s drop in wholesale prices was the sharpest since May.
Reuters, Dec. 13
The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment.
The Thomson Reuters/University of Michigan’s preliminary reading of the overall index on consumer sentiment plunged to 74.5 in early December, the lowest level since August.
It was far below November’s figure of 82.7.
Reuters, Dec. 7
The Federal Reserve’s machinations — which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases — will not stave off a developing deflationary trend.
In the second edition of Conquer the Crash (p. 114), Robert Prechter describes what generally happens, depending on the position of the Elliott waves, near the end of the Kondratieff cycle.
Near the end of the cycle, the rates of change in business activity and inflation slip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.
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This article was syndicated by Elliott Wave International and was originally published under the headline Two Signs That Deflation is Far From Over. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
By OilPrice.com
The oil and gas game can be a tricky one for junior companies, but if played right the pay-off can be massive. At a time when juniors are risking a lot in volatile venues in the Middle East and Africa, Canada’s Aroway Energy (ARW) is planting its feet firmly in homeland soil and in conventional plays.
Why? Because for the smaller juniors this is not a long-term game and blowing all your capital to drill a single unconventional well in a risky frontier won’t pay off. Canada still has plenty to offer for juniors, even though you have to kiss plenty of frogs to find the prince. The end game, after all, is merger and acquisition.
In an exclusive interview with Oilprice.com, Aroway CEO Chris Cooper discusses:
Interview by James Stafford of Oilprice.com
James Stafford: Junior oil companies have been storming the scene with some bold investments in tricky frontier areas. Where do you see this going and what will the next phase for the juniors be? Where will the action be, in conventional or unconventional plays?
Chris Cooper: I am a big believer in the conventional plays. I find that the non-conventional plays are turning into more of a game for the intermediate-size companies primarily as a result of the capital that is required to exploit the resources. Horizontal wells with multi-stage fracturing is an expensive game. I find that the conventional plays expose juniors to a less risky scenario with higher returns on investment and longer-term production more often than not.
Given the current state of the capital markets and the scarcity of funding, I think the smaller juniors will continue to play in the conventional arena.
James Stafford: What’s the ideal partner for a junior company, and what can make or break it for a junior?
Chris Cooper: As far as make or breaking a junior, I believe you need to minimize the company’s risk by drilling wells that are going to give you good internal rates of return and steady production; a good mix of development and exploration wells. It is also very good to have a good operator that is responsible in keeping a control on costs.
James Stafford: What separates the good management teams from the mediocre in the Canadian junior oilpatch?
Chris Cooper: Management teams that have built and sold companies in the past have a responsible, methodical approach to how they run their businesses. More often than not, these teams do not try to re-invent themselves by drilling wells and formations that they have not done in the past. They continue to focus on what they know best, whether it be drilling in the Peace River Arch, chasing Leduc wells, or focusing on cardium wells. They often do not stray from their formulas and that is why they are good teams.
James Stafford: More Canadian oil is now being marketed by rail. Can you put the rail versus pipeline transport comparisons into perspective for us from a Canadian operating perspective?
Chris Cooper: A lot of companies, including Aroway, are capitalizing on the benefits of moving their oil via rail as opposed to pipeline. I think it will increase our netback, our profit per barrel, by several dollars immediately.
For instance, before we purchased our West Hazel Property in Skaskatchewan, the owners would truck to Talisman or another big operator that was pipeline-connected. Then, once the oil got to the pipeline-connected operator, they had to pay a certain amount of money to get it in the pipeline for diluents to meet pipeline specifications. Then they had to pay for the pipeline tariff and then they got the price the pipeline operator provided wherever they were on the pipeline.
So for example, the last month we got $53 to $54 a barrel, after the blend-in tariff for our West Hazel production, which is probably the lowest you’re going to see for a long time. Our netback on that oil was still greater than $20 a barrel. But for that $53.32 a barrel we sold, if transported by rail, we remove the pipeline tariff, we remove the blend for the diluents and we get $9 more added to the netback value.
So what we’ll end up doing is trucking our oil from the field to a company called Altex Energy, which is partly owned by Shell Canada. Shell owns all the railway cars and all these railway cars get filled up with heavy crude and shipped down to their Port Arthur facility on the Gulf Coast. At Port Arthur what typically happens to our crude–because it’s somewhere between 11 and 13 degree oil—is it goes straight into bunker fuel for ships.
So the refinery doesn’t have to touch it in some cases and that’s where we get a pretty substantial bump. Then you’re not subject to pipeline apportion and issues. It just opens up whole new markets for you.
At the end of the day we will get somewhere around $66 or $63 a barrel this month and then we’re going to bump that up by another $9 next month by taking all the crude we have in West Hazel by rail. So our netback will be $35 to $40–and that’s just the West Hazel crude.
James Stafford: What is the market like for assets right now, from a junior’s perspective? What’s the ideal prospect?
Chris Cooper : Asset sales are heating up. We are finding that there are a lot of assets being marketed through companies like Sayer and NRG Divestments. There are also several larger brokerage firms representing companies for “strategic alternatives.”
As an example, Aroway just picked up a great producing asset in Saskatchewan for $10,000/flowing barrel. The market for similar assets in Saskatchewan at that time was about $40,000/flowing barrel. Companies need to exercise patience and do their due diligence. Not to mention kissing a lot of frogs to find these types of assets. They are out there.
James Stafford: A lot of North American juniors are hitting the riskier frontiers with all they’ve got these days—from Iraqi Kurdistan to Sudan, even Somalia. Why are they willing to take this risk and is it paying off?
Chris Cooper: With higher risk comes higher reward, but I don’t think it is paying off in the broader sense. Sure, there are 2 or 3 juniors that have hit home runs, but more often than not a junior is going into those types of plays with only $5 or $10 million in the treasury and they blow this after drilling just one well. I have always believed there is great opportunity offshore, but the risks are lower and infrastructure and political stability in North America is in place. There is plenty of opportunity in North America.
James Stafford: Related to this, where do you see Canada’s oil and gas industry 10 years from now?
Chris Cooper: I see the oil and gas industry in Canada continuing to grow with the advancement of new drilling techniques and new innovations in exploiting existing pools to increase the recoverability. We have a stable political system in place which enables business opportunity to grow in Canada.
James Stafford: We hear a lot about Alberta, but what kind opportunities are we looking at in Saskatchewan?
Chris Cooper: Saskatchewan is definitely open for business. The royalties paid in Saskatchewan are very low and the production opportunities are very good. We are actively looking for new opportunities in Saskatchewan.
James Stafford: Do you lend any significance to Canadian media reports that the Cabinet is reviewing some new legislation that would set stiff payouts for the oil industry for accidents?
Chris Cooper: Personally, I think it is part of the grand plan to help the approval process. My theory is that the Canadian government will lay out a plan for big fines and then push to have the pipelines approved. The construction of pipeline projects creates jobs and would be good for the economy.
James Stafford: Do you think this is simply a carrot for the protesters at a time when the Enbridge hearings are raising tensions?
Chris Cooper: There will always be protesters.
James Stafford: What do you see happening to energy markets in 2013?
Chris Cooper: I see the price of oil and gas both increasing. They are depleting resources….it’s an inevitable function of supply and demand.
James Stafford: What are your views on the Keystone XL Pipeline? Do you think it is likely that Obama will approve its construction, and if so how will this affect your business?
Chris Cooper: I think he will approve it. The Governor of Nebraska gave the new route the okay. I think now that Obama has been re-elected he will go ahead and approve. Again, that is a lot of job-creation for an economy that is struggling. More pipelines are good for Canadian producers as it helps get our oil to market.
James Stafford: What are Aroway’s top three plays, and why?
Chris Cooper : Our current plays all have different risk and production profiles. We have a large inventory and land spread in our JV lands in the Peace River Arch, which provide a healthy mix of development and exploration risk. Very big upside in this play.
Our West hazel production play is a very stable, long-term production scenario that we feel will provide great cash flow and netbacks to the company. For little investment we feel we can substantially increase production at West Hazel.
Our Kirkpatrick Lake and Little bow lands in central Alberta are also very prospective properties that have the ability to turn into new core areas for the company. All our properties are oil focused and are highly prospective.
James Stafford: What can we expect from Aroway in 2013?
Chris Cooper: I am confident 2013 will be a big growth year for Aroway. We will continue to drill on our existing properties and leverage our production and financial position to take advantage of existing and upcoming opportunities in the sector as far as acquisitions and potential farm-in opportunities. We are confident it will be a big year for our shareholders.
James Stafford: 2013 has been touted as the year of the merger and acquisition. As one of the hottest investments around at the moment, do you think that Canadian junior oil & gas companies, like yourselves, will become a favoured target for larger oil companies looking to expand?
Chris Cooper: I think I can speak for most junior companies when I say, ‘I hope so’. There are a lot of big companies that need to fill the production gaps in their natural depletion, thus in some cases forcing big companies to do that through acquisition. I think the goal for most juniors is to be taken over by a bigger company at a nice premium for the shareholders.
Source:
http://oilprice.com/
By. James Stafford of Oilprice.com
EURUSD
Yesterday, nothing new happened to the overall picture for the euro. The trading session was boring and dull. The EUR/USD continues to be in a consolidation phase. Having rebounded from 1.2983, the pair managed to essentially recover to the resistance near 1.3045, which does not mean any improvement in its prospects. The euro is trading within a descending resistance line so far, and its attempts to increase continue to attract the sellers. Thus, the pair’s reduction to the support of 1.2880 still looks very real. Only the growth and the ability to consolidate above 1.3158/71 would mean a change in the trend.
GBPUSD
The GBP/USD is also consolidating after its decrease, which was suspended by the psychological level 1.5000, as expected. The pair managed to recover to 1.5140, but it is premature to talk about the development of an upward correction, at least while the pair is still trading below 1.5230 — 1.5280. The ability to consolidate above the 53rd figure would indicate the potential of developing a more substantial correction. Until then, the pair would remain under pressure, and it can drop towards the 48th figure.
USDCHF
The USD/CHF increased to 0.9462, then its entered a consolidation phase, whete it dropped to the 94th figure. The dollar is still able to stay above this figure, which shows the saved demand for it, as well as the potential to return to the current highs before their passing. In principle, falling below the 94th figure will not mean the worsening of the outlook, while the pair will be trading above 0.9280 — 0.9260. The next target for the bulls will be the level 0.9500, then — 0.9550.
USDJPY
Last week, the USD/JPY finished its trading period with its increase to 93.68, but at the beginning of the new trading week, the pair bulls did not have enough strength to continue increasing, and the rate dropped to 92.91. The bulls’ inability to break above 93.68 gives the bears a chance to try to develop the downward correction again, but if the pair overcomes this resistance, there will be no correction for a while. However, the bears have to pass the support near 92.20 — 92.00, in order to talk about the corrective movement.
London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 5 March 2013, 07:00 EST
U.S. DOLLAR gold prices climbed to $1584 an ounce Tuesday morning, 1.2% above last week’s low, as stocks and commodities also edged higher and the Dollar weakened slightly after another Federal Reserve policymaker spoke in favor of ongoing quantitative easing.
Silver hovered just below $29 an ounce this morning, 3.5% up on last week’s low, while major government bond prices fell.
“Given the heavy selling we saw in a host of markets last week, [precious metals] could push a little higher over the next few days,” says Ed Meir, metals analyst at brokerage INTL FCStone, “but having said that, the technicals in gold and silver remain quite poor and we likely have to do quite a bit more on the upside before some of the technical damage is repaired.”
“Between here and the $1635.48 December low, the gold price should continue to encounter resistance,” says Commerzbank technical analyst Karen Jones.
“Failure to hold over $1554.83 [however] will trigger losses to the $1522.48 December 2011 low.”
Gold in Euros rose back above €39,000 per kilo (hitting €1215 an ounce), slightly up on the week.
Sterling gold prices by contrast were slightly down on last week’s close at £1045 an ounce by lunchtime in London.
The volume of holding held to back shares in the SPDR Gold Trust (ticker GLD), the world’s biggest gold exchange traded fund, fell for the tenth straight session yesterday, the first time this has happened since the GLD was launched in 2004.
This makes the current run of outflows twice as long as the previous highest, with the GLD seeing its bullion holdings fall for five straight sessions on two previous occasions – in October 2010 and May 2011.
On the New York Comex meantime speculative futures traders last month built up their biggest gold short position since 1999.
Self-directed bullion investors meantime grew less bullish towards gold last month, according to the Gold Investor Index from BullionVault, which fell to a five-month low at 54.4
In the US, asset purchases made by the Federal Reserve as part of its ongoing quantitative easing program “have been reasonably efficacious in stimulating spending” said Fed vice chair Janet Yellen Monday.
Yellen added that she does not currently see any potential costs to QE “that would cause me to advocate a curtailment of our purchase program” and that it should continue until the US labor market improves and that the Federal Open Market Committee should not unwind QE until after interest rates start to rise from their current historic lows.
“The committee’s intention is to leave that accommodation in place until well into the recovery,” she said.
Last Week, Fed chairman Ben Bernanke said there are “clear benefits” to QE when he testified to Congress.
Since the start of February the US Dollar Index, which measures the Dollar’s strength against a basket of other currencies, has risen more than 2.5% to six-month highs above 82.
“A strengthening Dollar, an improving macro[economic] outlook and lower inflation expectations would certainly drive gold lower,” says a note from Societe Generale.
“Since the generally ‘negative’ real [inflation-adjusted] interest period since 2007, gold prices have rallied…if history provides guidance, returning to positive ‘real rates’ would create significant headwinds for gold.”
Over in Europe, economic conditions “may…justify in a certain number of cases reviewing deadlines for the correction of excessive [government] deficits,” said European Commissioner for Economic and Monetary Affairs Olli Rehn Monday, following the latest meeting of Eurozone finance ministers.
France is set to miss its deficit target of 3% of GDP this year and may do so again next year.
“We do not want to add austerity to recession,” said French finance minister Pierre Moscovici.
China “will have to work hard to attain” Beijing’s official growth target of 7.5% this year, due to a “growing conflict between downward pressure on economic growth and excess production capacity”, outgoing premier Wen Jiabao said Tuesday.
Growth of 7.5% would represent the slowest growth since 1990.
China was the world’s second-biggest gold buying nation last year, according to the most recent data from the World Gold Council.
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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben can be found on Google+
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
By www.CentralBankNews.info Australia’s central bank left its benchmark cash rate unchanged at 3.0 percent, as widely expected, saying the outlook for inflation would make it possible for the bank to ease policy if necessary but there are signs that the impact of last year’s rate cuts are starting to stimulate the economy.
The Reserve Bank of Australia (RBA), which cut its cash rate by 125 basis points in 2012, most recently in December, said inflation is likely to remain in line with the banks’ target and with economic growth expected to be a little below trend in the coming year, it is appropriate to continue with an accommodative policy stance.
“Present indications are that moderate growth in private consumption spending is occurring, though a return to the very strong growth of some years ago is unlikely,” said Glenn Stevens, governor of the RBA, in a statement.
While the full impact of last year’s rate cuts will take time to become apparent and “there are signs that the easier conditions are having some of the expected effects,” Stevens added that the exchange rate remains higher than expected, given the decline in export prices, low credit demand and the fact that some households and firms were focused on reducing their debt.
The RBA’s statement largely mirrors last month’s statement. The RBA started its easing cycle in October 2011 and has cut rates by 175 basis points since then in an attempt to counter the impact of lower Chinese demand for raw materials and the peak in resource investments, which “is approaching.”
Australia’s Gross Domestic Product rose by 0.5 percent in the third quarter from the second quarter for annual growth of 3.1 percent, down from 3.7 percent and 4.3 percent in the first quarter.
Stevens said the downside risks to global growth appears to have lessened in recent months and growth in China has stabilised “at a fairly robust pace.”
In its latest quarterly report, the RBA forecast economic growth of 2.5 percent in the year to June 30 and inflation of 3.0 percent. The RBA targets inflation of 2-3 percent.
In the fourth quarter, Australia’s inflation rate rose to 2.2 percent, up from 2.0 percent in the third quarter and 1.2 percent in the second.
Great news!
The hate mail has just started arriving!
Let me explain why this is a good thing.
I’ve been writing about gold and silver for years; but only now have I started copping it. I’ve had some cranky emails, and also some posts questioning my sanity on my free Google plus page.
‘Wishful thinking!’ says Bill on my call for a rally.
‘You will regret writing your last report indicating Gold has started its big rise,’ emailed Stewart.
And my favorite, ‘I’ll bet you $50 the gold price won’t be at or above US$1900 by June 30th,’ from Luke.
Then back for more the next day, Stewart tells me, ‘Gold stocks are toxic. I am getting out while I can’.
But why do I reckon that suddenly copping all this a good thing?
The reason this is such good news is that extreme vocal bearishness is without doubt the best sign of a market bottom that you’ll ever see.
(Please feel free to tune into our free Google plus page to give us your two cents worth.)
It’s only at this point of capitulation, when investors start dumping assets and throwing insults, that you can have a genuine turning point in the market.
For example, back in late July 2012, I had a few emails in the Diggers and Drillers inbox that would have made even a hardened miner blush.
The whole resource sector had been falling for 18 months. It was the darkest of days. But only at that point of capitulation for many did the frustration spill over in earnest into emails that needed a parental guidance warning.
At that point, I knew the market had bottomed. A few days later, on the 2nd August I told Diggers and Drillers readers about the emails, saying that:
‘There’s an age-old cycle of market emotions, and the general apathy and low participation in the current market, along with the number of frustrated investors… could tell us we are somewhere around ‘despair’ [in the chart below] right now… If we are there, or close, then the worst could be behind us now.’
And sure enough, the timing of the emails coincided almost exactly with the resource sector hitting rock bottom. I copped it on the 19th July, and the mining sector then bottomed on the 25th July.
Since then it’s rallied 13.8%.
I think of it like this: An asset in uptrend is like a bus; it can only carry so many passengers. When there are too many punters trying to get a free ride, it’s overloaded, so it just won’t go anywhere.
You have to wait for the breaking point, when you’ll get a mass exodus. And only then can the bus resume its journey. Or in other words, only after the depths of frustration – and seller exhaustion – can that asset’s uptrend resume.
This is exactly why the old saying goes: bull markets are born in pessimism.
So, when investors are at record levels of bearishness, it’s yet another stark warning that we are at, or close to, a bottom for gold.
This is true in all markets. And for gold, you can see how well it works in the chart below. At the bottom of the chart, you’ll see the ‘Ned Davis Research gold sentiment daily composite index’ (paid research republished with permission by Tocqueville).
I’ve circled in red the times it’s plunged since 2006 as the market went bearish on gold.
Then, I’ve circled in green the corresponding times in the gold chart in the top half. This is where it gets interesting. You can see that since 2006, when the market goes maximum bearish on gold, it has always preceded a rally that lasted a few months at least, or in some cases more than a year.
So it’s great to see the market so deliciously bearish on gold right now. If this pattern repeats, get ready for a chunky move in gold very soon.
We had more fuel for the fire over the weekend. The US Federal Reserve wheeled out its chairman, Dr Ben Bernanke, to deliver a riveting speech at ‘The Annual Monetary/Macroeconomics Conference: The Past and Future of Monetary Policy’.
After recent confusion from the Fed’s messages, Bernanke gave good reason to expect gold to pick up from here:
‘…the expected average of the short-term real rate over the next 10 years has gradually declined to near zero over the past few years, in part reflecting downward revisions in expectations about the pace of the ongoing recovery and, hence, a pushing out of expectations regarding how long nominal short-term rates will remain low.‘As the persistence of the effects of the crisis have become clearer, the Federal Reserve’s communications have reinforced the expectation that conditions are likely to warrant highly accommodative policy for some time.’
I’ve emphasised those two sections in bold.
The first one is bullish for gold because low rates are generally better for gold. The reason is, historically some investors would rather have the funds in the bank or in bonds when there’s interest to be had, instead of in non-yielding bullion.
The second one is good news too, as ‘highly accommodative for some time’ translates to ‘money printing for some time’ which has so far been very positive for gold.
Yet this is the just the latest in a recent series of signposts warning of a big move coming for gold.
Dr Alex Cowie
Editor, Diggers & Drillers
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