China’s Holding It Together…For Now…

The Shanghai Index has hit an uptrend...

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Not Scared of the Stock Market

Not the "dumb money" anyway...

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The “Rich Man’s View” of Gold

The big news in this gold chart isn't news at all...

The "NEWS" in the gold charts is the near-$100 per ounce decline over the past month, writes Brian Hunt in Steve Sjuggerud's Daily Wealth.

This price weakness has a lot of investors stressing out and searching for an explanation for what's happening to the No.1 form of "real money".

But here's a gold chart showing why stressing over the decline is crazy...

Remember, gold is one of the world's most difficult-to-price assets. The metal cannot be valued like a piece of real estate (using rental yields) or a share of stock (using book value). It can trade on all kinds of wild emotions.

Thus, huge swings in the Gold Price chart have proven to be the norm...not the exception.

Given gold's volatile nature and the recent price weakness, we again urge folks to take the "long view" (aka the "rich man's view") of gold...and note that the gold chart could show a fall all the way down to $900 per ounce...and still remain in the confines of its bull market.

It would also, I believe, be a wonderful chance to buy more.

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A Gold Profit Strategy

How do you know when it's a bull market and time to buy gold...?

I'VE COME UP with a Simple Strategy to tell you when to buy gold...and when not to own it, writes Steve Sjuggerud in his Daily Wealth email.

It's so simple, you could teach a monkey to follow it.

Best of all, US$10,000 invested in this Simple Strategy would have turned into nearly $2 million since the start of the '70s. Just buying gold – and holding it – over the same time frame would have turned $10,000 into just $300,000.

The chart here tells the story. The blue line is the Simple Strategy. The gold line is the price of gold:

Not only did this Simple Strategy dramatically outperform the price of gold, it did so with substantially less volatility...

My Simple Strategy managed to steadily rise from the lower left of the chart to upper right. It almost entirely avoided gold's big Dollar-price fall in 1975-1977. And it generally avoided gold's two-decade fall from 1980 to 2000.

The Simple Strategy is so simple, it's almost embarrassing. But it is based on an important point. Let me explain it.

How do you know when it's a bull market in gold? The crucial point is to recognize when gold is only rising because there's a bear market in the Dollar.

You see, if the US Dollar is crashing against other currencies, it's probably also going down in terms of gold. That can make it look like gold is in a bull market. But what if gold is falling in terms of the Euro or the Yen? That's not a gold bull market.

So what is a bull market in gold?

One simple definition is: when gold is going up in terms of the world's most important currencies. I took a look at the four most widely traded currencies – the US Dollar, the Euro, the British Pound, and the Japanese Yen. And I came up with my Simple Strategy. Here's how it works:

If gold is up versus all four currencies over the previous month, then buy gold. Repeat the next month.

That's it. And when I tested it over the last 40 years of data, the results were astonishing.

When gold was up versus all four currencies in the most recently ended month – when my Simple Strategy flashed a buy signal – gold rose at a compound annual rate of 35%. My Simple Strategy was in buy mode about a third of the time. (All the rest of the time, gold lost money.)

So if you'd simply stuck to buying gold when you got a signal, and then switched to cash (Treasury bills) when the signal was off, you'd have turned a US$10,000 investment in 1971 into nearly $2 million today.

Since 1971, the price of gold has risen at a compound annual rate of 9.2% a year. By using this much less volatile Simple System, where you're invested in gold about one-third of the time, your wealth would have compounded at 14.5% a year.

This system is simple, but it's sound. History shows that a great predictor of when gold will go up is when it's already going up versus the major currencies.

It would be easy to refine my Simple Strategy to produce more dramatic results (and chances are we will for a future product we're working on). Or you could leverage it up with a double-long gold fund, for even bigger profits.

But at the very least, now you know how to find out if conditions are bullish for gold. And in case you're curious, we are currently in a bull market in gold...and we have been since March. Each month, gold has been up against all four currencies. Trade accordingly.

Buying gold today? Make it simple, secure and cost-effective here...

Gold’s Smooth, Long-Term Uptrend

The Gold Price began this bull market in 2002...

NOW THAT the Gold Price has soared from $925 an ounce to $1200 an ounce, it's amazing how many people CNBC trots out to explain every random $20 move in the metal, writes Brian Hunt in Steve Sjuggerud's Daily Wealth.

Trying to analyze every move in the Gold Price is a waste of time. We don't see gold as an investment. We see it as real-money "crisis insurance". We bought our gold long ago...and we hope to never have to use it. Not much more "analysis" is needed here.

We also encourage folks to take the "long view" when taking stock of their gold holdings. This long view – a 10-year chart of gold – is our chart of the week.

Gold began its uptrend in 2002. Since then, it has climbed higher every single year...and now sports one of the smoothest long-term uptrends in history.

You'll also notice the long-term trendline we've drawn in blue. As you can see, gold could fall all the way down to $900 an ounce and remain within the confines of its uptrend. Keep this sensible view in mind when listening to the ridiculous short-term-focused commentary that goes for "analysis" these days.

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Buy What’s Working, Sell What’s Not

Gold Mining stocks are outperforming the ailing stock market...

"DO MORE of what's working, and less of what's not." That's what supertrader Dennis Gartman regularly writes, says Steve Sjuggerud in Daily Wealth.

This is the right advice. As Dennis has explained over the years, you'll get half of the gain of a bull market in the last 10% of its duration (i.e. in the last year of a 10-year rally).
 
Whether it's dot-com stocks or commodities, you never know what is heading straight up. But if you do more of what is working – if you buy into the uptrend – you have a chance at capturing big gains.
 
The problem is, it seems like nothing is working right now. For example, I wrote about big drug companies on Friday. The sector is cheap and ignored – two of the things I look for. Drug giant Pfizer is trading at just six times this year's estimated earnings.
 
But the problem with Pfizer (and the drug companies) is there's no uptrend yet. I'm buying at record cheap prices. But I know I'm swimming upstream to start...and that's not where I really want to be. We can do better.
 
So where's an uptrend now? What's working today? Gold Mining stocks are working.
 
While everything else has fallen, gold stocks held on. The biggest names in gold stocks – Barrick, Goldcorp, and Newmont, are all trading very close to new highs for 2010. The uptrend is in place here. And relative to the price of gold, Gold Mining stocks still look cheap right now.

When gold rises, the profits of Gold Mining companies rise even more. So when gold goes up, gold stocks should soar. But get this: Gold is up 30% in the last two years. Based on the tried-and-true rules, gold stocks should be up 60% or more. But gold stocks are only up 10% in the last year.

Gold has soared. But gold stocks haven't. That leaves them "cheap" relative to the price of gold...and need to catch up. Gold stocks are also ignored. Because while there's plenty of talk about gold out there, the average man on the street doesn't own a gold stock. Heck, the average investor probably doesn't own a gold stock.

We have what I like to see. Gold Mining stocks are cheap relative to gold. Most people don't own them. And, importantly, gold stocks are working right now. Remember, you want to own more of what is working and less of what is not. Gold stocks fit that bill.

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Gold Stocks vs. the S&P

Whether or not Gold Mining stocks beat gold, they've risen as the S&P fell since late-April...

BACK IN LATE 2008, shares in Gold Mining companies suffered one of the worst wipeouts in market history, writes Brian Hunt in Steve Sjuggerud's Daily Wealth.

Most small, speculative gold stocks lost over 80% of their value in just a few months. Even the bigger, more established gold miners lost nearly 70% of their value in seven months.

Since this washout, many Gold Mining stock investors are scared to death of what could happen to their holdings if a big market correction hits.

Well, such a correction has hit. Investors have fled stocks in general in the past month and a half. But they've left gold stocks alone...and they've created an extraordinary "divergence".

If you're bullish on the sector, you have to be aware of what's happening now. To see what I mean by "divergence," we need to check in on how gold stocks are performing relative to the stock market as a whole.

Below is a performance chart displaying the percentage gain in the big gold stock fund GDX (black line) versus the performance in the benchmark S&P 500 stock index (blue line) over the past four months.

Up until late April, gold stocks and the broader market moved higher at about the same rate (although gold stocks were more volatile). Then, on April 23, the broader stock market reached its 2010 peak.

That's when gold stocks and the S&P started "diverging" from each other. The S&P is down 11% since April 23. Gold stocks – helped by the near-$100-per-ounce climb in the Gold Price – are up 8% during the same time.

This is incredible "relative strength" from the gold stock complex. After all, at the end of the day, gold stocks are stocks. When investors need to dump portfolios and raise cash, gold stocks are just as easy to sell as the next stock.

Gold stocks are also viewed as more speculative than most sectors... so it's a bullish sign to see them hold up while folks are dumping other speculative positions, like oil stocks and emerging market stocks.

But the underlying strength in gold, coupled with large investors taking big positions in gold stocks, has allowed gold miners to buck the negative overall stock trend.

For instance, mega hedge-fund manager John Paulson has around $2 billion in just one of his gold stock positions, Africa-focused AngloGold Ashanti (AU). Considering that the soaring price of gold is pumping up profit margins for miners, it's no wonder super investors like Paulson are buying them right now.

If you're looking to take a similar gold stock position, some elite miners to consider are Goldcorp (GG), Newmont Mining (NEM), and Randgold (GOLD). You can also take the diversified path and own the big gold stock fund (GDX).

There's no guarantee gold stocks will continue this extraordinary outperformance. This trend is relatively new. But it's likely to continue. The uptrend in gold is the most powerful uptrend in the market right now. It's been brushing broad market weakness aside and taking gold stocks with it.

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Commodity Bear Market

Commodities have entered a bear market. Unlike gold...

LAST MONTH, ExxonMobil saw $38 billion erased from its market cap in just two weeks...more value than the entire market cap of most oil companies. More value than Nike's market cap, writes Matt Badiali, editor of S&A Resource Report, in Steve Sjuggerud's Daily Wealth email.

As many DailyWealth readers know, ExxonMobil is one of the best-managed companies in the world...and one of the safest oil investments ever. The only time you'll ever see such a big chunk of hide torn from ExxonMobil is when you have a three-day period like May 4 through May 6, 2010.

During those days, Nymex crude oil futures fell $9.08 per barrel...10.5%. It was the largest three-day percentage decline in crude oil since June 1998. It also highlights the central problem commodity investors face right now:

Commodities have entered a bear market.

Commodities are "cyclical assets", meaning they tend to go through huge booms and busts. When folks see the price of a commodity shooting higher, they're quick to produce more and more of that commodity, which eventually brings on so much new supply it causes prices to crash.

The mirror image of this action is when the price of a commodity sinks to new lows. This is when folks shut down production in order to stop bleeding money on a mine or oil well. Supply gets pinched, and prices skyrocket.

Now I'm no hardcore devotee of technical analysis (also known as chart reading), but I do know it's suicide to buy into a commodity downtrend. No matter how great an oil company is, if the price of oil is sinking, its shares are going lower. To size up commodity trends, I use what's called a "200-day moving average" (200-DMA).

A moving average simply takes the closing prices over a given time period – in this case the last 200 days – and averages them together. The 200-DMA smoothes out day-to-day volatility to give us a view of the trend.

Bull markets never go straight up. But when a market is trading above its 200-DMA, you can figure it's in a bull trend. When a market is trading below its 200-DMA, you can consider it to be in a bear trend. The chart below is the benchmark commodity index plotted with its 200-DMA. You can see it is now officially in a bear market...and caution should be our main strategy here.

What does this cautious stance actually mean for investors? It means being extra mindful of your protective stop losses...and avoiding big position sizes.

Two particularly risky areas are oil stocks and base metal stocks. Oil and copper are highly dependent on the global economy. Any slowdown in Europe or China and they'll suffer. I think the recent downturn will eventually produce some spectacular bargains (especially in oil services), but I'd rather see folks focus on gold stocks and natural gas stocks right now.

You see, while oil companies like ExxonMobil were selling off last month, gold stocks and natural gas stocks held steady. I've profiled why you should be long natural gas here and here. It was too beaten down to sink any lower during the May selloff.

And gold? Last month, I told my subscribers that gold is being increasingly viewed as a safe-haven currency by big money investors. It's not behaving like a typical commodity. Gold demonstrated this "not a commodity" attribute by holding steady during the May selloff. Gold stocks like Newmont Mining and Barrick Gold held steady in turn.

Keep in mind...oil and copper prices in particular are dependent on the global economic situation. Ask 10 analysts their take on the situation, and you'll get 10 different answers. But you can be sure natural gas and gold stocks are holding up extremely well while much of the commodity complex is weak. This leads me to recommend them as the best places for commodity investors right now.

Ready to Buy  Gold...?

Buy Gold, Forget About Your Grandkids

"Buy Gold for yourself," says fund manager David Einhorn. The debt crisis will strike soon...

"GOOD NEWS for the Grandchildren" was the title of David Einhorn's speech last Wednesday at the Ira Sohn Conference in New York. I was there, writes Steve Sjuggerud in his Daily Wealth email.

"Are you worried that we are passing our debt on to future generations?" Einhorn began...
 
"Well you need not worry. Our generation – not our grandchildren's – will have to deal with the consequences..."

Einhorn is worth listening to. (His latest ideas are outlined in this New York Times article.) Einhorn's investment success has made his hedge-fund customers wealthy. He's earned them more than 20% per year compounded, after fees.

Einhorn famously revealed that Allied Capital was defrauding the government. He wrote a great book about his six-year battle with Allied, called Fooling Some of the People All of the Time. All value investors should read it. (He first publicly stated Allied was defrauding the government at the 2002 Ira Sohn Conference.)

Einhorn also "almost made it to the final table" at the World Series of Poker main event in 2006. He donated his $659,730 in winnings from that event to the Michael J. Fox foundation for Parkinson's Research. And then in the spring of 2008, Einhorn publicly predicted the death of Lehman Brothers...taking a sizeable position in Gold Bullion as the financial crisis wore on, and switching it from a trust-fund position to physical gold in spring 2009 so as to cut his clients' annual costs. [Ed. note: It's cheaper to buy and own Gold outright and hold it in secure storage that to hold shares in Gold ETFs...]

So he's smart, a successful investor, and a good guy. He's worth paying attention to.

Einhorn believes the United States could face a Greece-type debt situation much sooner than anyone thinks (in our generation, not our grandkids'). He brought up civil servant pay as an example of a US crisis in the making similar to Greece.

Einhorn explained how, in 2008, the average US federal civilian salary with benefits was $119,982, compared to $59,909 for a non-government worker. And when you have a government job, you can work for 20 years and then retire, getting retirement pay the rest of your life (the next 40 years). Einhorn questioned the sustainability of those entitlements.

Einhorn wasn't the only speaker at the conference. His hedge-fund-manager peers shared their favorite ideas as well. Most speakers at the conference held a similar view to David's.

The optimistic take was essentially that:

"People are adaptive...We'll figure out how to adapt to these times, and make money out of them. There's never been a catastrophe that you can't see coming. If you can see it coming, then you can adapt."

To invest in this difficult time, David said to Buy Gold and gold stocks...and worry about your grandchildren later.
 
As he said:

"When push comes to shove, there's a good chance the Fed will print money to the point where significant inflation shows up."

Einhorn's favorite Gold Mining stock was African Barrick Gold – which I admit I am not that familiar with. It trades in London, at what Einhorn believes is a significant discount to its gold-mining peers.

If Einhorn says it's worth checking out, then check it out.

Looking to Buy Gold today? Make it simple, secure and cost-effective by using BullionVault..

A Waste of $1 Trillion

Why Europe's $1 trillion bail out could make Gold Investment vital today...

JUST UNDER $1 trillion...that's what the European Union has promised in an emergency rescue package to stabilize the Euro currency and Europe's financial woes, writes Steve Sjuggerud at Daily Wealth.

The result? Nothing so far.

On Friday, the Euro hovered around $1.27 all day. As I write...$1 trillion later...the Euro is hovering around $1.27. Like I said, nothing.
 
In fact, the result turns out to be worse than nothing. It may prove to be the worst $1 trillion ever spent.
 
To me, this $1 trillion spells the end of the Euro as a credible "threat" to the US Dollar. And it brings gold one step closer to being at least the world's No. 2 reserve "currency" (behind the US Dollar).
 
You see, before the $1 trillion promise (along with new promises from the European Central Bank to spend money to prop markets up), the Euro currency had some semblance of credibility.
 
The Euro's credibility goes back to the predecessor of the European Central Bank – Germany's "Bundesbank". For decades, Germany's old currency (the Deutschemark) was one of the world's strongest. The Bundesbank had a reputation for not sacrificing the value of the deutschemark for political needs, so investors wanted to hold Germany's currency.

With the start of the Euro, financial markets assumed the new European Central Bank would inherit the legacy of the Bundesbank. That's what kept the Euro up as a credible threat against the US Dollar's world dominance.
 
But the $1 trillion promised over the weekend – along with promises to prop up the markets – killed the idea that the European Central Bank would act like the Bundesbank. It horribly damaged the Euro's long-term credibility.
 
Now, the Euro is just like a Dollar – politicians are willing to sacrifice its value. Wait... a Euro is now worse than a Dollar. The Euro is less traded (less liquid) than the Dollar. And if the Euro fails, there is nobody to blame.
 
It gets worse...
 
Yesterday, in his excellent Gartman Letter, trading guru Dennis Gartman asked, essentially:

What is the propensity of the reserve banks of China and India to add Euros to their reserve assets now? We have to think it is somewhat reduced from what it was only a short while ago...

On the other hand, what is their propensity to own gold now? Almost certainly it is enhanced.

The numbers are showing it. Gold Prices are hitting highs in BOTH Dollars and Euros. In short, paper money really lost credibility over the weekend.

The Euro is now a garbage currency. It deserves even less credibility than the US Dollar. But the US Dollar doesn't deserve a lot of credibility, either.

It's easy to sit in the States and see the problems over there. But the thing is, we have the same problems. We have too much government spending...and we have too many future promises we can't fulfill, like Social Security.

What makes our government's problems that much different than the countries of Europe? They're just ahead of us.
 
What we need is change. We need countries to commit to changing their ways.
 
You don't fix a drug addict by giving him more money. He'll go spend it on more drugs. Instead, you need to get him to rehab, to give him a fighting chance to change his ways.
 
You don't fix someone who's overspent on their credit cards and is living beyond his means by giving him more money. He'll simply get himself deeper in debt. Instead, you need to cut up the credit cards and force him to live lean for a while.

What can you do? Two obvious things:
Buy Gold instead of paper currencies. The US and Europe have made it crystal clear their "release" valve is the value of our paper currencies;
Make your presence known to your government representatives. Do your best to "take their credit card away" and "send them to rehab" to prevent the US from becoming the next Greece.
Both the Dollar and the Euro will be weak against gold, as politicians the world over have now proven they'll sacrifice the value of their currencies for short-term political gain.

Trade and invest accordingly.

Buy Gold and own it – securely – inside non-bank Swiss storage for just $4 per month by using BullionVault...

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