SuttonWatch.Net: Is It Time To Buy Pet Rocks?

Among the most famous examples of a contrary indicator in the financial media is the 1979 cover of Business Week entitled "The Death of Equities". Just after this article, US Stock prices would chop around for another couple of years before entering a massive bull market that began in mid-August 1982 and continues to this day. The Nasdaq Composite Index posted a record high this past Friday, July 17th.

While Jason Zweig's Wall Street Journal article entitled "Let's Be Honest About Gold: It's A Pet Rock" may not be in the same class as the 1979 Business Week article when it comes to potential contrary indicators, I think it's close! Here is the opening paragraph from Mr. Zweig's article:

"Gold is supposed to be a haven amid hard times and soft money. So why, even as Greece has defaulted, the euro has sunk against the dollar, and the Chinese stock market has stumbled, has gold been sitting there like a pet rock? Trading this week below $1,150 an ounce, the yellow metal has fallen more than 39% since it peaked at nearly $1,900 in August 2011."

Yes, the price of gold has fallen 39% over the last 5 years, but without admitting gold might be a worthwhile addition to any one's investment portfolio, Mr. Zweig just happened to also mention that gold advanced 18.7% annually between the year 2002 and 2011. The price of gold actually bottomed out near $250/ounce in January of 2001, then rallied for 9 1/2 straight years to near $1,900/oz in August 2011. This is actually a 21.3% annualized rate of return, which translates to a 660% actual rate or return for the decade!

The 35% increase in the value of the U.S. Dollar relative to a basket of the world's major currencies since early 2011 might just have a little to do with the correction in the price of gold during this latest 5-year period. Will the U.S. Dollar continue its meteoric rise over the days, months, quarters, and years to come? In almost every speech these days, Federal Reserve Chairman Janet Yellen threatens to raise interest rates. Maybe she will, but maybe she won't. Market participants seem to think that higher U.S. interest rates will be bullish for the Dollar and bearish for gold prices. Maybe so, but maybe not!

While no one can be sure how the U.S. Dollar or gold prices will behave if the Federal Reserve raises interest rates, I think we can safely conclude with relative certainty that the world's central banks will print at least $1.3 trillion worth of paper money this year (and probably more next year) in its efforts to support financial asset prices and supposedly fight perceived deflationary forces on a global basis.

While I think Greece is a "pimple on an elephant's ass" in terms of its impact on the financial markets, China is the actual elephant! And the PBOC's money printing machines are running 24/7 at maximum right now in a desperate battle to support its own financial markets against complete collapse. And unlike most global central bankers right now, PBOC central bankers actually LIKE gold. And I feel confident in forecasting that they are NOT done buying gold (under the radar, of course) at current depressed prices!

I've included three charts below for your review, but first a few tidbits which may be of interest here:

1. The major Gold ETF (symbol GLD) bottomed out in October 2008 at 66.00 (i.e.about $660/oz in gold price terms). It then rallied to a high at 185.85 in September 2011 (about $1,858/oz in golf price terms). This past Friday's close was 108.65, which is still 65% higher than the October 2008 low.

2. The benchmark Philadelphia Gold/Silver Stock Index (symbol XAU) bottomed out in October 2008 at 63.52. It then rallied to a high of $232.72 in December 2010. It then fell steadily over the next 5 years to a closing reaction low of 54.20 this past Friday, July 17th.

Does anyone think its odd that the XAU is down 15% from its 2008 low while gold prices are actually UP 65% from that same October 2008 low?

With energy prices down almost 50% over the last year, it's not hard to conclude that this major variable in the cost of production for mining companies might actually represent a significant NET PLUS to the earnings bottom line for this out-of-favor group.

At the time of this posting (Sunday evening, 10:00 PM CT), gold prices are down about $30/oz in overseas trade to near $1,100/oz. With this kind of price action, it's not hard to predict that precious metals mining shares will be lower to begin the day tomorrow, but I believe that real bargains are close at hand here!

It's time to buy Pet Rocks !!

U.S. Dollar Index (DXY) Monthly Chart with Computer-generated Buy & Sell Signals