When to Buy and Sell Gold

by Addison Wiggin & Ian Mathias

  • The importance of contrarianism: Stocks stage remarkable rally, despite lousy economy

  • Alan Knuckman offers new S&P resistance and support targets

  • Time to sell gold? Bill Bonner & Frank Holmes offer sober assessments

  • Chris Mayer unveils his latest BRIC investment opportunity


  Despite all economic indicators to the contrary, the Dow and S&P 500 are up nearly 7% so far in July.

Last week, we were ready to leave the stock market on the side of the road, dead. But after yesterday’s rally, the Dow is just shy of break-even for the year… and the rally continues today.

“Last week was the biggest weekly jump in the Dow since July 2009,” our resource trader, Alan Knuckman, wrote early this week.

“The rise of more than 5% in four trading sessions sets up a recovery from extreme lows that was led by the base in commodities prices the week prior. What’s more, the S&P’s reversal above the oft-mentioned support level 1,040 after the dip to 1,000 sets up a recovery to spring stocks higher as earnings take center stage once again.

“The economic news has been heavy on stocks since the end of April,” Knuckman contends. “An overweight and unbalanced sentiment would be negated with a move above 1,130.”

  In spite of The 5’s tendency to focus on the moribund economy, Alan’s done a fine job staying levelheaded with regard to his trading strategy. Just yesterday, he closed out the better half of a position in the Australian dollar… for a cool 76% gain in about a month.

“A little over a month ago,” Mr. Knuckman remembers, “when our original Aussie dollar buy alert was issued, nobody — and I mean nobody — wanted to be long anything. The contagion spreading across Europe was extremely foreboding.

“But we stuck to our guns. We identified a good reward-to-risk level and continued to manage our money wisely. We were able to separate ourselves from the scared little Aussie sheep.” And that discipline netted Resource Trader Alert readers about $1,000 in profits per contract.

Alan has a unique ability to shut out the sturm and drang of the daily headlines and focus on the trade. “I don’t give a s&*t what I trade,” he once declared at our monthly editorial meeting. “If it moves, I’ll trade it.” Each to his own. If you’re a trader, Alan can help you make money. Check out the his Book of “Millionaire’s Market” Secrets, here.

  Still, the U.S. economy remains in the intensive care unit: The federal deficit topped $1 trillion for the 2010 fiscal year last month, the Treasury announced yesterday. The June deficit amounted to $68.4 billion, the second highest June deficit on record, and thus the total deficit for the fiscal year, which ends Oct. 1, exceeded $1 trillion.

So… some bar-napkin math and we’re on track for a $1.3 trillion deficit for 2010, just a shade lower than last year’s record $1.4 trillion. (Don’t fret. We’re confident this is all part of the Obama administration’s plan to cut the deficit in half by 2013. Baby steps.)

  Interesting tidbit: “Only seven years in the past 56 have seen deficits in June,” the AP reports. Even in a month that typically enjoys surplus (thanks to quarterly tax receipts), Congress couldn’t stay out of deficit.

Correction: They could have, but they just chose not to.

  America’s trade deficit widened in May by over $42 billion, the Commerce Department added yesterday in an ill-timed report. That’s the largest since November 2008.

  Confidence among small-business owners fell to a three-month low in June, the National Federation of Independent Business reported yesterday. Their index hit a two-year high in May, along with the stock market, and has since plunged.

  One more data point today: Retail sales fell 0.5% in June, the Commerce Department reported this morning. That’s the second monthly drop and larger than the Street anticipated. While the stock market rallies, headline optimism for the economy dwindles…

  Gold is doing what it does best today, which is not a whole lot. The spot price has been steady all week around $1,210 an ounce.

  “If we were speculators, we might consider selling our gold,” Bill Bonner writes, in tune with our “deflation now, inflation later” forecast. “But we're not gamblers. We hold gold because it represents real wealth, not because we think it will go up in price.

“We don't really know what direction it is going. But that's why we hold it. We don't know what direction anything is going. The nice thing about gold is that it doesn't matter. Gold doesn't go anywhere. It just sits there.

“If you buy a bond, for example, you have to worry about the credit quality of the issuer. If things get bad enough, he won't be able to pay up. Your bond could be worthless.

“Same for stocks. A stock is a share of a company. If the company goes out of business, your stock certificates (assuming you have them) are only good for decorations.

“Real estate is more reliable. But there are taxes and upkeep to pay.

“Gold is a better way to store wealth. You don't pay property taxes on it. And the roof never leaks.

“Besides, gold is especially valuable when other forms of money lose their appeal. The trend of debt destruction will probably not end soon. And the feds will probably sooner or later follow Paul Krugman's advice to "raise [the Fed's] long-term inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash is a mistake."

“In the meantime, gold may go down in dollar terms. Which will make a good time to buy it.”

  “It may come as a surprise to some,” adds Frank Holmes, “that both the S&P 500 and the Russell 2000 are both considerably more volatile than gold bullion.” Frank — always a favorite at our Investment Symposium — offered this chart as proof:

“We believe that each asset class has its own DNA when it comes to volatility. You can see this in the chart above, which shows the rolling 12-month volatility over the past 10 years for gold and gold equities compared to key large-cap and small-cap stock indexes.

“For gold, the volatility over any 12 months for the past decade is plus or minus 14.8% and for gold stocks (as measured by the HUI), it about three times greater — investors should look at these numbers as ‘normal’ behavior.

“If you don’t pay attention to volatility of gold, for instance, you'll risk being herded into buying at the top and then getting upset and selling at a loss after it corrects.

“When you understand volatility, it’s easy to see how much risk you have if you’re leveraged. If you're not leveraged, you have the flexibility to be able to buy gold on down days. Volatility can help you buy gold on sale.”

  “I've been thinking about Brazil more and more as I study what's going on in the world,” Chris Mayer writes, turning to one of his favorite subjects of late. “More and more, I come the conclusion that Brazil will have a big hand to play. For investors, there will a variety of opportunities.

“For instance, the cerrado: a vast savannah that is one of the most productive farming regions in Brazil. It produces 54% of Brazil's soybeans, 28% of its corn and 59% of its coffee. It also supports 55% of Brazil's beef industry.

“It's an immense area — about 200 million hectares (or 494 million acres) — with about half of the land still available to convert to producing farmland or to support livestock. This has been, and remains, a kind of frontier of world agriculture. When you look at the amount of new arable land cultivated in the past 30 years, much of it has come from right here.

“Though Brazil didn't win its sixth World Cup, the country is in a good spot. It has a few things the world will really need over the next couple of decades as the global population rises by more than 70 million people a year. It has land, water and plenty of sunshine. Good for growing things… and good for smart investors.”

Of course, not all cerrado investments will pan out. Brazil is an emerging market, after all, and unrefined infrastructure and complicated logistics could spoil investments in even the most pristine farmland. That’s why Chris is headed down there himself in September. You can begin enjoying the fruits of his research ahead of time by subscribing to Mayer’s Special Situations here… $1 trial subscriptions are still available.

  Last today — as much as we hate to join the media scrum over George Steinbrenner — his death yesterday is a remarkable example of our torrid “estate tax” laws. Because he passed this year, 2010, his family will pay no estate taxes. The previous 45% bludgeoning expired in 2009, and the even worse 55% tax won’t come to fruition until 2011.


For Steinbrenner’s heirs, that’s $600 million in saved taxes, unless Congress attempts some sort of clawback legislation. We hasten to remind you, this is money Mr. Steinbrenner had already paid taxes on at least once… the benevolent state has concluded that it is entitled to half or your life’s work, after taxes. But that’s only for the very successful, so it’s cool.

  “Can you bring yourself to detail where all this Federal money is being spent/wasted/bloated/out of control?” a reader asks, responding to Friday’s issue, but curiously on task today as well, “80% of the U.S. government budget goes to:

1) Social Security (the old)

2) Medicare (the old)

3) Medicaid (the poor AND the old)

4) Interest on the Debt (the rich who own the Treasuries)

5) Defense (who owns the defense contractors’ stock? The rich, mostly)

“You guys need to keep clients reading what they want to hear, but the Congress and the federal government are spending EXACTLY the way the voters want them to.”

The 5: Indeed.

“To some degree,” writes another, conveniently providing an answer to the first, “I think you are correct about where and why the government spends. George Bernard Shaw said it best: ‘A government that robs Peter to pay Paul can always depend on the support of Paul.’

“The ranks of 'Paul' are growing, and we are doomed. The rich — many of whom are capitalists capable of creating jobs — will leave, and the middle class will be taxed into the poorhouse, adding to the population of Pauls.

“Soon, our very existence will be at the mercy of the government.”

Happy Bastille Day,

Addison Wiggin

The 5 Min. Forecast

P.S. Today is your last chance to subscribe to Vancouver Confidential. The conference is sold-out. But you can still get a backstage pass and act on the advice of Chris Mayer, Marc Faber, Barry Ritholtz, Doug Casey, Bill Bonner, Frank Holmes, John Mauldin, Byron King, Rick Rule, Patrick Cox… and more… the moment it’s issued at the conference.

This is the first time we’ve offered access at this level, especially if you’re not planning to be there in person, and it does take some time to set up. If you’re interested, you’ve got to let us know by tonight. Details here.


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