Sunday, November 29, 2009

Gold (GLD) and Dangerous Parabolas/Dubai/Kazakh Bank

1. Gold and Dangerous Parabolas: A dangerous parabola is an upward spike in price usually occurring at the end of a substantial bull move in price. An example would be the move in the Nasdaq average in 1999 which occurred after a substantial run up in that average since 1993. A similar dangerous parabola occurred last year in the oil market as prices spiked to about $140 a barrel, and in Japanese stocks in the late 1980s. Some of my prior discussions about categorizing parabolas are in these posts:

A non-dangerous parabola would be an upward spike in price occurring at the end of a nasty bear market. This kind of parabola may need corrections to resolve itself, but nothing like the typical 50% plunge that can occur at the end of a dangerous parabolic move. An example of a non-dangerous parabolic move would be the rise in the S & P 500 averages in the months after August 1982, or October 1974, or March 2009, all of those parabolas occurred at the end of long term secular bear markets (i.e. August 1982) or after an extremely strong cyclical bear move, as in our recent climb off the March lows or in the rally from 1974 to 1976 after the huge bear decline in 1973-1974.

Gold had a dangerous parabolic move in its last bull market, during a five month period between August 1979 when gold moved from around $300 to its peak at $850 in January 1980. Gold Price History The following site has a long term chart of spot gold prices from 1975 to 2008 which shows the parabolic move from that earlier bull market. Gold The Wikipedia article about gold as an investment has a chart starting in 1968, which clearly shows the bull market in gold starting in 1972 at around $50 per ounce. So by August 1979, gold had already enjoyed a bull market rising from $50 to $300 over about a seven year period. The last move from $300 to $850, coming after a long term bull move, is what I call a dangerous parabola. The reaction move took gold back to $330 an ounce by March 1982.

Over the weekend, I read an article written by Daryl Guppy who believes that gold is in a dangerous parabolic move now. He opines that a break in the parabolic trend could cause gold to retreat quickly to a $1000 an ounce. If he is correct about that downside target, then a 10 to 15% correction in price is not how a dangerous parabola corrects itself. A fifty per cent decline is more like a normal reaction at the end of a dangerous parabola, as shown in prior reversals in asset prices which underwent a dangerous parabola ranging from commodities to stocks.

I would start the current cyclical bull market in gold as starting in or around December 2001 when gold was selling for $275 an ounce.

I own both gold and silver bullion. My last purchases was when gold was trading in a narrow band between $250 and $300.

Normally, my response to what I would characterize as a probable dangerous parabolic move is to sell the asset undergoing the parabola, or at least make a substantial pare. I am not able to do that with my gold and silver. In fact, I have never sold any of it.

I mentioned previously that my first gold purchase was when I was 13, a five dollar (1/4 ounce) Liberty Head gold piece minted by the U.S. in the 1880s, purchased for the then staggering sum, at least to a 13 year old, of $30. I was also using my earnings to buy at face value dimes, quarters, and half dollars that contained 90% silver which was the case for those coins minted in 1964 or earlier. Those earnings were all available for investment back then, in the sense that I had no living expenses at 13, but there is only so far that one can going earning a $1.25 an hour. When I started to add to my gold, I also added to my silver by buying one of the more beautifully designed coins ever minted by the U.S. Mint, the Walking Liberty originally issued as a half dollar with 90% silver content, from 1916 to 1947 ( Walking Liberty Half Dollar - Wikipedia), but was reissued by the Mint as a silver dollar which could be bought at a slight premium to their bullion value starting in 1986. The American Eagles Program of the United States Mint I bought several rolls of those. And those coins are one troy ounce of 99.9% grade silver.

So, since I am unable to sell gold or silver, locked in a bank lock box, and rarely seeing the light of day, I recently embarked on a hedging program. The purpose of the hedge is to make me feel better in the event prices to plunge. Bought 50 GLL Gold- U.S. Treasury Note and Bond Prices-U.S. Dollar I do not believe that the hedge has any real monetary value.

The purpose of some recent posts is show that the correlation between gold and inflation, or gold and the value of the dollar is not as strong as many people believe. Item # 4 : Bought 100 Activision/End of the Carry Trade-Not Likely/Sysco/Euro vs. U.S. Dollar Item # 3 U.S. Dollar and the Carry Trade/Sold 100 PMK at 9.2/Gold & Inflation

When the dangerous parabola starts, one thing is for certain, it will end and the end will be nasty. While that is a truism, a cliche, it does not help me now in determining the length and duration of the current parabolic move in gold. I was saying in early 1999, at the beginning of the dangerous parabolic moves in stock averages particularly in the Nasdaq average, that the move was a dangerous parabola, and yet it continued for another year or so before imploding. I did not participate in that one on either the upside or the downside, just missed it altogether.

I would not be surprised if gold either continued its spike upward toward $1400 or started its correction soon. No one knows about the timing.

So, for now, I am content to add to my hedge in stages as previously discussed, and I am now willing to ride GLL down to around $6 before taking a loss on the position (see disclaimer). I do not view that position as a bet or a gamble but simply a hedge. I have discussed the tracking problems with the double short ETFs, which requires me to monitor that issue daily. Another reasons for selling the position would be a tracking error developing over time that I view as both substantial and adverse, meaning it is going the wrong way on the tracking.

2. Dubai: Apparently this Emirate, part of the United Emirate Federation, is adept at borrowing and spending large sums of money, which sounds familiar, and has been running large budget deficits for a long time. It imposes no income or sales taxes, which sounds good, and it has insignificant oil revenues which is mostly controlled by Abu Dhabi. Dubai - Wikipedia NYT Based on what I have read over the past few days, Dubai's revenue stream appears to be borrowing ever increasing amounts of money to spend on vast construction projects, that lenders were apparently willing to extend based on some sort of implied assurance that the UAE and Abu Dhabi would stand behind the repayment of those debts. Earlier in the year, Dubai floated 20 billion in bonds, and sold 5 billion in bonds just recently to two majority owned banks by Abu Dhabi. Now, what exactly happened to that 25 billion? It does not appear to me that the recent credit facility announced by the UAE central bank addresses the core of the problem, the assumption of 60+ billion in debts with little in the way of revenue to service and to repay that debt. dubai1129.pdf It appears to be nothing more than a temporary band aid. Reuters

You have to wonder about the willingness of banks to pour money into a dark hole, with little in the way of legal recourse. Another example of that mindless lemming behavior is contained in a NYT story about the Kazakh Bank in Kazakhstan. Good luck in getting those billions back!

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