Valencia Research Group

Examining Gold's Volatility and Outlook

2009-12-09T21:43:00.000-08:00

If you are a gold market watcher like us, you're probably familiar with Kitco, the primary source on the web for real-time 24 hour market coverage. Complete with enough graphs, analysis and conflicting commentary to make any body's head spin. Perhaps it's the myriad of animated banner ads that create a carnival barker/fun house effect that contributes to the
overall confusion. If you have some skin in the game, this website can quickly become addictive.

Gold May Fall Towards $US 1,000 Says Investec Australia - The Australian, Dec 9 2009 7:53PM
Gold bubble worries lead to significant sell-off in top gold ETF - Mineweb, Dec 9 2009 6:44AM
Simon Constable: Gold bullion's bull market remains intact - MarketWatch, Dec 10 2009 12:20AM
Gold Inches Above $1,130, Gold ETF Steady - CNBC, Dec 10 2009 12:18AM
On Wednesday gold continued to retreat from the previous gains, leaving analysts speculating on the rational behind the continued sell off. The news of twin credit downgrades of Greece and Dubai sent investors running for the safety of the dollar. This statement was the general consensus gathered from the highly paid commentators in the financial media. From where I sit, that's equivalent to escaping a burning building, seeing thunder clouds gathering on the horizon and returning to the burning building to avoid getting wet. Although lately it seems any reason is a good enough reason to talk up the dollar, as nobody want to see a rapid decline. Unfortunately, the dollar's designated role as safe haven is more habitual than a matter of practicality. Perhaps the dollar's gain could be attributed to timing, as the traditional safe haven found in gold had just exhausted a record-breaking rally and continues to be experiencing a normal correction for year-end profit taking.

Investec Australia warns the sell-off may drive gold back to the $1000 level by year-end. (see links above) If this is the case we might see another fantastic buying opportunity as the market gathers momentum toward another record breaking rally sometime in Q1-10. Although support levels are difficult to predict at this time, I'm willing to take a crack at it.

One Year Chart (click on chart to enlarge)
Considering the bullish posture gold has been in over the past year, the pattern suggests the corrections are normal, near uniform and tend to be followed by stronger buying momentum. The previous two cycles (B) indicate a support level above $1,100 heading into 2010.

The five year chart draws a slightly different picture. Going back to gold's first major increase in years, which began to rally in March/April '07, the price peaked out around $700/oz. It took three volatility cycles, flirting with the new high, before the break out which set a new high at $1000/oz.
The correction that followed set support levels at the previous high and was again followed by three cycles (with an increase in volatility) testing the new high, before another breakout.

ETF's: The Game Changer
Exchange traded funds, namely, State Street Global Advisers SPDR Gold Trust (GLD) appeared on the scene around 2005 offering investors a cost effective and secure way to access to the gold bullion market with a high degree of transparency and liquidity. By 2007, Gold ETFs became a major market force, allowing investors to move in and out of positions with the ease of trading stocks. Higher daily volumes helped move the bullion market to record highs and also contributes to increasing volatility. For additional thoughts on the topic, John Nadler, Kitco's Senior Analyst, has some interesting commentary on ETF's potential impact on bullion market volatility.

All this talk of market volatility begs the question, "How do I profit from it?" right?
The answer is simple. spend some serious time studying the market. I'm not sure if it's a good or bad thing, but the gold market never sleeps. (except on weekends) There is always a market open somewhere in the world. If your really into it, you can stay up late watching the Hong Kong market over lap with London and morph into New York trading...but I don't recommend it. For only the bravest or most reckless traders wishing to capitalize on gold's volatility, there is the ProShares UltraShort Gold (GLL) ETF that double shorts the market, allowing traders to capitalize on the corrections that are sure to come following a rally like the one we just witnessed. A word to the wise; these tools are very dangerous in the hands of the novice. Spend several nights studying the foreign markets before attempting this trick.

Where gold will end the year is any one's guess. So, my guess is that some selling will continue with a support level found in the $1100 - $1130 range, followed by some sideways movement leading to another rally in March-April 2010.

Copenhagen Climate Summit: Time to Cover Your Assets?

2009-12-08T07:27:00.000-08:00

"Something is rotten in the state of Denmark"
- Marcellus
From William Shakespeare's Hamlet

Copenhagen climate summit: Barack Obama given power to cut greenhouse gases: Hopes that the US will pass new laws vital to limiting carbon emissions were given a major boost on the opening day of the Copenhagen climate summit. America's Environmental Protection Agency formally declared that greenhouse gases endanger human health – a decision which will give President Obama the power to regulate emissions with or without the backing of Congress.
Telegraph.CO.UK (full article)

Regardless of where we fall on the political spectrum, to firm believers in global warming and skeptics alike, ratification of the Copenhagen Climate Treaty means one thing...new sweeping taxation authority imposed on developed nations by an unelected global governing body with the aim of transferring capital to developing economies. As we've seen with a growing chorus of recommendations for the creation of an international currency from the 2009 G20 summits in London and Pittsburgh, a far reaching agenda is being put forth toward an institutional rearrangement of the world financial system under singular global governance.

Institutional Investors Following Suite
If IMF statistics are any indication, it appears the flow of investment capital toward developing counties has already begun. Over 25 billion in mutual fund investment capital was directed into emerging market bonds in Q209, a startling about face from the 17 billion reportedly divested just two quarters prior.

Indicators such as this reveal a global re-alignment strategy of epic proportions. Beneficiaries being emerging markets in Asia, Asia Minor and Latin America, while countries formerly known as Industrialized foot the bill through carbon emission controls designed to incentivize the continued flow of industry, jobs and economic opportunity.

Whether Copenhagen is successful or not, (which at this time we are not completely sure of the outcome), we can clearly see the framework of the world economy the globalist wish to engineer. Considering the traditional disparity between the first and third world, the conditions for a uniform global currency remain out of balance to maximize efficiency. From a globalist perspective, this problem is nothing a two-decade-long campaign toward parity can't rectify. Down here on the ground, where you and I live, a campaign like this simply means pain. Given this scenario, the average investor is now transformed into a survivalist, and needs to adapt a much broader perspective and to be able to navigate the landscape with a "big picture" viewpoint.

Identifying the Nodes and Hubs of the 21st Century Economic System
It's critical to identify and target key markets around the globe which are poised to benefit from the literal re-engineering of the global market place. BRIC nations initially come to mind, as they are anticipated to assume the role of economic engine in the 21st century and have subsequently captured the attention of the financial press.

Although it's important to pay close attention to developments within BRIC countries, We at Valencia Research Group, like to go beyond mainstream consciousness and scout out the fringes for overlooked opportunity. We believe there are smaller economic "hot spots" off the beaten path which offer extraordinary upside potential for the risk tolerant. We have identified our top five geographic locations, have assigned analysts to cover them and will be reporting our findings over the course of this blog. We would like to share this valuable information with our readers. Be sure to click through to our website and register for our distribution list under the Contact Us button. It's free, it's educational and best of all it's painless.

Gold Pull Back Creates Buying Opportunity

2009-12-04T14:42:00.000-08:00

Gold futures tumbled 4% Friday, sustaining their first major loss in a run that began early in November, as the U.S. dollar rose sharply after an upbeat U.S. jobs report. -Marketwatch

The long November rally which pushed gold to a record $1218.25 and inspired our first blog post to boldly proclaim our bullishness on the metal, came to an end today on the news of a favorable US job report. Such timing, in a previous era might drive an analyst to retreat to the nearest watering hole to drown sorrows in several pints of lager and spend the weekend nursing a bruised ego. As I've stated before, (and is rapidly becoming my mantra), "We are in extraordinary times". Had I begun my blog a few days earlier, I likely would have warned of the over-heated market, and warned of a steep temporary decline driven largely by a profit taking sell off going into the weekend. As you will note from the daily trading chart, the sell off occurred during New York trading hours, as buyers tested the low throughout the day and were poised for a late rally leading to the close. Although the late $10 recovery was stifled. it suggests $1150 gold is viewed as a bargain. Look for Asian markets to take advantage of the buying opportunity when trading resumes Monday.

As a side note, I no longer base any action on Labor Department data, ever since they decided to classify hamburger flipping as a manufacturing job.

Today's price decline creates a perfect segue into the subject of investing in precious metals, particularly the purchase of physical gold as a store of wealth versus trading gold on market fluctuations. The later obviously bearing higher risk levels, but also creates the opportunity to lock-in profits from rising gold and purchasing on the dips.

Purchasing Physical Gold

Once the investor decides to make a play in precious metals, the glaring questions are what to buy?, How to buy it? and what to do with it once I own it? Gold can be purchased in a variety of forms, Bullion (bars and coins) being the preferred format for simplicity and universal acceptance in the marketplace. Bullion is usually issued by a government mint, or can be produced by a gold production company. Government issued bullion (bars and coin) is the safest bet for purity and quality and comes in one ounce (coin/bars) and ten ounce bars. Numismatic, or rare collectible coins are also popular among coin collectors, but value added premiums based on rarity, historical significance and other factors can increase cost considerably. Although I appreciate the historical aspect, I tend to shy away from the collectible market, due to the complexity of the learning curve associated with collectible coins. When it comes to investing in metal, with its inherent complexity, I prefer to simplify wherever possible. Jewelry also falls into this category, although the gold market is often driven by demand for jewelry in many cultures. India, being the world's largest consumer market of gold for this purpose, is known to affect the spot price during traditional custom gift-giving holidays.

Gold Bullion can be purchased, depending on supplies, directly from the government mint, a private brokerage firm, a coin trader or a private party. Personally, I have experience purchasing from a large reputable brokerage firm and mom and pop coin dealers without issue. I recommend due diligence when choosing a vendor. A quick search on-line will provide ample advice. Purchases over the Internet should be approached with caution. Don't fear taking delivery through the Mail or major shipping companies, the content is likely insured, but double check for good measure.

A word about brokerage firms - The novice gold purchaser may tend to view the gold broker as super-knowledgeable and/or a source of strategic advisory. Keep in mind the broker makes his/her living on the trading commissions and often has self-interest in mind. Don't be talked into setting up a trading account and sold on the idea of leveraging your purchases. This should only be attempted by the most astute and experienced market timers. Many a would be gold-trading millionaire lost everything in margin calls prompted by severe sell-offs. These brutal events are referred to as bloodbaths, by veteran traders.

Storage
Any purchase of physical gold should be regarded a long-term store of wealth, a hedge against inflation and an alternative savings plan. The purchaser should consider this an illiquid asset that can become liquid and (highly mobile) in an emergency situation. Historically, many have fled politically instability or natural disasters with merely the clothes on their backs and their cache of gold in tow. Hopefully, you and I will never find ourselves in such extreme circumstances. That said, Gold should be stored in a safe (private) location. The safe-deposit box at your local bank is an excellent option, but remember...we live in extraordinary times, so use your best judgement. Once the investor has timed purchases, buying on the dips, and has acquired a comfortable percentage of his/her portfolio in physically possessed gold bullion, the lure of the market fluctuations may attract the investor to try his/her hand at timing trades in order to profit from the market ebbs and flows. Obviously, this practice must also be approached with caution.

Next: Examining the cycles, rhythms and trends in the gold market, and how to time trades to profit from volatility.

VRG: Bullish on Gold

2009-12-03T09:21:00.000-08:00

We have been following the world financial crisis pretty closely over the past several years. Contrary to popular consensus, that the crisis was unforeseen and unpredictable, we anticipated the current turmoil, and positioned well in advance. From our perspective, the mainstream financial press, although slickly packaged for mass consumption, has largely missed all the indicators and is currently playing a game of "catch-up".

We've been following gold for quite a while, waiting for the mainstream financial press to catch on to the gold bull market which has been under way for the past eight years. It seems the recent spike in gold has prompted nearly every financial news outlet to suddenly focus in on gold as a hedge in an uncertain economic environment. As gold moves closer to the center of attention and the herd mentality kicks in, we're anticipating a bubble-effect to emerge. However, this bubble will likely be much larger than previous bubbles we've seen in tech stocks and real estate. The coming gold bubble is of an order of magnitude larger than anything we've seen thus far. As bubbles go, this one has the elasticity to expand over the next decade and beyond. Consider the following factors; (which we discuss further in following blog posts)

Global in scope- As the world's reserve currency continues to weaken, nearly all governments must unload their holdings of US dollars and migrate toward stable assets. Although other currencies provide safety in the short term, most of the major currencies will in effect suffer from similar destabilization. Gold is historically and universally acknowledged as the reliable store of wealth, especially during times of economic uncertainty.

Supply and demand- The world's entire gold market is a small fraction of the aggregate financial markets, which is based on a fiat monetary system. A minor shift of capital from the world's stock exchanges into gold can have a massive effect on gold prices, simply because the supply of gold bullion is finite. We are seeing the beginning of a shift of capital out of paper and into hard assets. As the herd mentality kicks into gear, we'll see millions of new buyers in the gold market.

These extraordinary conditions create some remarkable upside opportunities for investment in gold and other precious metals. We'll examine these opportunities in detail over the next several blog posts. Here's a summary of what to expect:

Primer to Gold Investment - We'll discuss in detail investor's options to capitalize on the upward trend in the precious metals markets, including;

Purchasing physical gold, Bullion, numismatic coins, jewelry.
How to hold gold assets - possession vs. intermediary
Purchasing through a brokerage house
Exchange Traded Funds (ETFs)
Mining stocks

Primer on Mining - As gold prices rise and market supplies become exhausted, we anticipate pressure on production levels. Mining companies will likely see investment capital and ample incentive to further develop existing mines, bring new mines into production, as well as the exploration of new assays. Our analysts have studied the mining sector and the world's gold bearing regions. We'll provide our insights into the mining industry and highlight potential opportunities where they exist. We'll also provide many links to current information, to assist your own research.

Analysis of Mining Stocks - Unlike the dot com stock frenzy of the late 1990's, mining companies cannot be created overnight. Tremendous work and due diligence must be performed prior to taking a mining company public. We've spent the time researching and analyzing the financial statements, rock sampling and drilling reports of numerous mining and exploration companies. We'll be highlighting the standouts, the up-and-coming, and the unknowns alike.

As the mainstream financial news outlets continue to spoon-feed their editor-approved content, we at Valencia Research Group strive to remain well ahead of the information curve. We will continue to honor our commitment of providing in depth research, objective* analysis and uncovering opportunities in today's ever-changing economic landscape. We invite you to join us, by following our blog posts and subscribing to our equity report distribution list. We also encourage your participation through our comments section following the posts.

Steven Breitbach, COO
Valencia Research Group
Valencia, California
661/287-9420

*Disclaimer: From time to time, Valencia Research Group produces issuer sponsored research reports of which VRG receives cash compensation. However, VRG holds no interest in the subject company stock. Issuer sponsored reports assist in creating efficiency in the market by raising the visibility of sound companies overlooked by investors. VRG provides full disclosure of all issuer sponsored publications and makes clear distinction between issuer sponsored and independently published reports. For information on hiring Valencia Research Group please visit our website.

Welcome to Our Blog

2009-12-01T19:56:00.000-08:00

These days, it is increasingly necessary to communicate ideas and share information, so we at Valencia Research Group decided our website is not complete without a blog. Please check in regularly for useful information regarding the rapidly changing financial environments, news and opinion. Although the financial markets are in extraordinary condition and appear unpredictable and frightening to most investors, we believe extraordinary opportunity exist for the cool-headed, big-picture investor. These are truly exciting times, and we at the Valencia Research Group won't let a world-wide financial crisis stop us from enjoying the quest for the opportunities that await. Whether you're an individual investor seeking quality information, or considering becoming a client, you are invited to check in regularly to see what's on our minds at VRG. We also encourage you to leave your comments on this blog or contact Valencia Research Group directly.

Jasmine Breitbach, CFA, MBA, RPLU

Principal, Sr. Analyst

Valencia Research Group, LLC