smart-money-report.com Blog

Lance Lewis is right on target explaining the Gold/XAU ratio (except he looks at the inverse of the ratio). Here is an important point:

And keep in mind that those prior plunges in the ratio to the 0.21 area to even lower levels have occurred near major lows, not just off of all-time highs, as we are now. To have this low of an XAU/Gold ratio (basically back near the August panic lows) with the XAU, HUI, GDX all breaking out to new all-time highs for the first time in 25 years is extremely bullish from a contrarian standpoint.

Think about it this way: If the Dow were to melt up to a new all-time high at 20,000 and was trading at a mere PE of 5x and a dividend yield of 7% because the market was so terrified that the economy was about to collapse (even as stock prices went to new highs AND they were dirt cheap relative to earnings), would you want to short that? I sure wouldn’t. That’s a recipe for an upside explosion, and is actually what frequently happens at big bullish inflection points. In essence, we’re seeing the equivalent of that in the gold shares right now.

Read the whole thing.

Why hedge funds blow up:

First, potential investors do not want to invest in a hedge fund that promises 10% per year. They want their risk capital to return a lot more, forcing hedge funds to squeeze blood from a stone with exotic strategies. Or else they cannot get money from the client.

Second, since there is only so much return that can be had from any strategy, the only way to increase returns is to use more leverage. And of course, that cuts both ways. When it’s up, it’s up a lot. And when it is down, it is over and out.

Exactly. Inexperienced individual investors tend to have unrealistic expectations on what is achievable in terms of performance. Hedge funds, and others trying to attract investors, have no choice but to try to deliver. So they end up taking on way too much leverage with predictable results — unmanageable losses. It’s the oldest story in the world — greed. Read the whole thing.

Mark Hulbert:

The bond market over the past year provides a textbook illustration of contrarian theory. One year ago, when the HBNSI stood at 49.5%, only marginally higher than where it stands today, the yield on the benchmark 10-year Treasury note 10-Year Treasury Yield Index stood at 4.43%.

Within two months, the yield on the 10-year note had risen to 4.89%, a significant rise for the normally staid Treasury market. And, of course, bond prices fall as interest rates rise.

In other words, bond timers (consistently wrong) are too bullish. Therefore, look for lower bond prices and higher yields. I agree.

Famous investors often say they don’t use technical analysis. But some also admit that they look at charts to see what has happened in the past. Actually, that’s the whole point of using charts. Jim Rogers is a good example.

Mike Niehuser thinks that the recent plunge in NovaGold (NG) shares is overdone:

NovaGold Resources Inc. (AMEX: NG) and Teck Cominco Ltd. (NYSE: TCK) placed the Galore Creek project in British Columbia on hold until construction costs are brought into balance with conservative long-term copper metal price assumptions. NovaGold’s share price closed down about 50% on the announcement. Clearly, this was difficult news, but it was not as catastrophic as implied by market trading. We believe this may be the case as the industry is beginning to recognize Donlin Creek as one of the world’s largest undeveloped gold projects.

I think he makes a good point.

Look at #2 about LIBOR:

Fed Funds Futures are pricing in a 25 basis point cut, but markets and LIBOR are suggesting the probabilities of a 50 basis point cut are increasing.

The result would be a still weaker dollar.

From Resource Investor:

Gold demand in China, including the mainland, Hong Kong and Taiwan, rose 24% in the third quarter to 88.1 tonnes. Mainland gold demand rose 25% to 78.9 tonnes in the three months ending in September. Gold jewelry demand rose 24% in the period to 74.8 tonnes, while investment gold demand rose 43% to 4.1 tonnes on China’s mainland in the third quarter.

Where’s the supply going to come from?

From Richard Russell:

The nonsense and misinformation about gold never ends. We hear a lot about the “great 1980 rise in gold to a record price of 850″ Actually, what happened is this. Gold closed above 800 in 1980 on only TWO DAYS. Gold closed on January 18, 1980 at a price of 830.00. Gold closed on January 21, 1980 at price of 850. The next day gold closed at 737.50. Gold in 1980 never closed above 800 again! The price of gold at the end of January 1980 was $659.

Gold has never in all history ended a month at 800 of above. This Friday will mark the end of the month of November. If Friday’s gold is at 800 or above, it will be the FIRST TIME GOLD HAS EVER CLOSED A MONTH IN THE 800s!

Furthermore, in 1980 gold was in a parabolic rise. It was literally blowing its top when it surged to its peak at 850. Not so today. Gold has been rising methodically and rather carefully here in 2007. The big third phase speculative rise lies ahead.

It’s a pretty good deal when you can beat the market and be out of the market more than half the time. Mark Hulbert has a way. Also, it looks like the odds are that the stock market will be up over the next several days.

Dr. Brett Steenbarger on how to overcome devastating losses, trading or otherwise:

I’m convinced that the most successful people are not those who avoid those ruts in life, but the ones who use those to turn themselves around.