Trader’s Narrative

A little while ago I tried to separate the effect of the weakness in the US dollar on the price of gold to determine whether gold’s bull market could actually stand on its own: US Dollar’s Weakness or Gold’s Strength?

There is a better index out there to determine this very question. The Kitco Gold Index is the price of gold measured not in terms of US dollars, but rather in terms of the same weighted basket of currencies that determine the US dollar index: Euro (57.6%), Japanese Yen (13.6%), UK Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).

So instead of pricing gold in the unit of a US dollar, the chart below charts it in the the same unit that we use to measure the US dollar index:

Source: Kitco Gold Index

This is the one year comparison but you can also see a 5 and 10 year chart (follow above link). These both tell the same tale. There is definitely a bull market in gold. But, it has been aided and abetted to a large degree by the weakness in the US dollar. Seen through the lense of other currencies, the gold bull is much more tame.

If you look at a very long term chart of the comparison, it becomes obvious that there are periods where the price of gold in US dollars shoots up only to come back in line with the currency basket. Right now is one of those times.

As you can see, the price of gold in the currency basket has yet to breach the high it set earlier this year. This was something I pointed out when others were focusing on the breaking of the nagging $1000 resistance: Major Non-Confirmation in Gold.

Also, the purest equity proxy for gold, the Philadelphia Gold Bugs Index (HUI), has yet to surpass its highs from last spring (March 13th 2008 - 515). According to the k-ratio analysis of the gold sector, this suggests that gold is ‘overvalued’ relative to gold stocks.

Last week we looked at the breadth of the gold stocks which showed about 80% of them closing above their short term moving average. Here’s an updated chart:

While gold stocks managed to eke out another positive day, breadth slipped from almost 90% to below 80%. Usually, in the past, when breadth has been this stretched, and heading down, there is a good chance that a short term top has been already made.

Earlier in this month’s sentiment overview, I mentioned a lesser known sentiment indicator called the “Daily Sentiment Index” (DSI). It is compiled and disseminated by Jake Bernstein’s firm through various “proprietary data collection methods” which include internet, telephone and/or email.

Since the objective is to arrive at a contrarian signal, pains are taken to only access retail traders and investors and to avoid professional traders. Also according to Bernstein, they do their best to survey the same base as much as possible. The resulting data is available daily on major global indices and commodities without lag by 4pm the same day. Overall, it has proven itself to be a very good contrarian measure.

Here is a recent chart of the US Dollar index along with its DSI:

Similar to other, more well known sentiment indicators (such as the AAII weekly sentiment survey), a simple question is asked: are you bullish, bearish or have no opinion. But unlike the AAII survey, the DSI is a considered ‘a proprietary indicator’ and there is no detailed disclosure of its exact nature or methodology. While you might think this opacity would make people reluctant to rely on it, the DSI has a large and loyal following, especially among the institutional crowd who don’t balk at paying almost $2,000 a year for a subscription. You can get more information on the DSI at Bernstein’s website.

For some perspective, here’s a very long term chart of the US Dollar Index with the two extreme lows in sentiment:
Continue reading ‘US Dollar Sentiment: Contrarian Bullish’

So Iceland is just one giant financial crater. To add insult to injury, someone even put the whole country on eBay. The listing was withdrawn because even eBay has standards.

Here’s a chart of the Icelandic Krona against the US dollar for the past few years:

There is nothing but doom and gloom in this tiny half-frozen nation. Just recently their 90th anniversary as a country was marred by protesters breaking into the Icelandic Central Bank. Things ended peacefully because, well, this is Iceland, after all.

But I can’t shake the feeling that this is actually an opportunity for a vulture-minded and deep-pocketed investor. There are many different ways to play an Icelandic recovery. I would avoid a straight play for government bonds or going long the currency (especially since there is little if no trading taking place).

Real estate would be a good alternative. Land isn’t going anywhere and neither will a building disappear. People still need a place to live, after all. Another possibility would be equities - blue chip stocks.

Argentina went through something similar in 2002 - although alone and unaccompanied by the rest of the world. But their currency did recover. From its deep slump, it rallied around 30% actually. And just recently has started to weaken again:

Of course, Argentina isn’t doing that hot right now. They were just getting back on their feet (or knees at least) when this new worldwide economic storm buffeted them again.

But I just can’t shake the feeling that Iceland will still be there a year from now, 10 years from now, and beyond. And someone will make a lot of money betting on that.