Recommendations: More Bounce for the Ounce
Recommendations: More Bounce for the Ounce 8.27.2015 by John Ing of Maison Placements For much of this year, clients have asked us, why gold?. The 1st. reason is positive supply and demand fundamentals. There is less gold coming to market amid deepening geopolitical uncertainty. The 2nd. of course is the aforementioned worldwide currency debasement. The 3rd. is the lack of trust in markets, currency and the ability of central banks to manage our affairs. The 4th. reason is that there is a growing distinction between paper gold and physical gold. Comex is the futures exchange where for every ounce of gold held for delivery in the warehouses, there are 124 paper ounces or claims against that ounce. If one wants physical gold they must line up and it is interesting to note that Comex physical deliveries are a mere fraction of what is delivered on the Shanghai Gold Exchange. We believe this dichotomy allows the bullion dealers the opportunity to manipulate the gold price through their algos and flash crashes. Simply, paper gold is someone elses liabilities. Physical gold on the other hand is no ones liability, has no counterparty risk, nor is subject to the shenanigans on the Comex market. For that reason, physical gold is desired by central banks and investors alike, subject only to supply and demand. The problem is that less gold or supply is being mined with Chinese demand increasing, acquiring physical metal as a store of value. As a result, weve been in backwardation for months. Taking that further, we believe that the gold miners in-situ gold reserves are the miners major asset. And when the inevitable squeeze between physical and paper comes, due to either questions about the bullion counterparties or in fact more demand for physical gold that can be supplied from the Comex warehouses, the price of gold will skyrocket. And the shares of course will be a leveraged way to play this. We thus believe that the shares represent real value here, particularly since the valuation of the market cap for in situ reserves are at record lows. We also believe that some sovereign funds will want access to the only unallocated gold in the world. Gold stocks are buys. For most technicians and chartists, Fibonaccis measured moves are a useful indicator of direction. In August, gold retraced to $1,088, the Fibonacci 50 percent support level. The age old Fibonacci sequence retracement often, but not always occur at three levels: 38 percent, 50 percent and 62 percent. The 50 percent support level is usually key support and a level from which there is a tendency for a reversal after retracing half of the previous move. When gold bottomed in 2001, it took less than 2 months for the turnaround. This time the reversal was only days. In our view, gold is a buy technically and fundamentally, with a measured move to $2,000 an ounce.