[T.S.R:17859] Jack Crooks-Why Is Roger's Always Wrong About Gold & Silver?

The so-called Bull of the Commodities trade appears more like a Bull in a china shop. Everytime Jim Roger and Marc Faber open their mouth to speak about Gold and Silver, it seems they have a loaded gun pointed right up their ass. At the the height of the Equities boom in 2008 Rogers was shilling Commodities, a year later the CRB index was down 40 per cent outperforming the Equities on the downside.

Early in 2010, speaking at a conference in Bombay, India, Roger's very dramatically pulled out a few pieces of Gold and Silver from his coat pocket and told Indians not to Sell, even though he himself was neither buying Gold or Silver. Subsequently by Q3 2011 Gold had moved to $1910/oz and Silver to $42/oz. In this 2 year period not once he mentioned buying Gold or Silver. So the Commodity Guru was clueless of the market direction of Gold both at $ 1100 an ounce and also when it was $ 1910 an ounce. He neither bought nor sold at any level. So what was the advise to go long commodities pointed at? Mass TV audiences which could be fooled across the World?

 More damaging has been his theory that commodities will outperform equities no matter what. This has been amply proven wrong between 2008 and late 2011. What has also been proven wrong is the thesis that Bernanke belonged to an asylum and the US Dollar is doomed. So why is that early in Q4 2011 the USD has zoomed and the commodities ranging from crude, cotton, sugar, copper, nickel, gold and Silver have lost nearly 40 per cent from 2011 highs? The answer: Roger's is much a charlatan as any other man on Wall Street or any Street and beyond the tricks of a snake charmer has really got no sense whatsoever about the markets except predetermined thoughts that commodities will rise.

Right or Wrong the view now is that Gold may drop to $1100/oz and Silver to $ 20/oz by end December 2011 and many so called sophisticated global commodity funds will liquidate. If this happens, investors would have lost paper gains of 3 years on commodities and will stare at insolvency themselves.

The swift sell-off in gold surprised many, as it seemed a foregone conclusion that this gold game was so easy. "Oh yeah, $2,000 gold and beyond is slam dunk — no brainer — don't you know. The U.S. dollar is going into the tank," seemed the sentiment till last week's reality intervened.

What happened? And will gold continue to slide? Let's just take a little retrospective and see if the odds are the top is in on gold.

Let me be clear, though, I don't know if a top is in place. But I want to show you a few charts that suggest this selloff is part and parcel due to the need for liquidity and an indication that the currency everyone loves to hate has probably put in a multi-year bottom.

Let's start with the Gold/Silver Ratio vs. Dow Jones Industrial Average (DJIA) Weekly. Now, this isn't a gigantic sample size I grant you. But I think it carries some logic and gives us some insight about the relationship between gold and other risk assets — measured by the DJIA.

As you can see in the chart below, there is a tendency for the gold/silver ratio and DJIA to confirm troughs and peaks:

The correlation of these peaks and troughs in gold and DJIA in the past have represented multi-year moves based on these confirmations. My theory is that silver being more of an industrial metal tends to ebb and flow more closely with risk assets i.e. stocks, thus why this ratio moves in the manner it does.

And what is interesting too, is that the last two peaks in stocks have preceded a break in gold prices by five months. You can see it in the chart below comparing Gold and the Dow Jones Industrial Average Weekly.

When fund managers get margin calls on the bad side of a portfolio, they meet that call by raising cash from the winning side of their portfolio ... in this case that would be gold.

We've heard a lot of talk about hedge fund managers liquidating gold positions. It makes sense given that risk assets, stocks and commodities, have been hammered. 

If this is true, and stocks and other risk assets, continue to fall based on the decline in global growth and liquidity, gold should follow stocks lower. And the much vaunted safe-haven appeal of gold could be history.

Was the end of QE2 the bell ringing at the top? The following chart of the Dow Jones Industrial Average Weekly can help answer that.

And the Commodities Index Weekly (CRB) chart looks to be turning over, too.

So if you think global liquidity is in trouble, where is the best place to hide, besides short-term U.S. paper?

I would say the U.S. dollar is looking like it can be a safe haven now. Below is a repeat of the dollar chart I shared last week.

And just like I said then:

"This indicates a real and sustainable move into the dollar. It might be a flight to safety and/or liquidity ... take your pick. And it could eventually turn into something much more this time around."

I have one more question for anyone who believed the dollar was heading into never-never land: Why didn't the U.S. dollar index sink miserably to an all-time-new-low as gold blew off to a new high?

The market will soon share the truth. Stay tuned, but if you own a bunch of gold and are heavily short the U.S. dollar, I think it pays to be careful here.

 

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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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