It’s Only Going to Get Worse for Gold

Tuesday, 28th July, 2015
Melbourne, Australia
By Kris Sayce

  • Jason says gold headed to US$870 next year
  • Statistically it was safe, but in reality…
  • A successful change
  • Boost your income without taking big risks

It’s hard to find anyone who loves gold.

OK, a few of us here at Port Phillip Publishing HQ adore the shiny stuff.

But we’re few and far between.

Even our dedicated resources analyst, Jason Stevenson, thinks the yellow metal stinks right now.

Today, gold is trading at US$1,095 per ounce or AU$1,500 per ounce. Where will it go next? My bet is lower. Jason takes the same view.

But to be sure, we’ve dispatched him to Vancouver for the Sprott-Stansberry Natural Resources Symposium.

On the speaking agenda are heavyweight names such as Rick Rule, Robert Friedland, Doug Casey, and one of the speakers from our World War D conference, Byron King.

You’ll hear more from Jason this week here in Port Phillip Insider, and in our free eletters, Money Morning and The Daily Reckoning.

Jason says gold headed to US$870 next year

As long ago as January last year, Jason sent this analysis on gold to his subscribers:

I continue to say that gold could go lower (my target is $1,037.34/ounce). That won’t come as pleasing news if you’re still hanging out for gold to go to $2,000 or even $5,000 as some commentators have claimed over the years.

The reason for my near-term bearish view on gold is that it’s in a long-term technical downtrend. It has been falling for the past two years. It’s now down around 36% from its peak.

When you’re looking at investments it’s important to look at these trends. I don’t like going against the trend because more often than not, you end up “catching a falling knife” and losing a lot of money. As the saying goes, “the trend is your friend”.

Because of the potential for further falls, even though I’m bullish on gold, I won’t recommend any more gold stocks in [Resource Speculator] until there are some very clear signs that the technical downtrend has reversed.

At the time, the US dollar gold price was around US$1,250 per ounce. Writing to several thousand resources investors, telling them that he saw the gold price going lower, took a lot of guts.

And to be honest, Jason’s view on gold didn’t entirely meld with my view. Sure, I had believed for some time that you wouldn’t see a true bottom in the gold price until it sunk below US$1,000 per ounce.

That’s the price level where I figure most of the ‘fair-weather’ gold owners will finally sell out.

But I also figured that there would be enough money printing and political instability to keep the price higher. In hindsight, it’s clear to see that was something of a wishy-washy view.

And so far, Jason’s analysis on the gold price has been spot on. However, if you’re hopeful that US$1,037 could be the end of the slide, hold up.

Last year, Jason updated his analysis on the gold price and concluded the outlook was much worse. He revised his price target…downwards…to US$931.

And now there’s even more bad news for gold lovers (me included). As Jason told Resource Speculator subscribers today, writing from Vancouver:

For the past four years, gold has been trending downwards. And for over 18 months, I’ve been telling you that we’ll see US$931 per ounce gold or below.

If you’re wondering what I mean by ‘below’, US$870 per ounce is my secondary target.

When could all this happen? Jason told readers today:

It’s more likely that we’ll see US$931 per ounce this year, followed by a fall to US$870 per ounce next year.


This is why we publish multiple viewpoints. At any given point of time, we don’t know who will be right.

Imagine if we had a ‘house view’ on gold. That house view may be influenced be me, someone who invests in gold and views it as a long term insurance policy against government meddling.

Because of my obviously biased view, some investors could take that to mean that it’s always a good time to buy gold, even for shorter term trading opportunities.

But thanks to Jason Stevenson’s technical analysis on the gold price, he has at least been proven right on the direction. Now it just remains to be seen if he’ll get it right on the price levels.

Gold and gold stock investors should pay close attention to Jason’s take on the gold price.

(You can check out more from Jason, including which resources sectors he’s backing now, here.)

Statistically it was safe, but in reality…

If you think gold has been volatile recently, check out China’s CSI 300 index:

Source: Google Finance

At first glance, the price action may not look like much to you. But as you should be able to see from the numbers on the right, over the past two months, the index has traded in a 1,600 point range.

That’s huge. It’s effectively a 30% move from the recent top to the recent low.

And just when we thought the worst could be over, yesterday, China’s market fell 8.5%.

It’s fair to say that yesterday’s drop even caught our emerging markets expert, Ken Wangdong, by surprise. Just last week Ken told New Frontier Investor subscribes that ‘statistically‘ it was safe to get back into Chinese stocks.

However, everyone knows that sometimes, statistics aren’t worth the spreadsheet their written on.

Aware of that, Ken reminded his readers:

However, we need to stay vigilant against any renewed systemic risks from China and Europe. Should it arise again, your crisis diversifier should kick in.

What is the ‘crisis diversifier’ that Ken talks about?

In the same weekly update, Ken explains:

The NFI buy-list now covers five markets — China, India, ASEAN, Latin and commodities.

You may have heard of the following terms used among mutual funds: overweight, neutral and underweight. These have direct implications on how much volume the funds are holding for each sector.

By changing weights, the funds can improve their return performance.

You can do the same!

However, it is easier said than done. It is usually a complex “dynamic process”.

What you can do is to use “weighting” as a diversification tool.

The following is an example:

This particular weighting gives our China and India stocks a 30% allocation each. ASEAN receives 20% due to its high growth potential. Latin receives a respectable 15% because we have an extremely depressed asset in there.

Commodities usually receive a 5% allocation during normal market conditions. I have kept it that way in this example.

You may apply this technique to your own investment to better spread your investment risk. Of course, the weighting you choose is up to you.

Many of our editors have developed their own approach to risk-taking over the past few years.

From my point of view, I prefer to let each editor come up with a risk strategy that suits them and they’re style of investing and analysis best.

That’s much better than forcing a particular strategy on them from above. In Ken’s case, he’s looking at risk and diversification from the perspective of which emerging markets to invest in.

He suggests allocating a part of your emerging markets capital into the various markets. In this example, he suggested you may want to have 30% of your emerging markets investments in China, another 30% in India, and the rest spread between ASEAN countries, Latin America, and commodities.

And just as I don’t impose a risk management strategy on Ken, he knows not to impose a risk management strategy on his readers. Some New Frontier Investor subscribers may want to invest all of their emerging markets capital into China…just because they love the growth potential.

If they do that, they also need to know the risks involved. Yesterday’s 8.5% drop in China’s stock market highlights the risks.

A successful change

Another one of my colleagues to adapt his investing style over the past year has been Greg Canavan.

I can’t give too many details about it here, but his subscribers will know what I’m talking about.

In short, it has been a raving success. Of the 11 stocks Greg has recommended since adopting this approach, nine are in the black — and that doesn’t include the 63% gain he’s made on short selling Fortescue Metals [ASX:FMG].

Anyway, we’ll get more details to you soon on Greg’s great run. Stay tuned.

Boost your income without taking big risks

The upshot of all this is that it’s wrong to think that there’s a ‘cover-all’ risk strategy that suits or is perfect for every occasion.

I’ve often written about what I call ‘punting money’ and ‘safe money’. I advise folks to divide their investments into two groups — ‘safe money’ such as gold, cash and dividend stocks, and ‘punting money’ such as growth stocks, small-caps, microcaps, futures contracts, and speculative options contracts.

As an aside, note that I specifically say ‘speculative’ options contracts. Not all option trading involves speculation.

We’ll reveal more detail on that when Matt Hibbard introduces you to a new way to generate extra income from stocks you may not even own. Sound intriguing? We’ll reveal more details soon. But if you want to be among the first to get into this new service, you can do so by taking out a Platinum Alliance membership here.

And remember, this is the last ever time that we’ll make Platinum Alliance membership available. The doors close for good next week — no exceptions. Details here.

But getting back to managing risk, even within the ‘safe money’ and ‘punting money’ allocation, you can still manage your risk according to each investment type.

If you use stop orders, you’ll probably use them in a different way depending on whether you’re investing in a big blue-chip stock or a tiny microcap.

And if you’re managing risk with a dividend portfolio, you may use position sizes that will help you achieve an overall level of yield for your portfolio, rather than investing the same amount of cash into each stock.

For instance, let’s say you had a $4,000 portfolio, and you’re looking to earn a decent income from stocks. You could take that $4,000 and put it all into one stock or a number of stocks that each paid a 5% dividend yield:

In this scenario, you would earn $200.

Alternatively, you could take your $4,000 and spread it across four stocks, each paying a progressively higher yield. Your portfolio could look like this:

In this case, you have a higher yield and income. You’re earning $370, or 9.25% on the same amount of cash.

However, this could also mean that you’ve increased your risk. Typically, (but not always), a higher yielding stock can indicate a greater amount of risk.

So, what can you do? Simple, you can play around with the numbers until you reach a level of capital exposure and average income yield that you’re comfortable with. Your portfolio could look something like this:

In this case, I’ve decided that I’m looking for an average income yield of around 7%. But rather than putting all my money in the stock that pays a 7% dividend yield, I’ve put most of the portfolio into a stock yielding 5%, and then put much smaller amounts in stocks yielding higher amounts.

You see? There’s no single way to do things when it comes to risk management, or even trying to build an income stream. You have to play around with ideas and your capital, until you’re comfortable.

Although, even then, you shouldn’t remain static. You should always pay close attention to what’s going on in the markets, and most of all, not be afraid to adjust your thinking if your view of the market has changed.

Kris [+]

PS: No doubt I’ll take a bunch of flak for having taken a bearish stance over the past couple of weeks. But I make no apologies for that. The next 8–10 weeks are set to be an interesting period, and it all revolves around the US Federal Reserve. I’ll reveal my latest analysis to Tactical Wealth subscribers next week. Details on how to join Tactical Wealth are here.