Gold long-term bull run is far from over

After I posted my last blog, expecting for a short term rebound of gold, there are some discussions about whether or not gold (same for precious metals in general) can still move up during the current deflationary situation. With respect to the factors that may impact on the prices of gold, I talked about them 5 years ago, which are still relevant. But these are more of those which may have short-term impact on gold. The real reasons that will support gold to resume its super bull run are the following two, in my opinion:

Currency war: each country is aiming to debasing their own currency, the cheaper the better. Although the US$ is in a short-term significantly strengthening against other currencies, which has a very negative impact on the gold price, however, long term US$ will still lose its value. But regardless, due to the next reason below, gold can still fly high during the time US$ is relatively strong. History has proved that if you know the historical gold bull runs in the past.

Negative real interests: I talked about this for Euro zone before but this is really a general phenomenon prevailing everywhere in the world that interest incomes people can earn from their saved the money are virtually less than actual inflation rates.  Of course, I’m not talking about the CPI that the governments want you to believe, but the actual purchasing power of your money. Do you really feel that your purchasing power has increased over years even when the governmental CPI has been kept very low? I guess the vast majority, if not all, would agree with me to say that overall the cost of living has been substantially increasing year after year. Some time ago, a friend sent me something interesting about the declining dollar purchasing power, a situation in CA, which is of course not limited to one state, but everywhere in the US and around the world:  " While the dollar's purchasing power has decreased over the past 16 years by 70%, gold has maintained its purchasing power. In 1999, it took 0.00667 ounces of gold to buy a dozen eggs. Today, despite the new regulations, you can buy a dozen eggs for just 0.00583 ounces of gold. If you look at the purchasing power of gold in terms of gasoline, bacon, filet mignon, or real estate, you'll find the same thing. An ounce of gold buys at least the same amount of everything as it did in 1999”. You see, governments can't print gold. It has been used as money for thousands of years. While we may feel more of the risk of deflation at the moment, the gigantic amount of paper money the governments around the world have created from the thin air will sooner or later find its way into the circulation  and when it happens, watch for the super-hyperinflation, which will be super bullish for gold and other precious metals. I touched upon this topic earlier here.

So why gold has declined so much in the past 3-4 years? Well, we have to understand gold had a gigantic bull run for 12 years, year over year non-stop. Can you tell me any other assets that have this kind of run for so many years? Definitely not as it has only occurred to gold. So with this kind of uninterrupted uptrend for so many years, one has to expect at some point there should be a rest period with correction. That’s exactly what is happening to gold. What we are seeing now is just a natural correction that will occur to any asset during their bull trend. It is just a rest for gold and it is healthy for the bull run. As long as the fundamental reasons remain intact, there is no chance gold will really turn to a bearish trend. I'm still super bullish for gold and will remain so for long long time in the future.  We just need some patience to let the natural market force go through its power and I think we are very close to seeing a truly phenomenal turn-around for gold. I cannot tell you exactly when but I’m sure it is very close. Be ready!

 

One relatively new ETF that trades gold in Japanese Yen and will be largely benefiting from the declining Yen is GYEN. You may consider to put some money here as part of hedge against of declining gold prices due to strengtheing US$.  I like the idea but due to its short life, I don't know if it can work out as it is supposed to be. Presumably, as long as the declining of gold price in US$ is less than the weakening of Yen against the dollar, this fund should be doing well.

 

Watch for a short-term bounce of gold mining

Is there anyone out there to be interested in gold today? Quite a few, if not none. It has been almost like a dead blow to gold in the past week or so when it has been dropping off the cliff just within a few days. Yes, it is very painful for those who hold gold, especially gold mining stocks. From a long-term perspective, I think gold is very close to its bottom and when it starts to rise, it could be a fantastic run in the next few years. But in the short term, the severe damage has been done too much to the sector and we cannot expect it will simply recover in a sustainable fashion with one or two attempts. However, it anyone wants to catch up a “dead cat” bounce, you may get a chance next week. Gold has been way too oversold at the moment and is due for a significant bounce for at least a very short period of time. If so, the mining stocks will lead. Today’s intra-day reversal of gold price was a strong indicator that this short-term bounce may start now. If I’m right, mining stocks will be doing better than gold itself, given how oversold they are in general. Buying some GDX is one way to go.

Of course, let me be very clear, gold may likely be not yet at the exact bottom and any bounce may likely be temporary and will come down again to test its recent low. Same for mining. So this has to be a very quick trade for anyone who is able to execute fast. You should be willing to take profits quickly, probably just within a couple of days,  if you are lucky enough to have some good profits. It could be substantial but the risk is of course also big. Trade accordingly.

Is Micron Tech a next acquisition target?

News has broken out that Tsinghua Unigroup, a microchip company owned by the Chinese government has made an offer to buy Micron Tech (MU) for $23 Billion.

MU is the world 4th largest semiconductor maker by sales. The deal would only price MU at $21/share, way down from its peak around $36 just a few months ago. So will this deal ever go through? It is almost certainly not! Not only the offer price is way too low, there is more just than the price that will make this acquisition very unlikely.

MU operates in four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit. The company offers DRAM products for data storage and retrieval as well as flash memory products, which are widely used in consumer electronics, industrial, wired and wireless communications, computing, and automotive applications. In other words, MU’s business is of the critical sectors that have strategic and security importance for the US. We have seen several attempts by the Chinese companies in the past few years that they wanted buy some US companies but failed as the US government simply blocked the way due to security concerns. This time is likely no difference. Having said that, I think there is a good chance that MU may become a solid target for M&A. MU is a great chip company with important products critically needed in the semiconductor industry in general and in the mobile communication sector in particular. Yes, its share price has been haircut by half but its business continues as usual. We have seen many recent examples that when great companies have short-term challenges with sharp declines of stock prices, they become great M&A targets. In addition, some lucrative deals may also easily pop up their prices. I think MU may be in this kind of situation. Of course this is purely a speculation as I have no insight knowledge whatsoever and don’t know for sure if this will happen, and even if yes, when this will happen. But buying some MU shares now is not a bad idea anyway and potentially a great one if some sort of deal comes true.

Why does the technical analysis work for stocks?

After I posted my short- vs intermediate-term prediction on S&P 500, I got an interest question what would be the catalysts for a rallied market to go down again. I'm sure many people may have the similar question.

The short answer is I don't know. To really understand this, we need to first understand why the technical analysis works since all my prediction was based on the technical setup. It won't be surprised for me to know that a lot of people have significant doubt on the technical analysis to guide for trading. I was one of them as I also very much doubted the technical patterns based on the past price actions could really foretell what is going to happen. However, after many years in the market with learning and practicing, I've finally changed my mind and am rather convinced now that the technical analysis indeeds works for trading. Why so? Well, in a nutshell, the price actions in stock charting are actually a collective reflection of the traders' behaviors or their psychology and mindset. Over years, people have identified certain patterns and trending lines that often indicate some extreme conditions that may trigger a turnaround soon. For example, when the market is overbought to some extreme extent, it means traders are very complacent and are thinking the world is in a perfect situation. But we all know, the world is not perfect and it is almost a 100% certainty that there will be something devastating to happen somewhere in the world. I don't need to know what is going to happen but I know something will happen to trigger some nervous reactions to bring down the market. Conversely, if the market is extremely oversold, it means people out there are very nervous, expecting the sky is falling. But we all know the sky has a habit of not falling. In this situation, just a little bit good news could trigger a great relief among traders to start to buy aggressively. Of course, nowadays the high frequency trading by institutions based on the predefined technical patterns has further enhanced the predictability of the market movements based on technical analysis. If you pay attention to my calling for the support or resistance, you may have realized that the markets indeed often move around within the limit of those lines in the short term. Before I finish, let me remind you of the 2 recent examples about the macro-trends that I accurately predicted:

• I was long for the Chinese market probably a year ago and made some good money for its initial moving up. But starting from about 2 months ago, I got really worried about the Chinese market. Technically it was extremely overbought and I called it a gigantic bubble to be burst. I even went so far to say that this bubble would end up with deadly tragedies. I was a bit too early but eventually we all know what has happening to the Chinese stocks. We have seen a lot of theories about what were the causes of this epic stock crisis. I'm certainly not smart enough to know exactly what has happened. But I try to keep a simple mind for myself. I still believe the historical bull market for China is far from over and will resume sooner or later. But technically it was way ahead of itself a couple of months ago that for sure would lead to a crash. While the Chinese market is rallying at the moment, I don't believe the correction is over and the bottom is necessarily formed. Purely from the technical perspective, there is a good chance that the Shanghai index will test its recent low again in the next few weeks and a lower low may finally allow the formation of a solid bottom. Of course, this is a very simplistic technical analysis and a lot of things can change its course.
• I have been calling for a downtrend for the US stock market for about a couple of months as well. Did I know the Greek crisis would trigger the 300 points decline for Dow Jones just a few days ago? Of course I didn't. But the technically I knew traders were too much complacent and were too bullish for the near future. So even though I didn't know what could bring down the market, I knew something problematic would happen to trigger the downturn.

Finally, the technical analysis also applies to individual stocks with the same principles. I have talked a lot about individual stocks in the past few months based on the technical setup and hope you agree with me that the vast majority of them did follow my calls. I made a bunch either long or short and hope you also benefit from my calls.

S&P Short- and Intermediate-term Trend

As I have talked for couple of months, the US stock markets have been entering into a significant correction. So far my prediction has been correct. S&P 500 has presented a bearish head and shoulders pattern as shown below. It broke its neckline around 2080, which becomes its resistance now. It was supported at 2040 last week. Now the markets are quite oversold short-term and are ready for a meaningful rebound. At the moment, the most significant headline risk is obviously the Greek drama. If Greece cannot make a deal tomorrow and is heading to a Grexit from the Euro zone, the market will go down straight. But I think there is a good chance they will strike a deal and Greece will remain in Euro. With this assumption, here is what I'm thinking about the S&P trending in the very near term (1-2 weeks) vs longer term (about 2 months). The solid pink lines are the few support lines for S&P and the green dot line is the likely pathway for S&P in the next couple of months.

In a nutshell, in the next 1-2 weeks, S&P will likely go up to meet its 50 day MA (red line) around 2100 but then it will resume its downtrend again and test various support lines. The most likely scenario for me is that S&P will be bottoming around 1990-1950. But if the situation becomes really ugly, then it is also possible S&P may go down towards the bottom of the last Oct correction below 1900. We may likely not see this but we need to keep this in mind as well.

 Based on this prediction, here are a few suggestions for you to consider if you also believe what I'm saying:

• As I have said many times in the past weeks, BE CAUTIONS to buy at the moment. Only consider those solid value stocks for long-term that you are not worried about the short-term volatility.
• For your existing long-term positions that are still in good valuation, no need to worry about them as this is a natural market correction, which won't last long. We are still in a secular bull market that will continue for a while for sure. If your value stocks have become very expensive, then a correction may knock down its price more severely. Selling portion of it may be considered as you can always buy back later with a lower price. But don't simply sell without understanding their valuation.
• For short-term trading positions, the next week or two's rally may give you a chance to lock in your gains. Again, a couple of  things can be considered:

                - sell those that have good gains already
                - use trailing stop to protect their gains. For more info on stop loss, see here.
                - if you are savvy about options, you may consider using options to hedge against the possible decline.

How to hedge Chevron

I recommended Chevron (CVX) a couple of weeks ago and thought it would not decline too much from $100. Apparently I was wrong. I quite underestimated the scope of the pessimism in the oil sector that has also dragged down the best oil stocks like CVX or XOM. Am I worried about CVX? Not an iota! It is still a great and one of the best dividend stocks in the world you can find at the moment with reasonable valuation. If anything I just add more for long-term when it drops. This is the time period when you can really build up a fantastic portfolio for wealth growth for your retirement. It is simply too difficult to find such kind of great value stocks when everything looks rosy!

Having said that, a question should still be asked whether there is a good way to hedge against the temporary downside risk for CVX? The answer is certainly yes. For most people out there, options are probably not a way for them to do hedging. But I think you can do something else simply for this purpose. Actually you may have already got the hedge setup without knowing if you followed my advice to have bought the refinery company, VLO. You can read here to see why VLO is thriving when oil price is weakening. As I said, oil could decline again and VLO should be doing great. This is exactly what has happening. Now the question is whether oil has bottomed after it has dropped to low $50s. I don't think so. Technically and fundamentally oil is till in a weak spot and even though it is recovering a bit these days, chance is high that it will come down again. We are simply producing too much oil at the moment but the demand is not there to match the supply. The world economy is in a total mess and the Greece and China's crisis has added more to that. So I think the good days for VLO is far from over and it should continue to be doing very well at least in the next few months. Now check out the chart below to compare VLO (blue) vs CVX (red). They are almost like a mirror image, aren't they? In other words, if you hold both CVX and VLO, your VLO will be doing well during the depressing period for oil, which will compensate the potential weakening of CVX. I think this is a win-win situation as you can effectively hedge for CVX and at the same time earn great dividends from both stocks!

What a turnaround day!

What an impressive day today for the markets!! I did expect S&P would try to rally but did not expect what happened after opening that it dropped like a stone for a while. However, finally it managed to come back quite strongly. Dow Jones has even managed to make the strongest intraday reversal in the past 4 years with a 300 points swing during the day. But just keep in mind, this is likely a short-lived dead cat bounce. It may still try to go up a bit, barring any significant negative news from Greece. Regardless, I don’t expect S&P could overcome its resistance around 2100.

As I said, Wal Mart (WMT) appears to have bottomed around $70. Today’s WMT price action is a classic text-book demonstration what a bottomed stock should do. As you can see below in the intraday price chart, WMT (blue) decreased much less than S&P (red) when the market was declining and jumped much higher than S&P when the market was heading high. This provides more convincing evidence that WMT has indeed bottomed for now. WMT is one of few blue chips that one can consider to buy during a severe market correction. But be aware that WMT is hitting its resistance around $74 and if you want to buy, you may get a better chance in a few days.

Good time to earn some tax-free money

I have talked about Muni before, the municipal bonds that are issued by local governments to fund their local developments. Typically Muni is tax-free and a good source for those who want to earn fixed income. Muni has been around for over 100 years and has been proved to be very safe and secured as the default rate has been less than 0.1% in generally in the past 40 years. After all, governments are largely able to collect money if they need via taxes. If they are in shortage of funds to pay the bond interests, guess what, they simply increase our taxes to make it up. That’s why it is rather safe to invest in Muni if you know the appropriate way. Right now, Muni as a whole is under significant pressure primarily due to 2 reasons: it is widely expected that the interest rates are heading higher moving forward and higher interest rates are generally bad for bonds. Chicago and Peurt Rico governments  are both on the verge of bankruptcy, which certainly make Muni investors nervous. But the thing is, the market is usually overreacting and at the time of crisis when everyone runs to the hill to hide, it is the great time for those who really know what’s going on and have the gut to buy when everyone else is dumping.  I think Muni is currently in such kind of situation. Buying now will allow you to earn much higher dividends and at the same time to be potentially rewarded with good capital gains down the road. So what’s the best way to buy Muni? You may shop around to buy individual Muni issued by different governments but you will need to know the values for each. For the vast majority of investors, this is a very risky way to buy Muni. The best way is to buy closed end funds for Muni, especially when they are at large discounts. These funds invest in a large number of Muni across a wide range of territories and sectors as well as with different maturities. Even if one or two of them get in trouble and even default, the impact on the total portfolio is quite limited. The negative impact of increasing interests means nothing if the bonds can be held through their maturity. This is usually how the closed-end Muni funds will manage their portfolio. Therefore it is a great time to take advantage of the current panic selloff of Muni that has resulted in a bigger discount for the net asset value (NAV) of such funds, close to 10%. Over time, the gap of discounts will be narrowed down, which will bring you the nice capital gains. I like IIM or NIO, both of which yield about 5-6% (tax-free) with a discount to their NAV around 8-10%. Don’t miss this opportunity!