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The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure)

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September 13, 2009 – Comments (22)

I first wrote this blog post in My original blog on June 15, 2009. Here is the original post (The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) -- If you are a CAPS user, please rec the original blog post. It is one of the most important and comprehensive posts I have ever written and needs as much exposure as possible --). I have decided to update the post right now for a few reasons:

1) Gold and Silver are beginning their breakouts. And per my fundamental analysis and my Wave Counts, the patterns are very bullish for the near term and long term. Is this *THE* breakout to new all time highs, and never looking back? Or is it another run-up to 1000-1030 and then a retest of support levels down to 700-800. I don't know. And more to the point, I don't care. Gold is about value and preserving wealth over the long term, through the current and future inflationary policies of the Fed and Treasury and the next crisis in the continuing financial meltdown. More on this point further in the post. But this next move is setting up to be a potentially significant technical event. Which way it breaks is a matter of opinion and debate. I am in the bullish camp. But moreover, I am in the *long term* bullish camp. I am a fundamentally engaged gold investor and have been for years now. So my opinions on this matter should not be read from a traders perspective. I have bought on all pullbacks, but I will also buy in a confirmed move above 1050. The peaks around 1000-1030 have been resistance for a long time. But based on the size of current short positions in gold, a move to 1050 could set up some massive short covering and fuel the leg of the next large bull move in gold.

2) I am a huge dollar bear. I have written two large posts on the US Dollar (Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog Jun 17, 09 and USDX Count Update and Thoughts Aug 12, 09) and while I agree that we will get a bottom in the Dollar that should last for a couple of months, it is *extremely* important to understand the long term trends of the US Dollar (down) and the fact that all fiat currencies eventually trend toward their intrinsic value (zero). This is not a gold bug statement. Look at the history of all fiat currencies. We even have dead United States currencies, since the US has been in existence! Anybody who thinks the Fed will not try to inflate their way out of this mess, or thinks there will not be political pressure to inflate the money supply or increase the debt ceiling on the US National Debt, really does not understand history or the willingness of politicians to dismiss sound economic policies in order to "look like they are doing something".

So this post is a repost/update to the original post. It has all updated charts with new annotations and revised counts (where necessary). Also I was playing around with a few numbering/coloring schemes when I wrote the original post, and all the charts in this new post are compliant with my EWP Numbering Scheme

Original Post is here:  http://marketthoughtsandanalysis.blogspot.com/2009/09/gold-blog-goldsilvergsms-and-little-oil.html

....... Continued in Comments Section .........

22 Comments – Post Your Own

#1) On September 13, 2009 at 7:28 PM, binve (< 20) wrote:

Gold is an exceptionally polarizing subject matter. This blog will NOT be a rant by a gold bug telling you to buy gold before the world devolves/vaporizes/implodes etc. Instead it will be a brief history of gold, why it has been traditionally important monetarily, why it still continues to be important, some FA and TA of gold, and some of binv’s thoughts on the matter.

There are a few thoughts that I would like to set the stage with for this blog post, and both come from the classic film: The Treasure of the Sierra Madre

“Gold in itself ain't good for nothing, except for making jewelry and gold teeth.”

“A thousand men, say, go searchin' for gold. After six months, one of them's lucky: one out of a thousand. His find represents not only his own labor, but that of nine hundred and ninety-nine others to boot. That's six thousand months, five hundred years, scramblin' over a mountain, goin' hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the findin' and the gettin' of it.”


You many wonder at these quotes and question their pertinence to the topics I enumerate in the opening paragraph, but I assure you that they are exceptionally poignant and get at the core of this whole discussion.

The Point of this Post and What is NOT the Point of this Post

This is not going to be a detailed analysis of every aspect of gold. And if you have been on Caps for more that 5 minutes you will have already realized that Caps has a gold aficionado: TMFSinchiruna. Sinch’s (Chris’s) blogs and pitches contain a wealth (pun intended) of information going back several years regarding gold fundamentals, gold trends, macroeconomics, miners fundamentals and cost drivers, etc. I could write a whole blog just indexing his information. But I urge you to read his blogs, especially the older ones at the beginning and mid 2008 which have unbelievably good information. Sinch is like me, he is not a gold bug. He is a guy who has looked at the fundamental issues facing our economy and nation, looked at the short and long term macroeconomics and policy decisions, and has concluded that gold has a place (perhaps even a significant place) in any serious investors portfolio.

Nor is this going to be a blog with a hundred charts talking about the minute movements of gold. I do not trade gold. I invest in gold. The short term movements are quite irrelevant to me. Now this may seem at odds with what you know of binv. After all, this binve port was built to take advantage of short-term/momentum plays. So why not trade gold? Because I believe that gold is one of the few asset classes right now in a legitimate bull market. Now, your gold bug alarms may be flashing with this statement, but I assure you that it is not based on a gold-bug mindset. It is based on a well-reasoned and balanced examination of a lot of facts, and is a conclusion that I have come to (but I am getting ahead of myself). More on this later.

You may hate gold. You may think it’s stupid. That it’s a shiny yellow rock, as arbitrary for storing monetary value as seashells, bottle caps or baseball cards. And that is fine if you do. I am not going to try to convince you (if that is your persuasion) to dump stocks and buy gold.

But I would like you to ask yourself, instead of gold, why put your trust in green pieces of paper with dead presidents faces on it?

Your first thought might be: “That is an absolutely ridiculous statement. I mean dollars are the currency of the United States”. This is a true statement. But why do dollars have value? You may have thought about this, or maybe you haven’t. But saying that gold is irrelevant because it is not longer an official currency, and just leaving at that, is extremely short-sighted and is (IMO at least) a bit gullible.

So the ultimate point of what this post will be about is a (hopefully) well-reasoned approach as to why gold is relevant to todays investor, actually especially to todays investor. I am not trying to win anybody over, nor will I simply preach to the choir. Instead I will give my thoughts any why I have come to the conclusions that I have, and hopefully it will cause you the reader to think critically about gold.

But First (I’m sorry to Say) A Slightly Off-Topic but Extremely Relevant Rant

In my last two large blog posts: More Thoughts and Analysis: Timeframes – Bearish, to Bullish, ...to Bearish and Market Thoughts and Analysis: Potential Turning Point This Week and Some Important EWT Observations I had two fairly large rant sections. These can be summarized into two statements:

1. “Anybody who says they know what will happen is delusional, a paid liar, or both”

2. Any analysis that is performed (macroeconomics, FA, TA, etc.) is ultimately an opinion and should always be treated by any reader as a guess, not as a fact.


In fact, I spent a lot of time belaboring these two points. And still I was questioned about the validity of my analysis, saying how I could claim to predict the future even though I had very specifically said in the original posts that I was not.

So read this, this is EXTREMELY important

Whenever I write a blog or a comment on a blog, this is my intent and thought process. And I would further argue that this should be any writers intent: I am not trying to convince anybody of anything! I am simply sharing my thoughts and ideas, sometimes the evidence and facts that I have looked at that helped me to form my opinions. But never will I claim that any of my opinions or the conclusions from any of my analysis as either a fact or an inevitable occurrence. I offer my thoughts and a guess with some probability of occurrence. THAT’S IT. And I would urge you as a reader to be highly skeptical of ANYBODY who claims anything beyond that.

Any author who claims to be an authority at: Interpreting macroeconomic trends, Technical Analysis, Sector Analysis, etc. is ultimately engaging in a non-definitive exercise. Why? Because the ultimate point of these analyses is to try to predict the future. And this is impossible.

The best anybody can do is to predict aspects of market with a certain degree of probability. That is it. To identify likelihoods of occurrence for events, to assess some amount of relative impact, and to identify risk/reward.

So let me (again) preempt any comment that questions my thoughts and analysis as if I were claiming any definitive outcome. I am not claiming to predict the future with any accuracy, nor am I trying to convince anybody to do anything with their money. I am sharing my thoughts and observations, nothing more.

What is Money?

What is Money? Another simple question with a seemingly obvious answer. But if you haven’t seriously thought about it, I invite you to do so now. The most basic definition would be: Money is a medium of exchange. Okay, that makes sense. Instead of a true barter system, money allows for goods and services to be exchanged between groups and individuals based on some agreed up ratio, or an exchange rate (remember this, this is important). E.g. A Snickers bar is worth 2 units of currency, or an hour of Babysitting is worth 10 units of currency, etc. Okay, so if you can purchase a Snickers bar with currency, and it is exchangeable (you can trade Snickers bars with other people), then is a Snickers Bar money? Again, the answer I expect to hear is a resounding “no”. I mean that’s ridiculous right? But let’s explore for a minute why this is ridiculous.

Money needs to be a medium of exchange. And as such should have reasonable consistency among measures of exchange (e.g., the Dollar or the Euro). So the first part is true. Snickers Bars are consistent with respect to the exchange rate with US Dollars (e.g. the Snickers/USD exchange rate). You can go into any Walmart or convenience store and pick up a medium Snickers Bar for $0.99. So why can’t you exchange a stockpile of Snickers back to a convenience store for say a gallon of gasoline?

Because simply being a medium of exchange is not enough to define money. Money must exhibit other properties: 1) Money must be valued equivalently by all parties in the exchange, 2) Money must have enduring value, 3) The supply of money needs to be regulated, 4) Money must be liquid, 5) Money must be fungible. So lets step through these one-by-one and apply them to our Snickers example

1. Money must be valued equivalently by all parties in the exchange. Lets say Joe and Linda both love Snickers and Joe has 100 Snickers and Linda  has a lawn mower. Joe and Linda decide to make a trade for 90 Snickers. Now Joe needs gas for the lawn mower and Tim has some gas, Joe offers Tim 10 Snickers for a gallon of gas. However, Tim is a diabetic. What good are Snickers to him?

2. Money must have enduring value. Joe has 100 snickers and is about to make the lawn mower deal with Linda. So Joes walks up to Linda, Snickers in hand, and then they start discussing lawn mower maintenance. It is a very sunny day and by the time the trade is ready to happen, Joe finds that all of his Snickers have melted

3. The supply of money needs to be regulated. Lets say that, despite points 1 and 2, Snickers does catch on as money. Well M&M/Mars has just realized it has a way to mint money. So what if it flooded the market with a new supply of Snickers? The market would be come saturated, driving down the price (much more supply vs. demand)

4. Money must be liquid. Let’s face it, carrying around cases of Snickers to buy groceries is a bit insane. Nor could you ever have a “digital” currency based on Snickers (what is the point of eating a digital candy bar, where is the store of value in that).

5. Money must be fungible. This may be a term you are unfamiliar with. Fungibility is the property of a good where the units are capable of mutual substitution. i.e. A single US Dollar is equivalent to every other US Dollar in existence. A pound of 0.9999 Oxygen-Free High-Conductivity (OFHC) Copper is equivalent to every other pound of high-grade OFHC Cu. But unless the Snickers bars are completely pristine they are not fungible (e.g. Is a brand new unopened bar fungible with one that is opened, with a bit missing and past its expiration date?)

So this should scuttle the dreams of any of you scheming up a “Snickers-based economy”. But moreover, it should really call into question what can be used as “money” or as a “monetary asset”. A share of common stock exhibits many of the properties above. But what about a home? Is a house fungible? Is it liquid? What about a Credit Default Swap (CDS) or a Collateralized Debt Obligation (CDO)? I am not trying to tell you what is money and what is not. I have laid out the properties that money and monetary assets should exhibit. You should think about those properties and then think about the assets that are held by your favorite companies or by financial institutions when they make loans or secure debts against those assets.

The US Dollar / Fiat Currencies as Money.

So I think we all agree that the US Dollar is Money. As is the Euro, the Franc, the Yen, etc. It displays all of the properties described above. But the money is not simply the notes that are issued by the governments and Central Banks (which is “token money”). The “money” of a nation is defined as its money supply. The “money” that is defined by the US Dollar is a bit more complicated that you might believe. The Federal Reserve issues (creates of thin-air) what is called base money. Banks (which are legally part of / have access to / and grow the money supply) increase the money supply by taking the deposits of customers and using it to lend to other people. Banks, by Federal rules, are required to keep a fraction of the deposits on their balance sheets as cash and can loan out the rest. This is the basis of fractional reserve banking and is the basis of our entire banking system. But not only the US, all over the modern world.

Okay, that’s all well and good, the Fed has complete control over the base money supply, and banks act as arms of the federal banking system and increase the money supply. But who decides what the “value” of the Dollar is?

The US Dollar / Euro / Yen, etc. are all examples of what is called “fiat currency”. Fiat money is legal tender because the government has decreed this to be the case. Fiat comes from Latin and means “Let it be done”.  The decree of value is a literal one. But the basis for this decree is backed from the fact that the government collects taxes from its citizens. Quite simply, fiat money is a tax credit. The value of the US money supply exists as a claim on the future tax of US citizens. Remember this, we will come back to this one.

Why Gold is Money.

Gold is money because it is a medium of exchange and exhibits all 5 attributes described above. And I can just hear some of you now “Can you go down to Wal-Mart and buy a Snickers bar with gold”. The answer is no, you cannot. The US government no longer recognizes gold as an official currency for all debts public and private. But does that make it any less valid as money? If you said yes, I would first ask you why?. Next I would point out that the Euro cannot be used to settle American debts, but does that invalidate it as a currency? A rebuttal would be, well you can go any Forex counter in the world and for a fee, exchange most major currencies with each other. And I would say: precisely! And in every city in the world, you will find a seller who will exchange gold for local currency.

Before I continue, let me say that before I read TMFSinchiruna’s blog (a couple of years ago, back when he was just Sinchiruna :) ), I thought gold was stupid. I had all of the same preconceptions and misconceptions that people typically have. I was born after the gold convertibility window was closed by Nixon in 1971. I have always lived in a world when gold was not an official currency. I am not a gold bug in any way. But I have gone through the process from being a skeptic to seeing the value in gold.

Gold is a currency, not a commodity. This is not strictly true, it is mostly true. The gold supply feeds three markets mainly: Jewelry (~65%), Investment (~20%) and Industrial (~15%). However, a very large portion of “Jewelry” demand really is investment demand. Indian and Asian cultures in particular use their jewelry as savings, and accounts for a very large portion of the overall jewelry demand.

It is a currency first, and a commodity only in a very distant second. Some of its properties have beneficial industrial uses: it is non-reactive and non-corrosive in many environments which make it good for dental fillings, it is a very good conductor and is used for high grade electrical connectors or contacts, and it has useful thermo-optical properties so is sometimes used as the outer layer in thermal shields for spacecraft, and yes, I would know :). But each of these uses can be filled with more cost-effective alternative that yield similar performance (polymer epoxies for dental fillings, Silver/Copper/or even conductive composites for high-conductivity electrical connections, and First-Surface Aluminized Kapton or Copper Foil for similar thermo-optical properties).

But it is precisely because of gold’s other properties (valued equivalently by all parties in the exchange, has enduring value, supply is to be regulated, is liquid, is fungible.) and the fact that it is NOT as industrially useful as other metals that makes it ideal as a currency. It is rare. New mining supply adds only 0.25-1.5% per year to the above ground supply.

So lets get back to the Treasure of the Sierra Madre quotes.

“Gold in itself ain't good for nothing, except for making jewelry and gold teeth.”

“A thousand men, say, go searchin' for gold. After six months, one of them's lucky: one out of a thousand. His find represents not only his own labor, but that of nine hundred and ninety-nine others to boot. That's six thousand months, five hundred years, scramblin' over a mountain, goin' hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the findin' and the gettin' of it.”


As I just said above, gold is a currency because it is used overwhelming as a store of value, and not as an industrial commodity. It is rare. Rare enough so that it is precious, (much rarer than iron or even copper), but not too rare (such as diamonds), and it is easily made into different sized denominations (unlike diamonds much are much more difficult to subdivide).

Among all of the materials in this world that could be appropriate for monetary uses, gold exhibits the best of all of the desired properties of money. Which is why it has been money for over 2600 years.

Okay, so Gold is Money, The Threats to Our “Money” (the US Dollar and all Fiat Currencies), Why I Made the Statement that Gold is One of the Few Legitimate Bull Markets, and What’s the Upshot?

Gold is money. Based on all of the evidence above, I am making that statement. It is irrelevant to me or to the world at large whether you personally accept this or not. The world has used gold as money for thousands of years, and I have a sneaking suspicion that it will continue to do so long after all of us are dead. It is a rare yellow rock, under nobodys jurisdiction, under nobody liability, sitting there quietly and quiescently preserving value. That is what gold does, it stores value.

Gold does not pay dividends, gold does not multiply, gold does not make the world go round. Gold holds value. That’s it. So gold is not a way to get rich. Let’s be very clear about this point. Gold is a way to be NOT POOR. Like I said, it holds value.

Gold has been a currency since ~600 B.C. 2600 hundred years of history as a currency. But let's not even go there. Lets just stick with the US currency just to compare recent apples to apples. Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt.

Now I said the US Dollar is backed only by debt. Remember above that the US Dollar (or more specifically the US money supply) derives it value from the fact that it is a claim on the future tax of US citizens. This is a finite amount (the maximum of course being 100% tax on all citizens). But the point to realize that this is conceptually finite. On the other hand, the Federal Reserve has no limit as to the amount of fiat dollars it can produce.

Increasing divisions (more fiat dollars created out of thin-air) of a finite resource (the future taxes the US money supply is claiming against) make each division, both old and new, by definition less valuable.

This is the definition of monetary inflation.

Now in order to fully describe all of the issues and to illustrate the full scope of the problem, this blog would go on for another 20 pages. I literally don’t have the time or the energy to talk about it right now. I will have to save it for another post. But what needs to be discussed is:

- The Federal Reserve
- Chairman Bernanke and the “lessons” he learned from studying the Great Depression
- Deflation
- Deflation-Scares
- Stagflation
- Monetary Inflation
- Price Inflation (which is NOT inflation, it is a by-product of monetary inflation)
- True Money Supply (TMS)
- Monetary Inflation and Price Inflation Cycles and Time Lags
- And much, much more! Call now, operators are standing by!

I have talked about all of these issues in one form or another in my binv271828 portfolio and in comments all over Caps. If you want to pursue the topics further (and I highly encourage that you do) please read these blog posts:

- Steve Saville: Market Value, Money and Credit
- Quantitative Easing Explained  
- Steve Saville: Why We are Gold Bulls
- Steve Saville: Money Confusion and Inflation/Deflation
- Zeal: Big Inflation Coming 2

What all of these posts talk about and discuss is what I believe (again, this is all simply my opinion, nobody has a crystal ball on this one) to be the biggest threat to our “money”, and that is inflation.

I believe that every signal that the Fed has given, both in rhetoric and action, is that it will try to spur the economy / avoid economic collapse by monetizing the debt of the Federal Government and all the Financials that made bad mortgage bets. The newest euphemism for this activity is Quantitative Easing. And this will be an unprecedented transfer of private debt to public debt (largest in the history of mankind). Bond rates are already beginning to signal the inflationary hazard of this policy DESPITE the fact the one of the main goals of QE was to put a floor under bond prices (put a cap on bond rates).

An argument that I have heard going around is that the US will be in a relatively stronger position as the currency devaluation wars goes down. The US is not the only economy in trouble. Far from it in fact. Nearly all Central Banks will be engage in a currency devaluation war. The main purpose of which is to make the debt servicing burden easier for all of the interest paid on Treasuries held by foreign governments. Whether the US comes out on “top” in this “strongest among the weak” battle (which I remain skeptical of, considering the size of the US debt the size of the ongoing QE programs) is irrelevant from my point of view.

Because having a currency that is “stronger” than your competitors while you are devaluing your own, still puts your currency in a weaker position relative to a currency that is not being devalued.

And what currency would that be? Gold.

This is the ultimate reason why I believe that gold is one of the few legitimate bull markets. Because I believe the US and most other Central Banks will try to inflate their way out of this mess. The US Dollar will undergo a huge devaluation in both real and nominal terms. And gold utility and true value comes during times of economic crisis (which I believe we will have a lot more of) and during times of weak currency confidence.

There is still a lot of talk about “deflation”. And while I agree that there will be price deflation in a number of assets (housing prices I think are still too high), this in and of itself is not true deflation. Prices in any asset class can rise and fall due to supply/demand considerations. As I said above, both inflation and deflation are monetary phenomena. In fact much of the recent price deflation in assets has been occurring among periods of extremely high growth of the TMS (monetary inflation). And if you read the Steve Saville links I have above, you will learn about the time lag between monetary inflation and price inflation. I would caution you to be very careful and to think very critically about the argument any author makes when they use monetary measurements when talking about deflation. Remember the 5 characteristics above that any monetary asset must exhibit.

Gold is simply a currency that holds its value. That’s it. Nothing more, nothing less. It shines (pun sort of intended) when it becomes obvious that there is a serious crisis with the value of a nations currency.

Moving on to some Technical Analysis of Gold, Silver and GSMs

Remember, as I said in the beginning, I do not trade gold. This will not be very detailed microcount type chart. I am looking at very long term trends and capturing the general direction for gold. As I have said before, Gold is in a legitimate bull market, and I am not interested in shorting or trying to time a legitimate bull market. I am fundamentally engaged and want to be part of the whole rally up.

Gold, The Really Long Count

From above: “Between when the US colonies were formed and up until 1934 there were two forms of currency gold and whatever paper currency the US was using (Continentals, greenbacks, etc. there have been a few). But up until 1934 the US dollar was backed by physical metal. The US Dollar was redeemable for 1 ounce of silver, and the ratio between the convertibility of silver-to-gold was also fixed and the dollar was tied to it. Then in 1934, this breaks. The Dollar is devalued relative to gold and the strict gold and silver backing of US money is broken partially. It is completely broken by Nixon in 1971. So from 1971 until now (not a very long time when this is viewed in historical context) we have a US Dollar backed only by debt. “ .

Here is the count associated with these actions.







Notes on these counts:

This long term action of gold really tells this history of the “falling out of favor” / “government releasing the shackles of economic responsibility” that gold enforces. And because of all of the inflationary policies that have been heaped upon inflationary policies, I believe gold is in a very long term secular bull market.

Again, I do not ask you to believe me. I am sharing my opinion. Nothing more, nothing less.

In the grand scheme, I think we are at the beginning of a very big {3} wave which will last several years. Since the peak in March 2008 to the bottom in Oct 2008, there was a 34% correction (nearly 45% of the entire move from 2000-2008). So the count I show is that the large 2 of {3} correction is over and we are now into 3 of {3}. The recent price action is unclear. We could be in a small correction (2 of 3 of 3 of {3}) or a larger correction (C of 2 of 3 of {3}).

Either way, I don’t care. I welcome any opportunity to buy on a pullback.

Here is a look at some long term trendlines and MAs for Gold on the Monthly Chart. Also see the horizontal triangle (bullish continuation) pattern on the Gold Chart. The monthly technicals still look very strong.



Dow-Gold Ratio

Here is another important classic measurement, the Dow-Gold Ratio (DGR).





The Dow-Gold Ratio is exactly what it sounds like, the Dow priced in ounces of Gold. What is important to note is how unstable the DGR gets starting in 1934 and then even moreso starting in 1971. My personal feelings on the ratio? I believe on this cycle, given the size of the problems and given the governments plans to try to “fix” the problem, the DGR could go to 1, and I wouldn’t be at all surprised if it goes lower than that. So what might that look like? Maybe the Dow reaches 4000 and 4000 $/oz of gold. Or maybe the deflationists are right maybe it 400 and 400 $/oz. But I doubt that will be the case. I think inflation will prevent the price of assets (such as the Dow) from going as low as they would otherwise go, but I expect the price of gold, which is a hedge against inflation and economic shenanigans to go much higher.

Silver

I know I have spent the majority of the post talking about gold. I would like to talk about Silver in more detail, but I am simply running out of steam. Silver is another monetary metal. Silver though has a very wide range of industrial uses. As such it straddles the line between a currency and a commodity. However Silver has some very interesting facts: Silver for a long time was not recycled (unlike gold which has been recycled for a long time in industrial applications). This is not true anymore, it is being recycled much more now. But as such, a large portion of silver is literally sitting in landfills in various chemical states. And because there is still so much industrial demand, the amount of silver sitting in vaults as a monetary metal is lower than the amount of gold. This makes Silver a bit of a conundrum at times. It whipsaws much more than gold. When gold sells off, silver sells off harder. But when gold rises, silver rises much faster.

I believe Silver is in a secular bull market much like gold. And the commodity correction last year gave an excellent entry opportunity. And I think even now is an excellent entry opportunity. Will silver fluctuate? You better believe it. But this is another investment I am fundamentally engaged in.



Notice how deep the retracement was during the commodity correction. It was nearly 72% of the entire bull move up from 2002. I honestly believe both gold and silver are in bullish continuation phases of their overall secular bull markets.



The Gold-Silver Ratio (GSR) is still trending down, which is indicative of Silver catching up to gold from relatively more oversold conditions. My $0.02. As much as I would never short gold, I would short silver even less. That’s just me. I am sure there are people who will trade Silver short, and do it successfully. And I wish them luck (I honestly do). But I would never do it with my money.

Gold and Silver Miners (GSMs)

There are several ways to measure the performance of Gold and Silver Miners (GSMs). You can obviously do it on an individual stock basis. I prefer looking at the HUI (the AMEX Gold Bugs Index). The reason I prefer this one is that it is a basket of miners that do not hedge their production. I think it is a better proxy for Gold / Silver / GSM performance than say the GDX or the XAU.

Let me also say there are many other ways to value miners. Including mining and extraction costs, ore grades, Measured Reserves, Indicated Reserves, Total Cost of producing Gold Equivalent Ounces (GEOs), Revenue from Mining By-Products (Copper, Zinc, Lead, etc), Royalty Revenue, etc. But this is beyond the scope of this post. And I would just end up pointing you to TMFSinchiruna’s blog anyways :) He has written several good valuation posts as well as valuation articles that get published on the Fool main page





The HUI/GOLD ratio is showing that during the commodities correction, GSMs became extremely oversold relative to gold. It this the count of this ratio is showing that GSMs are a very gold value relative to gold at the present time. Aditionally GSMs historically tend to lead the price of gold, both up and down, and the strength that miners have been showing is (to me at least) a very bullish signal.

My Thoughts on Gold / Silver / GSMs

Let me make my position on Gold, Silver and GSMs very very clear. These to me are investments. I have a lot of all three  in my long term investment account. CEF is my biggest holding. I sometimes trade GSMs (from the long side only). I would NEVER short gold or silver. Ever. Period. So when I look at the long term counts and these corrective patterns are unfolding, they could currently still be in a correction and go down. As far as I am concerned, that is great! Because it gives me an opportunity to buy lower.

So if you are looking at my charts and are trying to glean trading advice, I suggest you look somewhere else. Because I am fundamentally engaged in gold and silver. I think they are going much higher. And they will cease to be attractive investment only and not before the US economy transitions from a consumptive based to a productive based one, the dollar devaluation stops or slows dramatically (after the Dollar Index reaches a much lower level) and the FED fiscal responsibility.

Oil

Here are a few charts of Oil, mainly because I said I would. I am too tired to write anything meaningful right now :) But I have written about oil supply in several of my older blogs (see January timeframe). The situation right now is not driven by supply/demand (IMO). Supply reports have been coming in pretty much as expected the last 2 months. What this looks like is a mania again. There is a lot of talk of “green shoots” in the economy and a 2nd half recovery … blah, blah, blah. I call BS on all of that.

Oil is trading as if the recovery was expected, and I am highly dubious. Oil has nearly hit the targets that I set out in January ($77/bbl) which is 38% retrace of the whole drop down, but it has hit them much faster than I thought it would. I think oil will pullback when the rest of the market does.

In the meantime, oil will probably put on one last show before the correction. Oil likes to extend a lot, nor does it like to stay within trendlines. I would just expect the unexpected here :)

As far as a long term investment: I am highly bullish on oil. I think we are in a long term secular bull market with oil just like we are with gold. I believe all commodities will do well as inflation hedges. I think the public forecast by EWI that oil will go back down to $10/bbl is exceptionally unrealistic. Even if there is still a C wave down to come for a Wave {2} (assuming it is not done, which I think is a strong possibility), then there are still some major support levels below $35.





Of course, as always, all of this is just my $0.02 .... :)

Conclusion

Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions.

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#2) On September 13, 2009 at 7:39 PM, Mark910 (< 20) wrote:

"Badges, we don't need no stinking badges"  my favorite line.  Welcome back Binve.  I went long gold short Silver this week which seems contrary to your argument on Silver but I am using Puts against the leveraged Silver long ETF so maybe the decay will help me.  cheers

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#3) On September 13, 2009 at 10:40 PM, jesusfreakinco (28.98) wrote:

Binve,

I wish I could give you three recs for this.  Great post.

What happens if the Fed inflates the stock market bubble and the Dow sees 12K or 14K - with your DGR going to 1...  Could we see 12K or 14K gold?

I believe the Fed will do anything they can to sustain the stock market price.  It is an asset class that gives them good PR and keeps the sheeple believing that the economy is recovering, at least so they hope. 

If it goes to 4K and silver rises comensurate, it makes the current levels look pretty darn cheap.

JFC

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#4) On September 14, 2009 at 12:12 AM, binve (< 20) wrote:

Mark910, Thanks man! Yeah, that was an awesome scene in the movie. It was just a great psychological flick :). I am with you on gold, not so much on your Silver call :). Thanks bro :)

jesusfreakinco, Hey JFC, thanks!!

What happens if the Fed inflates the stock market bubble and the Dow sees 12K or 14K - with your DGR going to 1...  Could we see 12K or 14K gold?

Yeah, I suppose. I really don't think though that the Dow will be getting up that high and staying that high though. It is possible. But I don't think so. Here is my long term view on equity fundamentals and technicals (The Long View) and my little bullet point spiel on the matter :).

Here is my little speil on why I think US equity prices will still drop despite the inflationary environment

--- If I thought the outcome was truly deflationary, I would be making a call for the S&P to drop to 133 (during 1929, after the initial 50% drop, the stock market dropped another 80%! over the next few years). 20% of 666 = 133. And no I do not think that is realistic given government policies. I think something like ~400 on the S&P (~4000 on the Dow) is more realistic
--- But what the big drop in the middle of inflation?
--- Because earnings still stink!
--- Additionally, simply because there is monetary inflation does not mean there will be across the board price inflation (i.e. If TMS is increased by 10%, that does *not* mean that toasters, houses and equities will also increase in price by 10%). Read these articles by Steve Saville to understand why: Steve Saville: The Inflation Process and Steve Saville: Market Value, Money and Credit
--- Inflation is not enough to keep prices high (I think all the inflated money will find itself in real assets, most especially gold and also commodities, not the stock market), however, I think inflation will keep prices in the stock market from dropping as low as they otherwise would
--- Inflation will also help earnings from dropping in prices terms as low as they would go (in real terms they will be much lower)
--- I have said before, that the market needs to make a bottom in terms of valuation before it can go up again, and historically that is when PE is 6-10. For an excellent discussion on these very long term valuation cycles, read this article, Zeal: Long Valuation Waves
--- Just for kicks, lets use PE = 8 as the bottom.
--- Earnings (GAAP) from good analysts (such as Mauldin) are around $40. And for the sake of argument, lets say they stay the same for the next few years (I see a much stronger argument that they will actually shrink, I see no compelling argument that they will grow). But lets say inflation keeps them about $40.
--- PE of 8 * $40 earnings = $320 Price of S&P at the bottom
--- This is where I get my ~400 estimate for the S&P.
--- I think we will have inflation big time, but I think the market fundamentals are so bad that they will fall regardless of inflation
--- Incidentally, my gold argument still stands. Dow at the bottom of ~$4000 / SPX at the bottom of ~$400 (not as bad as an equivalent Great Depression move) still puts Gold at $4000 eventually if you believe like I do that the Dow-Gold ratio will bottom at 1 (or even less).
--- Gold is not only an inflation hedge (true inflation = monetary inflation, which eventually finds its way *non-uniformly* into prices) but is insurance against bad economic policies and financial shenanigans.
.

Thanks for the comments and the compliments!!.

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#5) On September 14, 2009 at 12:57 AM, awallejr (79.68) wrote:

Well you deserve a rec just because you quoted "Treasure of the Sierra Madre." You don't have to sell me on gold/silver/oil as long term hedge investments.  As for ratios, it seems that when oil/comodities in general go up the market goes up and vice versa.

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#6) On September 14, 2009 at 1:01 AM, awallejr (79.68) wrote:

"--- I have said before, that the market needs to make a bottom in terms of valuation before it can go up again, and historically that is when PE is 6-10."

I submit they did reach at least your 10 PE ratio in March if you follow Value Line.

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#7) On September 14, 2009 at 1:49 AM, awallejr (79.68) wrote:

As a further comment, I am more knowledgeable about oil than gold/silver.  The two stocks I have been touting are BP and ATPG.  Both have been firing on all cylinders lately. 

BP is aggressive in replacing reserves, made a big finding in the Gulf of Mexico, and pays a darn good dividend.  I honestly expect this stock to eventually hit 70-80 in a year or two, and being paid to wait.

ATPG, I don't know, this stock does have serious upward potential as I tried to illustrate in personal blogs and other threads.  I did suggest profit taking, but if you see it under $15 start accumulating again and accumulate hard. 

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#8) On September 14, 2009 at 2:59 AM, DarkToast (43.28) wrote:

Mostly a good post Binve, but I am going to nitpick just a bit on one point.

Banks (which are legally part of / have access to / and grow the money supply) increase the money supply by taking the deposits of customers and using it to lend to other people.

This is not what happens, at all. Customer deposits play an extremely minor and small role in a banks lending activites.

This is much closer to the truth, money is debt.

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#9) On September 14, 2009 at 10:36 AM, XMFSinchiruna (26.98) wrote:

binve

This is a phenomenal collection of information and insight! Your even-handed, level-headed approach to the sector, combined with your gift for promoting respectful discussion among people with diverse perspectives, make your posts a pleasure to see.

You've all seen me quote an old statement by Greenspan in support of gold as money. Well, he's now reiterated the statement with this:

What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment".

Regardless of his undeniable role in creating the circumstances that permitted this crisis to arise, the fact remains that for decades Greenspan was considered the foremost economic guru and the world hung on his every word. It could be said that few individuals alive are in a position to understand the nature of money better, so when Greenspan tells us that gold "still holds reign" as the "ultimate source of payment", the message could hardly be clearer: Gold is money.

"Gold still represents the ultimate form of payment in the world."

Alan Greenspan - Testimony before US House Banking Committee, May 1999

"In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. ... This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard."

Alan Greenspan

from the book "Capitalism, the Unknown Ideal" by Ayn Rand with additional articles by Alan Greenspan - 1967

 


 

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#10) On September 14, 2009 at 1:41 PM, binve (< 20) wrote:

awallejr, .

Well you deserve a rec just because you quoted "Treasure of the Sierra Madre."

LOL! Thanks man :).

You don't have to sell me on gold/silver/oil as long term hedge investments..

I know man, we have had many discussions on this in the past. I am glad this is a point on which we have agreement.

I submit they did reach at least your 10 PE ratio in March if you follow Value Line..

We have also had disagreements on this point in that past as well. Let me try to settle this, hopefully definitively.

First, lets get some data. Here is data, from Standard and Poor's itself, regarding earnings. Notice that we have Operating Earnings and Reported Earnings. P/E based on reported earnings is absolutely dismal, but we will stick with Operating Earnings as it gives a more nuanced picture (and arguably more accurate, yet more easily manipulated) of what is happening. FYI, When I talk about P/E, I myself use operating earnings (just for apples-to-apples comparison among other analysts), but am always mindful of reporting earnings, because there is no way to fudge GAAP numbers without people going to jail.

http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS

Now look at the Twelve Months Trailing (TTM) P/E ratios calculated *directly from reported and operating earnings*. You can see, when you sum the 4 quarters operating earnings from 3/31/09 back, you get $43. This is very close to the $40 that I was using in my analysis months ago. This is very close to the estimates that respectable analysts, such as Mauldin, was using.



Enlarge

So using **THE ACTUAL DATA** for 3/9/09 TTM Operating Earnings of $43 @ SPX of $666 => TTM Operating P/E of 15.5

Now look at the earning estimates upcoming (which I would argue are still optimistic) for the current price of 919 on SPX (as of 6/30 when this report was written).. Absoultely none of the P/Es are anywhere near 10. And with the rise in price of the SPX (now around 1040, the P/E is now significantly higher.

The bottom line is based on actual data, we got nowhere near a P/E of 10 on March 9, 2009 for the SPX

.... Okay, so now lets re-vist your Value Line assertion.

If ValueLine is saying that the P/E was 10 on March 9, lets do the math: Price on March 9 = $666. P/E on March 9 (per Value Line) = 10. => Earnings are $66.6 ..... !!!????!?!?!?!. Are you serious? Please tell me you are joking.

So lets say they were applying estimates 6 months out. Guess what, they are still way off. Estimates from S&P for TTM from 9/30/09 (6 months out from the low) from the spreadsheet is still .... only $38.34 !!!! It is lower (and is why I still use my $40 estimate, sort of an average for the last 6 months). Value Line is now looking ridiculous.

Okay, benefit of the doubt. Lets say they are using esitmates 9 months out (do you believe that the market successfully prices in events 9 months out? Good luck with that). From the S&P Data and estimates, this gives TTM from 12/30/09 of $54.09 ... Dude, that means the Value Line estimates are stil 23% *higher* than S&P's estimates, back when Value Line was estimating back in March

..... Based on this, the only logical conclusion I can come to (if Value Line is still sticking by a P/E of 10 reached in March 09) is that they are just polly-anna industry analysts (i.e. paid liars). And if you want to follow their analysis and think you are getting a screaming bear market bottom (in terms of valuation) deal, then that's your call man.

I think I have shown that it is all a bunch of BS.

Sorry, that rant was not directed at you. But I have read so many (and filtered out so many) uber-polly-anna analysts estimates, that it makes me exceptionally angry when I hear such obvious misinfromation from Value Line that the P/E was 10 back in March 09. I think they and others are seriously misleading investors.

I hope that was a useful demonstration / discussion!! Thanks, as always, for the comments awallejr !!

DarkToast, Uhh, then I mostly thank you for the compliment :)

but I am going to nitpick just a bit on one point.

Unfortunately, I am going to have to nitpick on your nitpick.

Banks (which are legally part of / have access to / and grow the money supply) increase the money supply by taking the deposits of customers and using it to lend to other people.

This is not what happens, at all.

Actually, you are incorrect. This does happen, and is the essence of why bank runs are inevitable occurences. This is not simply a flaw in how maturity transformation works, but is also a feature (rather a bug that we have lived with for over 300 years): http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html and http://unqualified-reservations.blogspot.com/2008/10/misesian-explanation-of-bank-crisis.html. Moreover, since the banks frequently get around the 10% reserve requirement (Steve Saville: Bank Reserves and Inflation), the problem of maturity transformation is even worse. The current problem and upcoming problem is that mortgage exposure is not low risk. Consumers will be defaulting in greater numbers from the upcoming Option-ARM reset default wave, but even more alarming is that consumers are defaulting on the "safe" 30 year fixed mortgages in increasing numbers. Thank God for the FDIC ... uhh, except the "lender of last resort" is what encouraged all they bad loans to begin with. Banks are still levered far too much for current risks, and are set for failure based on known (and unknown) future risks.

Customer deposits play an extremely minor and small role in a banks lending activites.

This is much closer to the truth, money is debt.

I agree on this nuance. I also agree that there are far more insidious ways than fractional reserve of consumer deposits where banks get into trouble. I was giving a basic example in the original post how this takes place. I didn't have time to go through all the other mechanisms, the post was long enough.

In fact, I have wrote about these other mechanisms ad naseum in my other posts. Maybe you have read them, maybe you haven't. But I assure you, we are in agreement that the finanical and banking system is in worse shape than most admit.

money is debt

Couldn't agree with you more on this one. In fact, I say this repeadetly in the original post above:

But moreover, it should really call into question what can be used as “money” or as a “monetary asset”. A share of common stock exhibits many of the properties above. But what about a home? Is a house fungible? Is it liquid? What about a Credit Default Swap (CDS) or a Collateralized Debt Obligation (CDO)? I am not trying to tell you what is money and what is not. I have laid out the properties that money and monetary assets should exhibit. You should think about those properties and then think about the assets that are held by your favorite companies or by financial institutions when they make loans or secure debts against those assets..

The US Dollar / Euro / Yen, etc. are all examples of what is called “fiat currency”. Fiat money is legal tender because the government has decreed this to be the case. Fiat comes from Latin and means “Let it be done”.  The decree of value is a literal one. But the basis for this decree is backed from the fact that the government collects taxes from its citizens. Quite simply, fiat money is a tax credit. The value of the US money supply exists as a claim on the future tax of US citizens. Remember this, we will come back to this one.

Now I said the US Dollar is backed only by debt. Remember above that the US Dollar (or more specifically the US money supply) derives it value from the fact that it is a claim on the future tax of US citizens. This is a finite amount (the maximum of course being 100% tax on all citizens). But the point to realize that this is conceptually finite. On the other hand, the Federal Reserve has no limit as to the amount of fiat dollars it can produce.

Increasing divisions (more fiat dollars created out of thin-air) of a finite resource (the future taxes the US money supply is claiming against) make each division, both old and new, by definition less valuable.

This is the definition of monetary inflation..

Thanks for the comment.

TMFSinchiruna, Thanks man!! Thank you again for all your support and compliments. I love adding to the conversation, especially with writers like you around. Those are fantastic quotes, and the extreme hubris just makes you want to shake your head. When he was a young economist, thinking about these things objectively, he came to a set of conclusions about gold. When he became chairman of the Fed, subjected to all of the political wranglings and economic abuses that politicians are famous for, he completely flipped on sound monetary policies.

This is precisely why I wrote my opening paragraphs:

I am a huge dollar bear. I have written two large posts on the US Dollar (Thoughts on the US Dollar, Analysis of the USDX Long T...... Jun 17, 09 and USDX Count Update and Thoughts Aug 12, 09) and while I agree that we will get a bottom in the Dollar that should last for a couple of months, it is *extremely* important to understand the long term trends of the US Dollar (down) and the fact that all fiat currencies eventually trend toward their intrinsic value (zero). This is not a gold bug statement. Look at the history of all fiat currencies. We even have dead United States currencies, since the US has been in existence! Anybody who thinks the Fed will not try to inflate their way out of this mess, or thinks there will not be political pressure to inflate the money supply or increase the debt ceiling on the US National Debt, really does not understand history or the willingness of politicians to dismiss sound economic policies in order to "look like they are doing something". .

Thanks my man !!.

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#11) On September 14, 2009 at 2:24 PM, 4everlost (29.45) wrote:

binve

Man, what an effort and what an awesome amount of information!

You've inspired me to reread all of the links - just to make sure I'm still in synch with the macroeconomics.  I'm late to this post, rec #31 from me!

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#12) On September 14, 2009 at 3:39 PM, awallejr (79.68) wrote:

"If ValueLine is saying that the P/E was 10 on March 9, lets do the math: Price on March 9 = $666. P/E on March 9 (per Value Line) = 10. => Earnings are $66.6 ..... !!!????!?!?!?!. Are you serious? Please tell me you are joking."

That PE is off THEIR world of stocks (1700ish), which world is actually pretty balanced out.  They show the lowest point of 10.3 on 3/9/09, the highest point on 7/13/07 of 19.7 with current at 16.1.  I have no reason to dispute their analysis.  You are basing it off the S&P 500.  Their world was not 666 on March 9th. 

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#13) On September 14, 2009 at 4:05 PM, binve (< 20) wrote:

4everlost, Thanks!! I really appreciate that !!!

awallejr,

......????

Dude, I feel like you are speaking another language. We are obviously not on the same page. So here is the deal

1. This whole discussion between us centers around my assertion that based on historical bear market bottoms, the *valuation* they historically reach before start climbing again is a P/E of 6-10

2. I claim that we have not reached a P/E bottom of those levels, based on an examination of the Dow Industrials and the S&P 500. These indices (the S&P 500 more than the Dow) represent a cross-section the the US economy and is more-or-less unversally accepted as a benchmark when discussing the "market"

3. All historical P/E analysis is done on the DOW or SPX (which give about the same values).

4. You counter that Value Line shows a P/E bottom of 10.3 on 3/9.

5. I proceeed to demonstrate that that is not even remotely possible

6. Then You state above in comment #11 that you are not talking about their analysis of the SPX (they do earnings estimates for a number of sectors and indices) .... BUT RATHER THEIR OWN PROPRIETRY INDEX.

..... dude ..... ????? WTF, over.

This whole time you are countering my argument of no P/E bottom being reached on the universally recognized US benchmark index by saying those levels were reached on a proprietary index?

Seriously?

First you are comparing apples-to-oranges. So a P/E bottom of 6-10 on the SPX might be 2-4 on your Value Line index. Second, it should have been obvious the context I was talking about (the SPX and the DOW), because when people talk about the broad market, this is what they discuss. I mean I could come up with some arbitary index (say the binve index or the awallejr) and do P/E comparisons against that too. But is it valid? Does it represent the economy? And even if it does, the POINT IS THAT YOU COMPARE AGAINST HISTORICAL NORMS *FOR THAT INDEX* NOT SOME ARBITRARY ABSOLUTE VALUE. You have to compare apples to apples.

You entire argument is therefore arbitrary.

Show me 100 years worth of P/E data for the Value Line index, and then compare P/E bottoms that way.

Wow, this conversation has now been a total waste of time. I think it is a bit understandable to see why I would be frustrated..

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#14) On September 14, 2009 at 4:58 PM, awallejr (79.68) wrote:

Ok now I am getting frustrated here.  You said you would need a market PE of 6-10 for a true bottom to form.  If you wanted to just limit it to the S&P that would have been the end of it.  I mentioned that in Value Line's Index they have their stock's average as having bottomed with a 10 PE. I assume both indexes define PE the same. You challenged the assertion by analyzing how that could not be for VL by this calculation:

"If ValueLine is saying that the P/E was 10 on March 9, lets do the math: Price on March 9 = $666. P/E on March 9 (per Value Line) = 10. => Earnings are $66.6 ..... !!!????!?!?!?!. Are you serious? Please tell me you are joking."

I assumed that $666 was the S&P number.  Correct me if I am wrong. But I wasn't talking S&P, but Value Line's different index so you would not have gotten an earnings figure of $66.6. They have several indexes but I am just guessing here that they might be using the composite one, which was about 170 on March 9, and 274 on Sept 2.

You are free to ignore Value Line's index I suppose, but you are using a DOW of 30 stocks and an S&P of 500 stocks.  Value Line uses an even larger world of about 1700.  Sure you can dismiss it as proprietary, but it is a respected publication and it actually has a long history (started in 1931 and incorporated in its current form 1982).

The point was you can ignore Value Line's low of 10, and insist it must be S&P 500's PE.  If those are your parameters fine.  But I think it is wrong to dismiss offhand VL's analysis for their even broader range of stocks.

I hope this explains things better.  I am not trying to be difficult.

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#15) On September 14, 2009 at 5:21 PM, binve (< 20) wrote:

You said you would need a market PE of 6-10 for a true bottom to form.  If you wanted to just limit it to the S&P that would have been the end of it.

Okay, I know you are not being intentionally difficult, so lets try this again.

I am NOT limiting this to the S&P. ***HOWEVER*** You have to know what you are comparing. The reason why I say a P/E of 6-10 on the SPX or the DOW is because based on historical analysis.

There is NOTHING MAGIC ABOUT A P/E of 10 !!

It just so happens that the broad US indices have made valuation bottoms around a P/E of 6-10. Read this link (I think I have provided it at least 20 times, but here it is once more). http://www.zealllc.com/2007/longwave3.htm

Here is the key point, ready for it?

THE VALUATION BOTTOM OF AN INDEX IS UNIQUE TO THAT INDEX !!!.

Lets make up index A, the binve index. And over 100 years, the P/E ranges from 150-300. You could then say that the binve index respents a good value when the P/E is 150-160 and is too richly valued when the P/E is 290-300

Lets make up index B, the awallejr index. And over 100 years, the P/E ranges from 0.1-4. You could then say that the awallejr index respents a good value when the P/E is 0.1-0.5 and is too richly valued when the P/E is 3-4.

A P/E Bottom range (like I am saying for the SPX) is CONTEXT-DEPENDENT. Just saying a P/E of 10 is cheap is and P/E of 40 is expensive is (IMO) a very obvious flaw. P/E of 10 might not very expensive for a utility stock and a P/E of 40 might be very cheap for an agressively growing stock. The same applies to an index.

I don't know why this is not self-evident to you?

Lets use a real-world example. I did a long term P/E analysis on the HSI (Hong Kong Hang Seng). The P/E on the HSI is not in oversold territory until it gets down to around 5 (lower that the 6-10 for the SPX) because it is made of of different components that the US indices. (i.e. the overbought / oversold range is index-dependent).

http://marketthoughtsandanalysis.blogspot.com/2009/09/hsi-long-term-pe-analysis.html.

The point was you can ignore Value Line's low of 10, and insist it must be S&P 500's PE.  If those are your parameters fine.  But I think it is wrong to dismiss offhand VL's analysis for their even broader range of stocks.

Dude, this is precisely why I wrote this above in comment #13, are you just not reading what I am writing?

Show me 100 years worth of P/E data for the Value Line index, and then compare P/E bottoms that way..

I hope this explains things better.  I am not trying to be difficult.

I know you are not trying to be difficult. But again, I thought this whole idea was self-evident. But maybe it wasn't. Hopefully you now understand all the necessary concepts from comments #10, #13, and #15 (this one).

I don't have any more time to spend on this. Peace.

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#16) On September 14, 2009 at 5:48 PM, awallejr (79.68) wrote:

Maybe I am being obtuse here, and you don't need to respond further if you don't wish.  But this link at least gives more details on VL.

http://www.google.com/url?sa=t&source=web&ct=res&cd=1&url=http%3A%2F%2Fwww.valueline.com%2Fnews%2Fvlv080307ut.html&ei=IbauSoquOJif8QaJrNXHCA&usg=AFQjCNEkXDtObegbj874L3jBnLH_cMJY8g

And I understand that a valuation bottom of an index is unique to that index.  That is why I said Value Line. And they have their all time low since I guess from 1961 as March 9, 2009.  Not 100 years but still almost 50 years. What more can I say. 

I suppose the bottom line argument is that I think we saw the bottom, barring any unforeseen catastrophe.  You don't like my support that is fine.  You are free to ignore it.  And time will tell who is ultimately right.

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#17) On September 14, 2009 at 6:02 PM, awallejr (79.68) wrote:

*correction, all time low was inaccurate, their PE low was March 9,09.  Prior to that was the 2001 recession but had a slightly higher PE bottom.

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#18) On September 14, 2009 at 9:54 PM, isusan (< 20) wrote:

Brief interruption from the peanut gallery...

Binve, you rock!  I never would have thought seeing any lower case letter would elicit any reaction from me... :)  So even sleep deprivation & baby talk couldn't affect your ability to share your thoughts & research with us? Cool. Congrats on Binvette & thank you for yet another great blog!

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#19) On September 14, 2009 at 11:02 PM, binve (< 20) wrote:

isusan, Thanks susan!! LOL! You rock yourself :)

Yeah, I am still on the very tired end of sleep deprived right now :) But very happy. Both the wife and baby are doing great! And little binvette is beautiful and perfect :)

Thanks susan, I really appreciate that!.

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#20) On September 16, 2009 at 3:02 AM, uclayoda87 (29.37) wrote:

And you stated that no one could predict the future:

17) On August 30, 2009 at 3:44 AM, uclayoda87 (30.24) wrote:

I can picture you building more charts at 2 AM between baby feeds.

No one could build these blogs in just daylight hours, so you had to have been working at night too.

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#21) On September 16, 2009 at 9:41 AM, A6Bogie (< 20) wrote:

Wow! binve great effort! After reading all the recommended posts where do I sign up for the degree? My head hurts but I was a Marine Biology major who then joined the Navy so I have a hard time wrapping my arms around all this information (some are just destined to do other things!). But I'm trying to learn me something. Recs for this and another if I could just for "Treasure of the Sierra Madre". It's one of my favorites.

Bogie

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#22) On September 16, 2009 at 7:40 PM, binve (< 20) wrote:

uclayoda87, LOL!. You got me, you did predict the future on that one :)

A6Bogie, Thanks! I appreciate that!! And LOL! yeah, I will give you an honorary degree from binve university :) Thanks :).

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