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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Seasonality of Gold Has Broken Down

Commodities / Gold and Silver 2010 Mar 10, 2010 - 05:53 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleThe Gold Report has again interviewed newsletter writer and commentator Lou Paquette, who launched the Emerging Growth Stocks website in 1995 to provide investors and speculators with a unique alternative to what he saw was a growing problem with corporate governance and conflict of interest on Wall Street. He is not counting out the U.S. dollar quite yet as the euro waivers. He also believes that there is no longer necessarily a seasonality regarding gold and gold stocks.

The Gold Report: The Olympics have just ended after about six years of preparation, was it worth it for Vancouver and was it worth it for Canada?

Louis Paquette: In terms of good will and sportsmanship—and pure fun—they were a success. Were they worth it in monetary terms? That depends on what you believe a benefit is. There's been a lot of debate and argument about this, but this is one point that I haven't seen brought up. That is, people are measuring the benefit—the cost and the benefit by the economic activity that is being generated, the free advertising and the increase in tourism now and later. But the problem is that much of the United States is going through a bear market in real estate right now, as we all know. It's called the housing crisis because housing prices are falling.

Vancouver is having the extreme opposite situation. We have a bubble in real estate prices here in Vancouver. In Windsor, Ontario, Canada's industrial heartland, it costs on average of 2.2 times a person's average annual salary to buy a home. Here in Vancouver it's over 10. It's five times less affordable to own a home in Vancouver. The biggest problems in Vancouver are homelessness and child poverty. Why? Because housing, whether it's rent or whether it's a mortgage, is sucking up everybody's income—all of their income. So there's no money left for anything else. So when I hear the Premier of B.C. giddy as a schoolgirl bragging about how this has been a success, attracting attention to Vancouver, it's the last thing that we need. We don't need more people. We need less people. We need less demand for housing. So on that basis alone, I would say it's kind of a contradiction. I'm very much against the Olympics; but in the last week or two, myself and my family decided we're just going to enjoy it and it's been a ball. In terms of fun, it's been really great.

TGR: Real estate has been a good investment for Vancouver since 2004 based on the Olympics. Is that bubble going to continue to grow or will it pop within a couple of years?

LP: I'm absolutely sure it's going to pop for a number of reasons. Number one, in any post-Olympic year, real estate prices usually drop in the city it's held in. There's always speculation prior to the Olympics. We're going to see that.

Number two, we have a new harmonized sales tax that's kicking in July. So everybody is buying now prior to this I think, it's a 7% additional tax that's going to kick in. You're going to have a lack of buying after July. So you got two big, big things that are going to be negatives—plus the prices that are just sky high here. I think we're going to see a real sharp retracement in the housing prices here.

TGR: In your February newsletter, you noted that there are two forces driving the markets. One is the negative sentiment towards the euro driven by fears of the PIIGS's defaults. You pointed out that states such as California are fairing far worse potentially than Greece, Italy, Spain or Portugal. Why is this relevant boosting the dollar and depressing gold prices?

LP: For the obvious reason. For a while now, the euro has been the one that's weak. The attention has gone to Greece and people are thinking, well what's going to happen if this contagion spreads to Spain and other countries that are looking bad over there? We've just seen this shift after a whole year of the U.S. dollar falling. It got really overdone. It got to be a really crowded trade and now sentiment has shifted negative against the euro, which has allowed the U.S. dollar to recover.

Interesting note on a technical basis, the U.S. Dollar Index has now had a 50% retracement of the negative down move that took place in 2009. So who knows? Maybe we've seen enough of a rebound now of the U.S. dollar, and the euro has come down enough that we're going to see a reversal now. Maybe the U.S. dollar will have a downturn now but, at the moment, all the attention—the negative attention—is towards the euro.

TGR: Well factoring into the U.S. dollar I'm sure, California's population is well over three times the population of Greece. It's the largest U.S. state and it's in serious trouble financially, many say much more than Greece. Are the eyes of the world investment/finance community just in the wrong place right now?

LP: I don't know if it's the wrong place because the euro has a really serious problem. The ratios—the debt per gross national product and the debt ratios—in many countries in Europe and England are terrible. I don't know if the investment community is looking at the wrong place. These things ebb and flow. For a while, the negative sentiment and the selling has been on the euro; and that'll continue until it gets to be too much, and then something will happen. Some news event will take place regarding the U.S. dollar, and then it will have a decline. That's just the nature of markets. They move back and forth.

TGR: When the U.S. dollar declines, are we expecting to see a focus back onto the euro, or would we start seeing focus on other currencies such as the yuan or rupee?

LP: I think the focus will go back on the U.S. dollar because it will have had a pretty darn good move up and the short sellers will probably swoop down on the dollar again. In terms of other currencies, we just keep hearing good things about the Canadian, Australian and Indian currencies. So I think the bears will circle the U.S. dollar again sometime later this year.

TGR: How do you think the Chinese yuan ETF factors into the equation right now?

LP: Well you can't pressure the Chinese to do anything. Telling them to let their yuan rise is almost counterproductive. They may not let it happen just because you want it to. They're going to do whatever they want no matter what.

TGR: As we move into this bear focus on the U.S. dollar, and we know there are issues with the euro, are we going to see a decoupling from the euro-goes-up-dollar-goes-down (or vice-versa) mindset, to euro-and-dollar-go-down, and Canadian, Australian dollars go up?

LP: That's what I think is going to happen.

TGR: How does an investor play that?

LP: It's kind of a race to the bottom with most of these currencies, even with Canada's. I hear the big, big investors saying, Canada's such a great place, and we're supposed to have a conservative government, yet they're going to have a huge massive deficit this year. Even the most favorable countries are now spending beyond their means and I guess the only way to play this is to have some gold in your portfolio. Have some raw gold, have some bullion and have some shares of good mining companies. If you're really aggressive, talented and you know how to short and play the futures markets, then you can try and time these, the bigger declines. Sooner or later the U.S. dollar will top out again. If you're really comfortable with doing that you could do a short sell on the dollar with the futures markets but I'm not that comfortable doing that kind of thing. So I just hold gold.

TGR: Do you feel confident that the Canadian banking system is going to remain strong given what you've just said, or do you just see that waning a bit too?

LP: Well the corporations themselves have run themselves fairly well. But sadly with—it seems like anytime the population figures out it can vote someone in who spends more, that's when you run into trouble. It seems like every country is doing that. Perhaps China and India aren't, but here in the West that's happening. I'm not comfortable with the government, but the Canadian banking sector is still being run fairly prudently.

TGR: There's a growing belief of a double dip recession for the second half of 2010. You refer to Dan Arnold's work, The Great Bust Ahead, predicting the bust will begin in 2013. If there is a bust ahead, how should the typical investor play a busting market? Some feel the prudent strategy is to go long in cash/gold avoiding equities whose value will fall during a bust. Is this your opinion?

LP: I would stick with holding some gold equities of really good companies. If we do get a real meltdown in the currencies, it's going to impact the price of gold—and the companies should make terrific profits. But will they melt down, too, in a big meltdown? I really don't know, but I would just hold some. The one thing I would be confident in doing is saving a lot of cash. I would short stuff and own more cash. I would not buy luxury items and I would save cash.

TGR: In our last interview with you, we discussed the typical seasonality in gold, especially gold stocks, both of which have a fall and a spring rally followed by a typically quiet summer and whether or not that seasonality was breaking down in your opinion. At that time, you were uncertain if the climate had truly shifted for gold. A year later, do you think it has? Also, has the psyche for accumulation of the metal itself moved into the acquisition of promising junior or mid-tier gold mining company stocks?

LP: Let me answer the second question first. For the last year, the emphasis has moved toward the metal. The gold shares, I'm looking at a chart right now of appreciation of gold and gold shares, and the gold shares have gone sideways for the past two years and gold has gone up. So for the moment, there's better value in the gold producers, in the shares of the companies, and people have been buying the bullion price.

The first question, has seasonality broken down? I think the answer is yes, kind of. The last buy time for seasonality was last August. That did work. The price of gold started to take off after that. But now when it comes to the high point, gold peaked on December 3rd; it hit a parabolic high at that point—and looks like a cyclical high now—and it's not strong. It's supposed to be peaking around now, and we're $100 or so below the peak. I would say the seasonality is breaking down because the price is now being driven by investment demand as opposed to physical demand for jewelry. So the answer is yes. The seasonality is breaking down and you have to revert to other methods to pick your highs and lows now.

TGR: To what extent do you believe news and the news media can make a market? And has the gold market yet to be made?

LP: I think it has a lot to do with it. And I don't think we've seen the full extent of it yet. We haven't seen a media-driven parabolic rise yet. You don't see the average person lining up to buy gold coins at this point. I think that day is going to come, but I don't believe we've seen it yet.

TGR: What are you recommending for portfolio diversification with regard to gold stocks, ETFs and the physical metal?

LP: The leveraged two-times ETFs were really popular here in Canada, and I'm completely avoiding them. They experienced time decay. So zero for the leveraged ETFs. And the main focus is on junior mining companies, exploration situations and near producers with growing reserves. I'm not buying gold anymore. I used to buy it years ago in the beginning first few years of the bull market, but I just sit on that. That's 5%, 10% of one's portfolio in the metal, in the bullion, and for me a lot larger than that with the gold share (but I specialize in that). So I don't know what the good number is for the average investor, but I'd say maybe 5%–10% of the gold shares of selected junior mining companies.

TGR: In the last interview one of the companies you mentioned was Rainy River Resources (TSX.V:RR). Would you give our readers an update on this company?

LP: I'm just looking at the chart, and it's had a very nice big move from $2–$5 area. I've actually taken profits on that. I'm just using the charts at that point. I'm not really following the moves of the company. Instead I'm buying and accumulating a company that holds shares of Rainy River right now at a big discount.

TGR: Which company is that?

LP: The company name is Skana Capital Corp. (TSX.V:SKN) and it's a merchant bank/holding company. It's kind of interesting because it's trading for around $0.18. It's probably worth $0.36 book value. It's got quite a bit of cash in the bank and it also holds shares in a bunch of promising juniors, including Rainy River. So I'm able to buy Rainy River at a half price sale by purchasing SKN.

TGR: What other companies do you favor currently and why?

LP: One gold junior exploration company is one called Yorbeau Resource (TSX.A:YRB). Trades for about $0.26. They're exploring a property in Quebec and hit two very rich intersections of gold located about 600 meters apart from one another. I just started connecting the dots and I'm thinking, if this is a continuous stretch of rich mineralization, they're going to have a lot of gold in the ground. I call it the next possible Osisko Mining Corp. (TSX:OSK), which holds a multi-million ounce gold deposit in Quebec. So it's just a promising exploration play.

TGR: Do you have any other companies that you're following?

LP: The one area outside of gold that I kind of like is the lithium area because of the battery use. There's one company called, Ultra Lithium (ULI.V) and it trades for $0.06. So it's pretty small market cap and the chart's very flat. If you know something exciting happens there I figure they might have some upside. So I'm following that one, too.

TGR: Are they an exploration company?

LP: It's a lithium exploration play. They have a couple of properties. I understand they're still in the acquisition mode, so there may be some more to come in to the company but its focus is entirely on lithium.

TGR: Earlier on we were talking about a double dip recession. You said people should short stop and go long on cash. So the suggestion is to hold cash; but really early on we were talking about the devaluation of the dollar and the euro. How is this a good strategy?

LP: Well, all I can tell you is what I'm also doing—taking a fair number of those dollars and owning stocks that pay good dividends. At least I'm making an income with that money. I guess that's where you have a portion in the gold sector too, if the currencies are going to devaluate. Consumer goods are going to fall in value even faster than everything else.

TGR: Value declines as soon as you take it out of the store.

LP: Exactly. So I'm not in a big hurry to buy brand new cars. They're going to be cheaper in the future.

TGR: So you were talking also a bit about having 5% –10% of your portfolio in metals, which leaves another 90% of your portfolio in other types of things. Given that there are significant reports of green shoots and some positive economic news, at least coming out of the U.S., what other sectors would recommend our subscribers invest in so they have a balanced portfolio?

LP: The areas I like are gold and energy. On weakness, I have been purchasing shares of these income trusts that pay 5%–10% yields. So I'm about 50% cash and about 5%–10% in the metal, say 20% in gold shares and the balance in energy shares. Also in special little situations, I've got the odd investments—biotech and even a social media company. Some very small micro cap situations are also in there, not specific to any sector, but "bottom up" selections based on the merits of the company.

TGR: In terms of energy, are there specific subsectors of energy that you're focusing in on?

LP: Yes. I've got a love/hate relationship with natural gas right now. The production community seems to be determined to drive the price to zero. But I hold something called Daylight Resources Trust (OTCBB:DAYYF). It's weighted towards natural gas, but the price of this stock just keeps going up and they're paying me almost 9% to hold it at the current price. They can do this because they're very good at hedging. They're actually getting a better price than what the market is paying for natural gas, and they just seems to be doing all the right things. So in spite of the sad situation with the natural gas price, there's a company that is performing really, really well. Sooner or later, this natural gas situation is going to turn around. They're going to deplete all these new reserves they've found and there's going to be a shortage of it. I'm not saying in the next month or so, but in the coming years there may be a great opportunity in natural gas.

TGR: So Daylight really seems to be more of a dividend play in the energy field as opposed to an upside opportunity in natural gas in the next year or two.

LP: I'd call it both. They do have reserves in natural gas. So if gas were to turn around, you'd get a pop in the unit price because of that. At the moment, you're right, it's more of an income play.

TGR: Lou, thank you so much for joining us today.

Louis Paquette launched Emerging Growth Stocks in 1995 to provide investors and speculators with a unique alternative to what he saw was a growing problem with corporate governance and conflict of interest on Wall Street. Lou posts a 15-minute audio interview, "Week in Review with Lou," most Fridays on his Emerging Growth Stocks website, along with "Charts of the Week," featuring his technical analysis and some political rants as well. He also has an Emerging Growth Stocks blog, which features a wide variety of interviews and articles. Lou also offers a Market/Management Psychology Investment newsletter that doesn't marry one sector but rotates with the tide of the market.

Paquette is regularly quoted in Investor's Digest, Bull & Bear, and Money Saver, and publishes on Info-mine, Kitco, and, etc. He is a regular speaker on Cambridge House Investment Conference circuit.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Avalon Rare Metals; Revett Minerals, Goldcorp.
3) Michael Berry—I personally and/or my family own the following companies mentioned in this interview: Senesco Technologies, Goldcorp, Quaterra Resources, and Galway Resources.
I personally and/or my family am paid by the following companies mentioned in this interview: Revett Minerals.

The GOLD Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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