Investors seeking an entry point to add to gold (and silver) positions or to initiate positions—as a strategy to balance portfolios to the risks of the coming turbulent re-balancing of the global monetary system—should consider a macro indicator that has served money managers and gold investors well for the past century. And right now that indicator tells us gold is cheap.
In an interview with Goldmoney Chairman James Turk, money manager Adam Fleming of Fleming Family & Partners suggested that, when gold shares stray too far in price from the price of bullion, gold becomes remarkably cheap on a relative basis—or, a buy—a buying opportunity that emerges once per generation, on average.
“I think it’s very likely that we have [reached a bottom in the gold price],” Fleming told Turk. He believes the experiment in fiat currencies not connected with precious metals of the past 30 years is becoming “unwound.”
“The reason why I believe gold is bottoming here, is because the gold shares are trading at two standard deviations to the gold price, and this has happened only five times in the last hundred years,” Fleming continued.
“In the crash of 2008, in 2000, 1980, in . . . way back in 1950s and in the 30s, he added. “So I think we’re at an extraordinary inflection point with both gold and gold shares, providing really unusual opportunities.”
Leonard Melman of the Melman Report agrees with Fleming and provides a context in which investors can measure the magnitude of the extreme disconnect between the prices of gold and the gold shares at this time.
“In mid-2008, gold was about $900/oz and the Philadelphia Gold and Silver Stock Index (XAU) was 205,” Melman told The Gold Report. “Now with gold just under $1,600/oz, the XAU is 147. So, while gold has almost doubled, the major mining shares have dropped by an average of about 40%, and many of the junior shares have fallen by more.”
Fleming’s observation of this recent phenomenon comes off the heels of comments made within a week by three other market pros, Euro Pacific Capital President Peter Schiff, Founder and Managing Partner of Matterhorn Asset Management AG & GoldSwitzerland Egon von Greyerz and Hinde Capital CEO Ben Davies—all of whom believe the selling in the precious metals market is overdone and opportunities to enter the market have materialized dramatically during the nine-month price consolidation of the bullion price.
“Gold is oversold,” Euro Pacific’s Schiff told King World News (KWN) on May 17. “ . . . as the market digests the weakening economy and the lower market, then you start to get the optimism for the release, the fix, which is QE3. So I think QE3 puts a floor (somewhere) beneath the market.”
The next day, Hinde’s Davies reported a “big seller” had dumped a lot of gold, overwhelming strong demand. But the big seller has stopped liquidating, according to Davies in his interview with KWN on May 18, and he expects a rally in the gold price from the lows of last week, as well.
“The sell-off in gold is reminiscent of the 2008 deleveraging process, but it is more similar in dynamics to 2012 when a notable fund manager had to sell his gold/ ETF holdings,” said Davies. “There were buyers of course, seller and buyer volumes must match. But the need to sell overwhelmed the need to buy.
“Gold buyers picked up some bargains then, and they will now. . . I particularly would like to be long gold now.”
On May 22, Matterhorn’s von Greyerz told KWN the physical market is extremely tight—so tight, in fact, that one of his clients discovered that the Swiss bank, with whom he entrusted his ‘allocated’ gold account, scrambled to find bullion in a manner reminiscent of the MF Global scandal to satisfy the client’s request for shipment of his gold to another location. “It’s absolutely amazing” what has happened, said von Greyerz.
And von Greyerz, too, sees gold soaring from the oversold lows of last week.
“I think we did make a low last week [in the gold price], and I think we are now going to see the rebound,” von Greyerz told KWN. “And once we get started—and that may take a few days—but I think we can see fast moves here. I feel pretty confident that we have seen the end of the correction and the next move up will be a big move. There’s no question about it. . . All the dominoes are down ready for gold to take off.”