Got Gold? If Not, You Don't Know History

What does Ray Dalio, the legendary founder of the world largest hedge fund, have to say about gold? In a recent exclusive interview with CNBC, Dalio says emphatically without any hedging of his recommendation:

I think gold should be a part of everybody's portfolio to some degree because it diversifies the portfolio... If your investment portfolio doesn't have at least 10% of the yellow metal, then you don't know history.

Wait a minute. The interviewer reminds Dalio that Warren Buffet, a more recognized investing legend, won't touch gold. Is he wrong? Dalio responds in a matter-of-fact manner, "I think he is making a big mistake, yeah." 

Dalio continues on making his case for owning gold:

Gold is like cash. It's an alternative version of cash. Money can be produced. Gold is somewhat limited (in that it can not be simply produced like cash). It's an alternative that should be part of everyone's portfolio but not in a big way. 

Dalio's bottom line: Know your history. Get some gold.

Rick Rule: Aggressively Buying Gold, Silver and Miners

The sharp correction in gold, silver and mining stocks continues. In just 3 weeks, here is where we stand:

                                        GLD:     -15%

                                        SLV:      -28%

                                        GDX:    -18%

                                        GDXJ:  -27%

It is not a pretty picture - to say the least! It takes a strong stomach to handle this volatility. 

What is Rick Rule, founder of Global Resource Investments, one of the most respected veteran resource investors and self-proclaimed contrarian investors doing with his own money right now? In an interview this week with King World News, Rick Rule answers this question and more. Good insights.

Rick Rule: What we are seeing in the markets right now is exactly the type of psychotic break, the type of non-fundamentally related volatility, that has over the last twenty or thirty years given us the entry points that have, in fact, built our track record.

The idea that 30 year US Treasuries are safe seems to me to be a widely held perception that’s wrong. . . . What I am doing by buying bullion is taking the back side on a trade of a widely held perception that I believe to be wrong.  I am further, if you will, taking that trade on steroids by buying the smaller market cap advanced stage developers or small producers. 

I think what’s causing the volatility in these markets in the very near-term is a constraint in credit.  The European banks, in particular, have been big providers of credit in the commodities business. The European banks have less availability of near-term credit themselves and so they are cutting back credit lines to their commodity related customers.

The set of circumstances you are seeing now in commodity markets, this extraordinary volatility, is a function, in the very, very near-term, of increasingly constrained credit markets and that is going to continue for a while.

I see a bit of a rebound this week as gold is oversold, and then the decline may resume, but I’m not sure I see gold settling on a daily basis below $1,500.  What’s important here, Eric, is that the action that we are seeing now isn’t fundamental action, it’s volatility.  

The junior producers, the sub $1 billion or sub $250 million stocks, are absolutely being decimated.  In particular, the stocks that are being decimated are in frontier markets in places like West Africa or South America or Asia.  So I’m going to be concentrating my efforts on the most decimated sectors in the precious metals markets.  Bullion markets are being decimated with people moving into long US dollar instruments.  I’d like to be on the other side of that trade, and I’m going to.

Disclosure: I am a client of Global Resource Investments 

Gold - Crash or Correction?

What a sharp and fast drop in the last week for gold.  As of mid morning on Monday, gold is down 12% (silver is down a whopping 30% !). Which brings up the question is this a crash or simply a typical correction in the decade long gold bull market? 


Taking a step back and looking at this move in the context of gold's longer term trend, John Roque provides some data and comments that puts this recent drop in perspective.

For every year from 2002 to 2010 gold has, at least, corrected to its 40-week moving average and been down, peak to trough on average 15.6% (see table).” He adds, so far gold is down 12% from its early September high. Support @ 1600 looks ok to us.  

Roque makes the observation that that in every year since 2001 when gold bottomed,

it has worked through consolidation phases. So far this recent sell off looks like it is in keeping with it's consolidation phase pattern.

Barry Ritholtz offers an additional technical explanation: 

When a trend channel has a parabolic breakout to the upside, the prudent thing to do is to peel off 10 or 20%. This sort of vertical spike works itself off by falling back to at least the prior channel.

We are solidly back in this upward channel with room to fall further before we break the lower channel line. In other words, long-term bullish technical indicators are in tact. 

Crash or correction? Looking at the last 10 years of gold's behavior, it sure looks more like a correction to me.