Gold Stock Bull

You know the economy is in bad shape when one of the world’s largest investment banks (Bear Stearns) collapses and a few months later we witness the 2nd largest bank failure in the history of the United States (IndyMac). And now we have news that Fannie Mae and Freddie Mac are insolvent and will need the Federal Reserve (i.e. taxpayers) to bail them out. Even the media cheerleaders are starting to look a bit less cheerful and entirely less believable when they suggest stocks are a bargain at these prices.

I’ve had family and friends start asking what they should do with their 401k, IRA and investments. They have received 2nd quarter statements and are down anywhere from 10-30% year-to-date. Ouch. The average investor could stand to lose as much as 50% of the value of their retirement account during 2008 alone. Still, many investors are stubbornly clinging to the notion that the bottom is in and the markets and dollar will rally during the back half of 2008. Don’t ‘bank’ on it.

So what exactly should investors be doing to protect themselves and even produce positive gains over the next few years? The answer is simple: Get out of dollar-denominated assets. Go long gold and energy. Go short the Dow, Dollar and Financials.

The talking heads can repeat ad nauseam how gold is a barbaric relic that does not pay interest. I will let the following graph speak for itself. This is a comparison between the performance of the Dow Jones Industrial Average and the Gold Bugs Index since the start of the millennium. The blue line is the HUI gold stock index and the red line is the Dow Jones Industrial Average.

If you would have invested in the Dow Jones Industrial Average at the start of 2000, your return as of July 2008 would be 0%. Factoring in inflation and the devaluing of the dollar over that same time period, your true rate of return would be something closer to negative (-40%). During that same time period, investing in gold stocks would have produced a return of over 500%! Barbaric indeed.

And what about shorting? Many investors have been scared away by a number of factors including the potential for unlimited losses. But with the relatively recent advent of short and ultrashort ETFs, investors can actually bet on a sector going down without actually shorting stocks. The ETF is geared to go up as the corresponding index goes down, eliminating the possibility of unlimited loss, providing diversity (which works in both directions) and allowing investors to go short within IRAs and other accounts that do not usually allow shorting. And what about performance. The following chart shows the ProShares Ultrashort Financials ETF, which I have been recommending to subscribers since March.

From May to July, SKF more than doubled in price from 90 to 210 for a gain of 133% in just two months. Even with the recent selloff, the ETF is still up about 50% since May 1.

The energy sector has also been extremely profitable to traders and investors alike over the past few years. Oil has appreciated even quicker than precious metals and some of the better-managed alternative energy companies have seen astronomical gains. One of our most recent picks, Renesola (SOL), more than tripled in price from our recommended entry point at $9. It has since given back a good portion of those gains, but is still up over 70% over the course of just 4 months.

The point is that there are always opportunities in the markets and just because the overall economy has slumped into a recession does not mean your investments have to do the same. Protecting your wealth and profiting during the current economic turmoil will take a shift in strategy, but your financial future could very well depend on it.

If you are interested in more detailed investing ideas, I offer a premium subscription which includes a view of the Gold Stock Bull Portfolio, the monthly newsletter “Road Less Traveled,” access to the members area of the website and email alerts highlighting trading opportunities throughout the month. The cost is $35, but you can cancel at anytime if you are not satisfied with the service. Click here for more information.

Welwind Energy has issued a flurry of promising news releases over the past few weeks. Most significantly, they were given a green light from the Chinese government and military to move forward with building their wind farm on the South China Sea. You can read the full press release here.

But Welwind is not solely focused on their wind farm project in China. On June 23, they announced their intent to double their land lease in the Peace River region of British Columbia from 2,300 to 4,680 acres. The Peace Region is known to have the best wind speeds in BC and their are a number of companies currently pursuing lease agreements in this area to build wind farms. Welwind has not finalized the deal, but commented that they are highly confident things will move forward and the lease contract will be finalized in short order.

Revenues from the South China wind farm are projected to be between $6-$7 million per year over the first few years. Not bad for a company with a market cap of under $25 million. But let’s not put the cart in front of the horse quite yet. Wind turbines are in high demand and the waiting period can be quite long in the industry. Welwind is addressing this issue by entering a joint partnership with Yatu Wind Energy Manufacturing. They have signed a turbine supply agreement which guarantees delivery in October of 2009 and presumably locks in advantageous pricing for Welwind. Welwind will receive 22 turbines per quarter for three quarters.

On June 12, venture capital and research firm Ludlow China upgraded their research opinion on Welwind and issued a target price of $0.60 - $0.70. If they are correct, that would represent a 300%+ increase from the current share price.

As you can see from the chart above, Welwind’s share price has shot dramatically higher after news that the company received all government approvals to move forward with the wind farm project. However, you will also notice that the stock price has shot higher on positive news a few other times in the past, only to fall back to previous levels in the following weeks. The stock is undoubtedly speculative at this point and still trades over the counter. However, with China’s commitment to green energy, the wind sector’s growth over the past few years and a determined and resourceful (if not seasoned) management team, I like their prospects for success. If you want to get a better feel for the company’s management, current projects and future plans, you can listen to a recent conference call.

I first wrote about Welwind in October of 2006 and have been in and out of positions since then. I currently own shares of Welwind and intend to hold my position through any future volatility. If the company’s stock mirrors the growth of similar wind companies during their initial years, the return could be huge.

Last week I wrote an article titled: “The Fuse Has Been Lit!” As a result of the article I received a number of E-mails from unbelievers.

It’s amazing how many people out there still do not understand the basic bullish fundamentals of the gold market. Even a large number of analysts are providing their clients with erroneous advice, by telling them to ‘wait for a bottom’. Many of these clients could well be facing the problem of looking back ruefully at the bottom, long after it is in place.

In order for gold to drop, here are some of the things that need to happen:

1) Several major gold discoveries need to be made in an area of the world where there are no rigid government regulations and no environmentalist groups, to slow down the building of a mine.

2) South Africa needs to rapidly solve its power shortages.

3) The rest of Africa needs to be able to supply ample power to the mines that are currently having problems obtaining enough power.

4) Chinese people need to stop moving up from lower classes into the middle class, and must stop spending money on gold jewelry.

5) The Chi-Coms need to stop buying gold for the treasury. (Currently almost all of the gold mined in China, remains inside the country).

6) The Russian government needs to stop buying gold for the treasury. (Russia is reaping the benefits of high oil and gas prices, and has nothing better to convert that money into than gold).

7) The US Treasury needs to prove that the claimed 9,000 tonnes of gold that were last audited in 1953, still exist, and are not leased out.

8) India needs to stop growing its economy, and needs to persuade its newlyweds not to ask for the ‘gift of gold’.

9) Oil and gas prices need to drop.

10) Food prices need to stabilize.

11) The ongoing banking crisis needs to be solved, and the banking system must prove itself to be (not sound as a dollar – but), sound as gold.

12) The world’s central banks need to stop adding funds to the money supply.

13) The Consumer Price Index, (real CPI– not fictitious numbers), needs to stop rising.

14) The US government needs to balance the federal budget. (The Federal deficit for the first five months of f/yr 2007-2008 is -263 billion dollars, compared to -162 billion dollars during the same period the year before).

15) Your neighbor, your brother-in-law and your shoe-shine boy must all be buying gold.

16) Finally, AND THIS IS KEY: ‘Real interest rates’ (T-bills less CPI) need to be positive by at least +2%. (They are currently negative by that much).

I’ve said this before, and it bears repeating: Build a file on your favorite analyst. Keep track of the recommendations. If he or she is wrong half the time, then why not flip a coin! Don’t pay attention to an analysis that ends with ‘on the other hand’. Remember the words of President Harry S. Truman: “Just give me a one-armed economist.”

Charts courtesy www.stockcharts.com

Featured is the daily gold chart. Price has broken out from beneath 2 months of resistance. This matches the length of the pull-back in Nov. and Dec. Price is now free to soar! The RSI and MACD have turned positive (green lines). The rocket is rising!

Featured is the weekly gold chart. Price closed above the purple line drawn through the closing prices of the previous 10 weeks, indicating a trend reversal. This is similar action to what happened the third week of December. The RSI is turning up from its support level, and the MACD is showing signs of bottoming. The rocket is rising!

Featured is the index that compares gold to the S&P 500. For most of the past year gold has outperformed Wall St. This trend was temporarily reversed in mid-March. The trend is moving back to favor gold again. Price has just broken out from beneath two months of resistance, very close to the rising 200 day moving average. Millions of investors use the 200D as their ‘guiding light’. The RSI and MACD are turning positive, in oversold territory. The rocket is rising!

Featured is the index that compares gold to oil. Currently 7 barrels of oil will buy an ounce of gold. The historic ratio is 15.4 to 1. Presently 25% below the 200 day moving average, the ratio is showing that it is ready to reverse (blue arrow). In the past, whenever the ratio was this low, the pendulum effect caused it to double from its low point. The anticipated target therefore is 14 to 1. The message from this chart is to sell oil and buy gold. The RSI and MACD are turning positive in oversold territory. The rocket is rising!
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Our last chart compares gold to the CCI commodity index. A lot of traders use this index to determine when to buy or sell gold, as it has a good predictive record. The first cycle shown here (from Buy to Sell) took gold from 650 to 835. The second cycle went from 800 – 925. The third cycle took gold from 950 – 1010. The fourth cycle is just getting underway! The RSI is rising up from the support level at 30. The rocket is rising!
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Summary:
Since no one can tell you exactly where or when a bottom is in place, until long after the fact, the best method you can employ is to buy gold whenever the price has dropped for a few days. Then, if you are an active trader, take some partial profits whenever you think gold is temporarily ‘overpriced.’ Never short a bull market! Gold has barely begun its ascent, especially when compared to some other metals such as lead (up 500%), uranium (up 530%), copper (up 470%), molybdenum (up 1,300%), and rhodium (up 2,200%).

This bull market has many years left ahead of it, in spite of the best efforts of the central banks that are trying to keep the price down, in order for the masses to believe that fiat currencies are safe. I saw them try that game in the 1960’s when they were trying to hold gold down at 35.00. Look at how badly they lost that battle!

DISCLAIMER:
Please do your own due diligence. I am NOT responsible for your trading decisions.

Peter Degraaf is an online stock trader with over 50 years of investing experience. He issues a Weekend Report to his many subscribers. For a 60 day free trial send him an E-mail, or visit his website: www.pdegraaf.com

Happy trading!
Peter Degraaf
May 17th 2008 AD.