This Summer of 2007

Today, I am writing in the train, going back to Paris, and I take the time to reflect on this summer.

At the beginning of July I expected and also hoped for a kind of crisis.
In a way, I was afraid that nothing would happen.
Well, I can say that I was not disappointed by the extent of the financial crisis that happened this summer, but the consequences for the Gold price have been disappointing so far.

In truth, I am not surprised anymore, by this kind of counter-intuitive moves, especially since May 2006 when I exited the stock market at the best moment, but reinvested everything in a Gold stock and erased more than half of my substantial gains of the first 4 months of 2006.
I exited this stock and avoided the worst,but subsequently, I erased all my gains by trying to exploit the sell off, and misinterpreting and failing to take advantage of the volatility of that Spring-Summer 2006.

This is when I started to read everything about Gold and got really interested.
Actually I had started to get interested in late 2005, early 2006, but was not so much comitted. I guess the lesson is still the same : read everything BEFORE investing.

Anyhow, I decided to invest again in this gold stock in september when I observed that it had found some support and might be recovering.
Two or three months later, it went up spectacularly, and I was vindicated.
I had recovered a big part of my maximum gains for 2006.
But I wanted more after everything that I had suffered, and the time I had spent on this case (another common mistake). So I did not materialize these gains and later the stock started to fall.

But I still believe in this stock and especially since its value depends on the Gold price.
My guts told me that all this suffering would pay in the end. And in the mean time, I could learn a lot about finance, history, politics and market psychology.
It is very similar to what I experienced with a Silicon wafer manufacturer whose stock I bought in April-May 2002. (this particular timing was because I thought that the worst of the dot com bubble popping was over). When the stock started to fall, I did not want to sell, and I started to read everything about the technology and its market. Two years and 8 months later it finally paid, but I did not really took advantage of the whole increase. In truth, I could have made a lot more money if I had stuck to this stock longer.
This is probably why I decided to stay longer with this gold stock this time, in spite of the risks.

Sometimes, I have doubts about this strategy because it is incredibly risky to invest so much of your own money in only one small company.
But now I know its business pretty well and I also know how it moves compared to the gold price. And I also have studied the evolution of the Gold price as well.

To summarize my analysis, I am quite confident in the potential of Gold in the long term, for several reasons that I will expose later, but I am even more confident that at some time in the medium term (say, less than six months) it is going to spike higher and I will use this opportunity to cash substantial gains. At least I will start selling and reducing my “Value at risk”, and start breathing more normally.
It might not make an enormous annual return (if I count 2 years of activity since the beginning of 2006) but it will be positive.

BNP Paribas comes in

Gold ended down 2% today. It fell along with the rest of the stock market. The Dow was especially hit, finishing at the lowest point of the day and continuing the trend seen in Europe earlier. BNP Paribas made the news by announcing that it would suspend two funds made up of obligations affected by the US subprime mortgage market.

This is funny for me because I used to work for BNP Paribas in Paris, and it was not a very happy experience.

Meanwhile, it was announced that the ECB was injecting a record amount of liquidity in the money market. The highest since septembre 11.
This mortage crisis is turning into the beginning of a panic. But we will have to wait to see how it all turns out.

But I am convinced that in the medium term it will be good for Gold.
The Central banks will do anything to avoid a depression because this one would be a disaster.
They will have to relax their monetary policy further, until inflation becomes a real problem and at this point in a few years, Gold price will be much higher.
Right now , the FED, in particular onlly talks about fighting inflation, but won't be able to follow suit.
It talks the talk, but doesn't walk the walk.

In the short run, Gold suffers, but we've seen this before in May 2006 ane February 2007, and it doesn't contradict the long term bullish trend for gold.

Right now with the panic that we see in the Stock Market, many forecasts emanating from the Gold bugs camp are realized and it can only reassure us of this investment in Gold.

What The F. ? What's going on with Jim Cramer ?

If you don't know yet the CNBC presenter Jim Cramer, that should be a good introduction.

It sould be titled :
"Financial crisis are so much fun !"

Trench Warfare

The current trend on the Gold market is still up, but my Gold stocks have behaved in a very frustrating manner, or worse, lately.
In particular, my Harmony Gold stocks have suffered a true crash (-30% in 2 days) and it caught me off guard. Some other gold stocks have also been hit perhaps because of contagion.

But Harmony apart, the Gold stocks' trend is not bearish yet. It has just suffered a correction on an overall flat trendline.
In the meantime, the stockmarket has suffered a mini crash before recovering.

So the trench warfare continues.

Just like in May 2006 and February 2007, this type of correction is very frightening but it isn't a clue for what's coming. Moreover, the fact that this latest mini crash has been so publicized in the media leads me to believe that this is not yet the beginning of a new trend.
(Apparently, I am not the only one with this opionion. Click on this post from "The Big Picture" )


A bull market has to climb a wall of worries.)

But I don't really care how the stock market evolves as long as Gold goes up.

In the long run, Gold stocks are correlated with the Gold price, and not with the rest of Stocks.
But we have to remember that in the short run, appearances can be deceiving. (See this article from Zeal )

To summarize, with the crash of Harmony Gold and the absence of a sustained rally in the rest of my gold position, it is a tough period right now. But I have to remember the basis for my invstments. I should know that in the longer term, and maybe sooner than later, it is going to be a good investment.

And these are the fundamentals

Cautious optimism for Gold

From now on, I will try to write more regularly in this blog.
And I will start with an analysis of the Gold market.

My last analysis was a month ago, at an important juncture, because it was just after the rebound that I had (correctly for once) predicted.

At the time I was still cautious, but reasonably optimistic. I wrote that it would depend on the currencies market (which is much larger and more important).
Well the EUR/USD has reached new highs (and is now at a new juncture), but more importantly, the USD/JPY fell dramatically during the month of July. It broke some important support levels and these two factors (EUR/USD and USD/JPY) severely crippled the Dollar Index, which is also threatening important support levels.

At the same time, the stock market has suffered, and for the first time in two years, the Gold market has not followed.
It might be a sign that these two markets are finally going to diverge (which is their normal historic behavior).


Finally the price of Oil has hit new highs and has not suffered from US statistics showing a slowdown.

All in all, we are on track for a stagflation scenario which would be very bullish for Gold.

But I remain cautious, because Gold does have a tendency to disappoint.
This disappointment is only the consequence of the unique excitement that Gold creates.

In any case, the month of august should be interesting.

About this Blog

It is the time for some perspective on this blog project.
Let me explain what is the evolution of its focus and meaning.

At the beginning, I had no precise idea of what it would contain, but gradually it has become a blog focused on Finance, Economics and some Politics.

In particular I have specialized myself in the area of investments and how to interpret the evolution of markets.

I started to learn about investing and speculating in the mid nineties, while I was still a student. Before that, I was interested by it, but it was a somehow remote subject because my family background did not predispose me for such an activity. My parents were middleclass leftist and/or catholic and did not encourage this interest(at the same time, they were interested in getting some returns on their hard earned cash).

But then i studied in a business school, and i grew more and more interested in economics and how this "science" however "dismal" could influence people's lives to a great extent. For me it was very important to manage it carefully for

Later after flirting with "ultra-liberal" ideas and their intellectual attraction, I nuanced them by discovering that ultimately, everything was political. There could not be a "pure" market economy, if only because the "big" players would always abuse their power. Economics was also a question of the balance of power. It was also about political institutions and geopolitics.

This was confirmed by reading Fernand Braudel's work "Civilisation Matérielle, Economie et Capitalisme, XVe-XVIIIe ".

But what really convinced me was the US decision to invade Iraq in 2003.
I was living in the US in 2002-2003, and everything became clear. It was a period when the stockmarket was crashing in the wake of scandals such as Enron, Tyco, Worldcom, and so on. At the same time, I could observe this massive manipulation of the opinion for the preparation of the War in Iraq.
The Bush administration was ostensibly pro-market, and at the same time was favoring manipulators and the crazy interventionists.

That is why I think that there cannot be a pure market-based economy. Anybody with power is bound to abuse it. This is how the world works, and this is why economics is not a science like any other one.
Also all the economic miracles in the developing countries only happenened through state intervention and protectionism, and thanks to their size (example : China, India, Thailand or South Korea)

In the rest of the developing countries , the "opening" of the economy has only led to a new style of colonialism (example : Argentina, Brazil, and all the african countries).

This is why economics is so fascinating to me. It explains a lot of things, but ultimately, it is only a tool in the hands of people.