Gold Stocks - All Perspective Has Been Lost

Many recent published commentaries appear to have lost perspective on the now much-hated Gold stock sector. The fact of the matter is that, technically, the secular bull market in Gold stocks has not even been confirmed. I do believe that in retrospect, the late 2000 bottom in Gold stock indices will be "the" bottom, much like the 1974 bottom in the Dow Jones Industrial Average (DJIA) was the true nominal bottom in this common stock index at that time. Here is a long term chart of the DJIA from 1940 thru 1985 (stolen from chartsrus.com) to show you what I mean:

And yet, we already have people pronouncing the secular bull market in Gold over despite the fact that we haven't even had a confirmed secular bull market in Gold stocks yet! Now I realize that mining stocks and physical Gold are not the same thing. Indeed, I have no long-term investments in mining companies and prefer the safety of physical Gold (and silver) held outside the banking system for long-term investment purposes.

However, to say that Gold is (or was, to be respectful to bears with whom I disagree) in a long-term bull market and Gold stocks are (or were) not seems a little bit far fetched to me. As a speculator in the paper markets, I am not even thinking about the end of a secular bull market that hasn't even truly begun yet! Here is a very long-term chart of Gold stocks compiled by Frank Barbera (stolen from a great and classic article) that only extends thru 2005, but gives a true "big picture" perspective:

And here is a chart of Barron's BGMI Index thru the recent nasty downdraft in Gold stocks (stolen from sharelynx.com):

Now, once the secular breakout is confirmed with sustained action (i.e. measured in years, not days or weeks) above around the 1300 level in the BGMI index, then we can start to talk about where the secular bull market in Gold stocks may end. Until then, this is just a major cyclical buying opportunity (a la late 2008) in an early secular trend, nothing more.

In fact the past few years worth of price action in senior Gold stock indices remind me of this:

Even if Barrick goes out of business (who in the Gold community would miss them?), Gold stock indices are headed much, much higher. I think the problem with most commentaries on the Gold sector I have seen lately is that they are too short-term oriented and fail to consider the bigger picture (a sign of the times as money gets "printed" faster and faster by our central banksta wizards). The Gold stock secular bull cycle likely has at least another 10 years to go. And if history is a guide, some of the largest gains in the Gold stocks will occur after the Dow to Gold ratio bottoms. Until the Dow to Gold ratio hits 2 (and a ratio less than 1 seems quite possible this cycle as power shifts from West to East), you can forget the long-term bearish thesis in my opinion.

If you would like some help trading the paper markets with an emphasis on the PM sector, I offer a low cost subscription service for only $15/month.

Gold - Are We There Yet?

It has been a 1.5-2 year sideways affair for the precious metals (PM), depending on whether you look at silver (peak in April of 2011) or Gold (peak in August of 2011). PM stocks, on the other hand, have done quite a bit worse than go sideways. While the more conservative Gold has only fallen a maximum of 20% from its August of 2011 highs, the more volatile silver and senior PM stock indices (e.g., XAU, HUI, GDX) have both fallen close to 50%. The junior PM stock sector has been decimated, with the GLDX ETF, as a representation of the very small cap/explorer sector having fallen almost 75% over the past 2 years.

One of the funny things about asset price declines is that they are met with the opposite emotional reaction of what is healthy. In other words, people should get more bullish as asset prices decline in an inflationary world, and yet the opposite happens. So, while Gold and silver are approaching the low end of their recent trading ranges, sentiment and trader positioning are at extreme bearish levels, just as they were last summer.

I am not a "pure" chartist or technical analyst when it comes to asset prices, but I think price charts tell a fundamental story rather well. Investing and speculating are risky ventures, to be sure, but we live in an era of global anchorless paper currencies. This means that the fruits of one's labor cannot be buried under a mattress using the official medium of exchange, as these scraps of paper (i.e. currency units) received for that labor are being thrown into the air by our masters at a pace that would make even rappers blush.

Though I thought last summer's lows in the PM sector would be enough to halt the correction and start a new cyclical bull market, one more vicious whoosh lower in the PM sector has caused all but the hard core Gold bulls to abandon the barbarous relics and the firms that waste their time digging treasure out of the ground. After all, treasure can be printed by governments and central bankstaz with a few simple key strokes, so who needs shiny pieces of metal?

In reality, we have likely just completed the 1987 crash equivalent in the PM sector when it comes to relative valuations of common stocks versus Gold. The current "Dow to Gold" ratio move has gone on much longer than I anticipated, to be sure. But it is clear to me that we are in no way positioned for a shift of the secular tides at this juncture. Here is a chart of the "Gold to S&P 500" ratio back around the time of the 1987 crash in common stocks using a weekly log scale chart:

Of course, the Gold bulls may have been a little premature in their celebration back then as this next chart shows:

And currently, we have the paperbugs rejoicing giddily in the streets as counterfeiting enormous amounts of money has propped up financial assets to the point where it seems as though Gold is once again irrelevant when compared to common stocks using the "S&P 500 to Gold" ratio:

Keeping the biggest of "big picture" perspectives in mind, here is the "Dow to Gold" ratio chart since 1980:

Now, I don't expect it will take another decade to get back to 1980-type levels in this ratio, but I'm prepared to keep riding the Golden bull that long if that's what it takes. The big money is made by sitting tight and holding on during a big bull market. Those who held common stocks thru the 1987 crash certainly didn't regret it for long. Meanwhile, using silver as a more volatile proxy for the Gold bull market, it seems as though we may be at the end of a big 4th wave-type correction that suggests a mania phase dead ahead:

If you accept this Elliott Wave labeling (not saying it is correct - this is just an opinion), it would suggest that the first wave resulted in a roughly 5.3 fold gain and the third wave roughly a 5.9 fold gain. Thus, since the first and third waves are roughly of equal magnitude, the fifth (and final) wave higher is likely to be of the extended variety and thus perhaps a 9-11 fold gain is coming. This would mean a peak for silver in the $200-$300 USD per ounce range. To anyone who thinks this is an outrageous number, I would ask: what do you think of one quadrillion as a number tracking the amount of outstanding financial derivative instruments in existence or one trillion dollars being the annual deficit of the world's current largest single country economy (i.e. USA). As last week's policy announcement from the Bank of Japan proved, there is no limit to the insanity induced by drinking the collective Kool Aid.

And oh, the hated Gold stocks. Using the XAU Mining Index as a proxy for the senior Gold miners, we can see that 30 years of price history tells us when to get excited about the Gold stocks and that time is now. Instead of greed, there is only fear, loathing and/or disinterest:

This is a juicy set up for a trade, if nothing more. I think it will be much, much more. Much as in the last cycle (i.e. 2003-2008), it may well be another commodity price spike that derails the current "Goldilocks" scenario. I think Gold and silver are set to lead such a spike as business conditions continue to deteriorate globally. Meanwhile, the futures COT (commitment of traders) report indicates unusually skewed bearishness for all but the commercial traders (large banks like JP Morgan), who are now as bullish on silver as they ever seem to get (chart below stolen from Software North):

This is a potentially explosive situation that strongly favors a resolution in the PM bulls' favor. I don't think there has been a reading of greater than 45% bullish for the commercial traders in the past 10 years, and they are now at 43%. The momentum-chasing hedge funds are piling on the shorts here right as we hit trading range support. With an expanding open interest (rather than the usual decline into a low), an explosive short covering rally could occur with the slightest hint of a bottom (such as, say, with the action to end last week?).

If you would like some help in trying to trade the precious metals and PM stocks, I offer a low-cost subscription service (one month trial is only $15). If not, keep your physical metal safe and outside the banking system until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle). In other words, don't get Cyprus'd!





 

2013 - The Year of the Gold Bull?

2012 wasn't a fun year for most Gold bulls. Seeing the S&P 500 outperform Gold and seeing Gold stocks get decimated through the 1st half of the year was enough to create suicidal sentiment that is now only marginally improved after another prolonged correction in the precious metals (PM) sector to end the year. But as the many calls for an end of the PM bull market by several of the same people who have been wrong / missed out the whole way up get louder, the risk in the PM sector gets lower and lower.

The bigger picture hasn't changed and isn't going to for some time: a major private sector secular economic contraction in the West being fought with manufactured money/credit units by governments and central bankstaz. This is not a period to favor paper, as reflected by common stocks, over Gold. My trade of the year for 2013 is the same as my favored trade back in August: go long the "Gold to Dow" ratio (or short the "Dow to Gold" ratio).

The secular chart of the S&P 500 (a broader index) to Gold ratio shows that time has run out for the paperbugs on this correction:

Of course, such a ratio chart doesn't tell us anything about nominal prices of either of these items. But it does tell us that a shiny piece of metal with no dividends or growth prospects should continue to trounce the wizards of Wall Street over the next several years. This is the forest one does not want to lose sight of the next time Warren Buffett talks about how perplexed he is by Gold. Perhaps Warren should have listened to his father, Howard (a congressman), a little more:

"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money."

[Read more: http://www.businessinsider.com/tired-of-warren-buffett-trashing-gold-here-are-some-quotes-from-his-gold-loving-father-2012-2?op=1#ixzz2GeRslYDz]

Now, I am not interested in politics, as I fully expect politicians to play their role and do the exact opposite of the right thing regardless of which party or platform they claim to represent. I also don't believe that a Gold standard can fix the world's problems, as governments controlling money is the problem, not the form of monetary system governments foist upon the masses. In most countries in the world currently, one is free to save in Gold rather than paper currency, which is the important thing for pragmatists like myself. But if one uses history as a guide, I think Howard Buffett was closer to the mark than his son Warren.

In any case, Gold will win over Warren and his paperbug minions this cycle because it is simply the time for this to occur. Cycles in markets exist much like cycles in nature, as financial markets are but a manifestation of the thoughts and emotions of one of nature's more curious species. We are in a secular fear and uncertainty cycle for conventional financial assets, which benefits Gold.

Moving from the philosophical to the tactical, now is the time to be bullish on Gold and its derivatives, not bearish. The intermediate term correction from the fall 2012 highs in the PM sector was much longer and deeper than I thought it would be, but we are where we are now. And keeping a healthy perspective on the intermediate term, the current set up is much more likely to lead to a bullish outcome than a bearish one. Here's a 12 year weekly chart of Gold thru Friday's close to show you what I mean:

And the beleaguered Gold stock sector is also oversold and significantly undervalued for the 3rd time in the past year.  An interesting phenomenon occurred to end last week, however, in the small cap Gold mining sector. Using the GLDX ETF as a proxy for the explorer/small cap Gold mining sector, here is the weekly price action over the past few years thru Friday's close:

I remain wildly bullish on the whole PM sector. If you would like some assistance navigating the PM sector with an orientation towards trading the intermediate-term swings, I publish a low cost subscription trading service that is only $15/month. Otherwise, keep the faith and hold onto your PM sector items tight. Don't let the short and intermediate-term noise distract you from what still promises to be a secular bull market for the history books. The Dow to Gold ratio will hit 2 (and we may well go below 1 this cycle).

A Gold Stock Bull Gives Thanks To Mr. Hendry

Mr. Hugh Hendry is a successful hedge fund manager with a bit of a rock star aura in the financial community. He has a colorful personality and keen insights to accompany his track record of making good money for his investors. In a recent interview, he said the following:

"I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity." 

I want to thank Mr. Hendry for calling the bottom of the recent correction in the "Gold stocks to Gold" ratio. Because this was only a minor/short-term correction in a fledgling new uptrend in this ratio, Hendry's comment was not as powerful a contrarian signal as the plethora of articles on how crappy Gold stocks are relative to Gold that appeared last spring and summer (like this one). However, this recent comment sure is going to prove to be timely in my opinion. I would take the other side of Mr. Hendry's trade, but unfortunately I am long Gold as an investment and long Gold stocks as a speculation and don't see any rational reason to short Gold. In other words, I am talking my book just like Mr. Hendry, so take everything I say with a grain of salt. But I believe Mr. Hendry is going to get stopped out of his "long Gold, short Gold stocks" trade rather soon.

To be fair, Mr. Hendry also mentioned that he is long Gold and short the S&P 500, which is Gold Versus Paper's trade of the year, so we certainly see eye to eye on other issues. Gold stocks are set to go on a tear and I stand by my call that the GDX ETF will be at 80 by the end of May, 2013. That is my conservative target, by the way, and a triple digit price on GDX by then is not at all an unreasonable proposition in my opinion.

Here's the daily action of the "Gold stocks to Gold" ratio, using GDX:GLD as a proxy, over the last 8 months:

Of course, this is a shorter term consideration over the next few months or so, and ignores the bigger picture. Here's a monthly "Gold stocks to Gold" ratio over the past 30 years or so, using the XAU mining index as a proxy for senior Gold miners:

We just completed our third positive month in a row for this ratio. Today's Halloween action also suggests the correction in precious metals (PM) stocks is over. The silver stock ETF (ticker: SIL) has been relentlessly strong even during a steeper silver correction. The chart of the last 8 month's action shows the importance of today's volume on this early stage breakout higher, with the "silver stocks to silver" ratio (using SIL:SLV as a proxy) charted below to show the incredible relative strength of silver miners lately:

When Gold and silver stocks are leading their respective metals, this leads to the most consistent and the strongest cyclical bull moves in the PM sector for both the miners and metals (a la late 2000-2003, 2005-6 and 1973-1974). It is actually to the Gold stock bulls' benefit that Mr. Hendry and many other hedge funds are short Gold stocks right now, as their short covering will add fuel to the bullish fire. My subscribers and I finished buying into a new long Gold stocks position last week in anticipation of today's action and I continue to believe Gold stocks will outperform Gold over the next several months, though I expect both to continue rising.

For the very long term, I am a "Gold guy," not a "Gold stocks" guy, but the speculative opportunity in Gold and silver stocks right now is as good as it gets in my opinion (at least relative to the obvious bottoming this past spring and summer in Gold stocks).

If you are interested in speculating in the precious metals sector and would like some assistance, I run a low-cost subscription trading service that focuses on the shiny stuff and the companies that dig it out of the ground. A one month trial is only $15. Of course, there is nothing wrong with avoiding the speculative pool of sharks completely and simply holding on to your barbarous relics until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle).

Silver and the Myth of Diminishing Returns From QE

There is lots of talk in the financial media about how there are diminishing returns from QE (i.e. money printing) with each successive round of counterfeiting. This is only true because such commentators are stuck in paperbug world and focusing on common stocks. But common stocks are in a secular bear market, so it makes sense that there could be diminishing returns on common equities related to bailing out banks and governments by destroying the purchasing power of the currencies of the world.

But before we dismiss money printing as ineffective, we have to view it from the perspective of the investor that holds silver instead of paper money, certificates of confiscation (government bonds) or common equities.  Helicopter Ben's experiment with everyone else's savings is going quite well from the perspective of one invested in silver. Here's a 4 year weekly chart of the silver price in US Dollars to show you what I mean:

I think $100/oz. or so sounds about right for silver within the next 1-2 years. Gold and silver stocks certainly flew out of the gates to end the summer as if anticipating this kind of potential move in the metals. As secular bull markets mature, the cyclical bull moves within them get stronger and faster. We have already started a new cyclical bull market in the PM sector in my opinion.

One of the sneaky tricks about inflation is that once money is counterfeited and passed around to those with connections to the printing press, we little folks don't always know where the subsequent price inflation is going to come from. While I may be wrong in thinking the best performing asset class over the next few years will be precious metals, the precious metals sector is certainly the easiest, most conservative, no-brainer choice to put both investment and speculative money to work. The federal reserve and other central bankstaz around the world will get price inflation by creating insane amounts of money out of thin air, it just may not be price inflation in the items they want.

In fact, as someone who always harps on the Dow to Gold ratio, I thought the silver to S&P 500 ratio chart may offer a clue as to how much further the run in silver relative to common stocks has to go if we maintain the current course for the next several years:

If Gold is going to $3500/oz and beyond (and I wouldn't bet against Jim Sinclair even with JP Morgan's money), silver will have a price in the triple digits. It's not that I think the federal reserve (not federal and has no reserves, so I see no reason to capitalize their name) can stop another stock market crash and/or major common stock bear market from happening. But they have proven to me that they are determined to destroy what's left of the value of the US Dollar and no one with any authority is interested in stopping them. Once a few more percent of the general population catch on to this in the advanced economies of the world, which are all going thru the same escalating serial currency abuse process, critical mass will be reached and the real Gold and silver stampede will begin. We're not there yet, but it's coming...

Hold onto your Gold, silver, platinum and PM stocks. While things are a little overbought in the short-term, we're going much higher in the PM sector. I stand by my call made in May of this year that GDX is going to 80 by May of 2013 and I suspect it could go much higher (GDX will likely get to triple digits before silver will).

If you would like some help in navigating these markets with a focus on the PM sector and short term trading tactics to augment core PM positions, I run a low cost subscription service. A one month trial is only $15.

Trade of the Year - Gold Versus Paper

I often harp on the Dow to Gold ratio, as I think it is the easiest way to see the "bigger picture" secular trend of poorly performing common stock markets (i.e. paper) relative to the free market's real money (i.e. Gold). I have been not-so-patiently waiting for a turn in this ratio back to the advantage of the Gold bulls. Well, we have now gotten to the point where I feel comfortable arguing that this ratio now is likely to provide the best trade over the next 12 months. When I say best trade, I mean the best potential reward/return relative to the risk.

I now see the risk as negligible and the potential reward as substantial in this trade. Here's a long-term monthly log scale chart of the "Gold to S&P 500" ($GOLD:$SPX) ratio as a proxy for the "Gold versus paper" trade to show you why I think the risk is low for this trade:

Once a trend was established, and the current trend in Gold outperforming common stocks is very well-entrenched, the 40 month moving average held every time except one in the past 31 or so years. And that includes during the Great Fall Panic of 2008. Pretty good track record, which is why I think the risk for this trade is very low right now and the ability to place a stop loss in case "this time is different" is clear. Scaling in to the weekly chart of this ratio, this time using the $SPX:$GOLD ratio instead of vice versa, shows that the time to start scaling into this trade is during the second half of August (i.e. now):

The easiest way to play this trade in a decrepit paper money system is to go long physical Gold. However, since this is a ratio trade, the “pure” way to play it is by going long Gold while shorting an identical dollar amount of the S&P 500 (or Dow Jones Industrial Average) at the same time. There is a double leveraged FSG ETF designed to profit from upward moves in the $GOLD:$SPX ratio, but it is highly illiquid and thus I cannot recommend this ETF since I am partly interested in mentioning this trade because of its low risk profile.

There is another way to play this ratio that is a derivative trade, and one most Gold bulls are tired of hearing about: going long Gold stocks. This is a higher risk trade, but with potential for higher reward. The under performance of Gold stocks relative to Gold has been rough over the past year. Make no mistake: Gold is safer than Gold stocks and will probably outperform Gold stocks as a sector over the full secular cycle of a declining Dow to Gold ratio. However, I am wildly bullish on Gold stocks right now and think they are set to outperform to start the next cyclical bull market in the precious metals sector. Why is that?

Well, below is a weekly subscriber letter from August 12th that summarizes the reasons why.


Gold Versus Paper August 11 2012 Letter



If this type of analysis interests you, consider a one month trial subscription - it's only $15. Hold onto your Gold and keep it away from Jon Corzine and other depraved banksta-types. Until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), Warren Buffet and other traditional Wall Street gods will continue to under perform a shiny piece of metal.

Gold Stocks: Bottom, Re-Test, Launch?

Though I favor physical Gold held outside the banking system that can't get MF Global'd over those paper Gold derivatives known as Gold stocks, there are times when a speculative opportunity presents itself that cannot be ignored (at least not by me). Now is such a time in Gold stocks. In my last post, I welcomed a new cyclical Gold stock bull market. I continue to believe a new cyclical Gold stock bull market has already begun and we are now completing (if we haven't already) the re-test of the mid-May, 2012 lows. What comes next? The launch!

Here's a 6 month daily chart of the GDX ETF thru Friday's close to show you my thoughts:

It is important to understand that fundamental valuations and "bigger picture"/longer term technical analysis both support a bottoming process here. My last post discussed some of these factors. And here is yet another important fundamental piece of data courtesy of the Tocqueville Gold Fund 2nd quarter 2012 investor letter (there are many other great data points at this link and the chart below is apparently courtesy of BMO Capital Markets):

The dark blue line in the chart above demonstrates that the price of senior Gold mining stocks relative to their current year cash flows is at levels last seen at the depths of the 2008 crash and the beginning of the current Gold stock secular bull market at the end of 2000. The Gold stock bears keep screaming about the rising costs of Gold mining. They are right about rising costs, but they neglect to mention the other side of the argument, which is more important: margins are RISING for large cap Gold miners, not falling, because the price of Gold is rising faster than costs are. And we are entering another coordinated global recession (no, there won't be any decoupling this time, either), which means the price of general commodities (like oil)  should fall relative to Gold. This will further improve margins for Gold miners.

We have seen several bottoms in Gold stocks in the past that resemble the current set-up. Here are some examples of the "bottom, re-test, launch" sequence that I believe is repeating right in front of our eyes. First up, the 2004 bottom, using the HUI Mining Index ($HUI):

Next up, late 2008, also using the HUI mining index:

Or even way back in 2000 to start the secular Gold stock bull market using the XAU mining index:

Could this time be different? Sure, anything is possible in markets. But given the low valuations in Gold stocks by multiple measures, recent 40% bear market in Gold stocks (2nd worst of the last 12 years in percentage terms and longer than average duration), and suicidal sentiment in the PM sector, the odds are now heavily favoring the Gold stock bulls here. Here is a chart of the "bullish percent index" for the GDM (the index that backs the GDX ETF) over the past 6 months to also show how beaten up the senior Gold stocks are ($BPGDM):

Gold stocks are a speculation for me while physical Gold is my way of protecting my savings from the ravages of a financial and bureaucratic system out of control. Until the Dow to Gold ratio gets to 2 (and we may well go below 1 this cycle), it is silly to be overly bearish on the precious metals sector. While traders bicker over whether Gold is about to break up or down right now, they miss the "forest": by the time we reach December 31st, Gold is likely to be up in percentage terms for the year, which would mark its 12TH YEAR IN A ROW. Is Gold a bubble or are there just a lot of sour grapes out there from those that have either missed the move so far or are desperately trying to prevent the inevitable "official" return of Gold as the anchor for a new international monetary system?

Hold onto your Gold. This thing is far from over. If you'd like to try speculating in the paper PM sector once you've established a core physical metal position, consider giving my low-cost subscription service a try. A one month trial subscription is only $15.

A New Cyclical Gold Stock Bull Market Is Born

And it is about time! After a 40% bear market (the second worst of the secular Gold stock bull so far), the large majority of investors and speculators have been worn out or scared out. The mid-May bottom was THE bottom in my opinion and we have a long way to go on the upside. The metals will rise as well, but Gold stocks will outperform this time.

Now, keep in mind that I favor physical Gold over Gold stocks over the long term and, in fact, own no Gold stocks for the long term. My long-term holdings are in physical Gold held outside the banking system. This is the safer place to be during this nasty secular common stock bear market, particularly when sovereign defaults are the theme of this next decade. We will not exit this secular common stock bear market until we have a new monetary system based on a modicum of common sense - in other words, one that involves Gold.

 Let Charlie Munger speak of how uncivilized it is to make a lot more money than he has for shareholders over the past decade by holding a shiny piece of metal instead of the paper promises of Wall Street's "finest." Sounds like sour grapes to me. By the way, shiny metal will continue to far outperform the Berkshire Hathaway stock price over the next several years - of that, you can be sure.

To the charts, I say, as this is where the answers lie in my opinion once one understands the fundamentals. Here's a "big picture" view of the XAU Mining Index ($XAU) using a monthly log scale plot over roughly the past 30 years thru Friday's close:

Others might say that we are headed for another 2008-style meltdown and we are going to lose that blue support line again, as we did in 2008. Hey, that's what makes a market. But there are fundamental and technical reasons for why we ain't going there again any time soon. The most important, in my opinion, is the fact that Gold stocks have already crashed relative to the Gold price. Here's a monthly log scale view of the XAU Mining Index divided by the price of Gold ($XAU:$GOLD) thru Friday's close:

Over the long term, it is apparent that Gold stocks have underperformed the metal and may well continue to do so for the longer term haul (i.e. next decade). However, speculative gains during a cyclical Gold stock bull come fast and furious once Gold stocks decide it is their turn to lead the way. Next up, the "Gold stocks to common stocks" ratio, using the XAU and the S&P 500 as proxies ($XAU:$SPX) on a monthly chart over the past 13 years thru Friday's close:

Furthermore, the fundamentals continue to improve for producing Gold companies due to a rising "real price" of Gold. I learned this concept from Bob Hoye and it makes sense. When the Gold price is rising relative to the cost of mining (regardless of what the nominal price of Gold is doing), operating margins for producing miners should improve, all other things being equal (which they never are...). Using the Gold price divided by the price of a basket of commodities, we can get a rough estimate of this trend. Here is a 30 year monthly chart of Gold divided by the CCI commodities index ($GOLD:$CCI) thru Friday's close using a log scale format:

This is where the "Dollar to zero" and hyperinflation crowd misses some of the nuances along the way. Sure, every currency becomes worthless eventually, but the turns along the way are what make things interesting to those who follow markets. For example, despite being a staunch Gold bull, I have been looking for a new cyclical bull market in the US Dollar Index since last summer, and I don't think the one that seems to be developing is over yet by a long shot. All currencies are declining against Gold, but doing so at different rates.

And if you are into technical analysis, you should have noticed the volume on the GDX ETF. May was the highest monthly volume in the history of GDX (with a bullish monthly candle to mark a bottom) and Friday was the highest daily volume in the history of the GDX ETF. Clearly, the big boys see the same things I do and have now established their positions. They are doing so at a time when sentiment in the Gold stock sector is as poor as it has been since the darkest days of the 2008 panic.

I had to smile at the number of recent articles I have seen describing how much Gold stocks suck and how they will never outperform the metal. Perfect! Here's my homemade sentiment chart using the data from the Rydex Precious Metals Mutual Fund (a PM stock fund), the plot showing the net asset value (NAV) of the fund (i.e. amount of money in the fund) over time. When the plot is low, the money in the fund is low, which is generally a combination of declining prices and money withdrawals from the fund. When the herd is bearish (i.e. NAV low), you want to be bullish and vice versa. Here's a 10 year plot of the NAV of the Rydex fund thru Friday's close:

I'd say we're not going to get much lower than the 2008 meltdown, but feel free to disagree. The turn has already come and gone, in my opinion. However, the bulk of speculative gains in this cyclical Gold stock bull market are ahead of us. For those with a longer-term view, ignore the squiggles until the GDX is 80 or more and we'll get there within a year if history is reliable guide. For those who like to try to play/trade the shorter term swings in the volatile Gold mining sector, consider giving my low cost subscription service a try (it's only $15/month). For those with a lower risk tolerance, simply hold onto your Gold until the Dow to Gold ratio gets to 2 (and we may well go below 1 this cycle). Speaking of my favorite secular road map chart, it looks like we have finally made the turn - here's a monthly log scale chart of $INDU:$GOLD over the past 15 years thru Friday's close:

And Yet Another One Bites the Dust

To all those who say that deflationary collapses cannot happen in paper monetary systems, I ask you: don't the PIIGS-ies of Europe count? Because they're all falling, one right after the other, like dominoes. Today, the Spanish stock market ($SMSI) closed below its spring, 2009 lows. Here's a 5 year weekly chart through today's close:





Spain joins Greece, Portugal and Italy in slow motion deflationary stock market crashes. Italy (Milan [$MIB] Index) did a peek-a-boo below the spring, 2009 lows in 2011, and then had a weak rebound. It looks set to break to new lower lows soon. Here's a 20 year monthly chart of $MIB thru today's close:






These are modern-day examples of deflationary stock market collapses right in front of our eyes. Those who say the bankstaz would never let it happen just don't want to face reality. Bankers can profit from both deflation and inflation. Who do you think is going to buy up the assets in these European countries for pennies on the dollar (after they print themselves up some fresh new money)? Now, I don't suspect that the larger economies with their own printing presses are going to go this route quietly, but Japan sure doesn't seem to have the inflationary central banksta rescue thing down so far after 22 years.

Unlike many Gold bulls, I don't see stocks as a better play than cash or US bonds here. I am not a buy and hold investor of these asset classes (that's what Gold is for), but I don't expect the US bond market to crater any time soon with a global recession in the works. I also really like the US Dollar right now as a trade. I know it's blasphemy for a Gold bull to talk of US Dollar strength (relative to other paper currencies), but that's what I see coming.

Will Gold survive a US Dollar rally? Is it remotely possible? Of course. Not every US Dollar rally causes a 2008-style meltdown. All currencies are sinking relative to Gold, simply at different rates (trampoline jumping is what I like to call it). The bears in the PM sector are out in force and I even watched a recent interview (hat tip to John Rubino at dollarcollapse.com for the link) talking about the Gold "bubble" collapsing with a book to back it up (an "author" sound more authoritative than a "blogger," eh?) - here's the link for those interested in hearing the other side of the debate.

Me? I'll stick with Gold. It's a no-brainer for the long term. Short-term? Sure, we can correct more. I would love a dip below $1600 to shake out a few more weak hands while Gold stocks take one more dive before starting a new cyclical bull market. But these are short-term, casino-related concerns, not the big picture. The big picture is shown below, a monthly chart of the Gold to Dow ratio ($GOLD:$INDU) from 1980 thru today's close:







Its stocks, real estate, cash, bonds or hard assets. I'll take cash in a secular economic contraction/Kondratieff winter/economic depression. However, I prefer cash that cannot be debased by decree, so I'll stick with Gold. I want to be like a banksta with the money left over to buy assets for pennies on the dollar some day when the house of cards finishes falling. The nice thing about Gold is that this will work in both a deflationary or hyperinflationary poop storm. Those who say Gold isn't a good hedge against deflation haven't studied their history. One of the hallmarks of a depression is that the purchasing power of Gold rises, which has been happening since 2000. The Gold to Dow ratio is only one example. Try the Gold to real estate ratio (in most parts of the world), Gold to commodities ratio or Gold to bonds ratio. They all add up to the same thing: Gold continues to trump other asset classes and this trend is nowhere near completion. And yes, I am aware of what happened to Gold in the fall of 2008. For anyone asking: are you aware that Gold was back at $1000/oz by February of 2009 (i.e. net flat during the deflationary crash) while stocks kept right on going lower into their March lows?

Having settled the long term (in my own mind, at least), I still enjoy the short term. Short term tactics are technically based, not fundamentally based. Trading is a tough game and 95% of traders fail. I like the game and have learned to be quite good at it, but it is not for everyone. I will go long or short any asset class if I think there is money to be made when trading (for example, I have a short position in Gold stocks right now). As for investing, however, you couldn't get me to touch paper cash, bonds, most real estate, or most common stocks with a ten foot pole. I'll become a paperbug again, but only once we have reached reasonable historical metrics to support such a move (e.g., how about a dividend yield for the average common stock in the 7-10% range?).

Right now, my subscribers and I are waiting to buy the next low in the precious metals patch, which is certainly close to being here. If this pending low isn't "THE" low, it won't matter to me from a trading perspective, because I can still make a lot of money trading "a" low. If you are crazy enough to try to trade with a portion of your capital, consider trying my low-cost subscription service. A one month trial is only $15. If you're too smart to take that kind of risk, then hold onto to your shiny, precious, edible Gold until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle).