Metal Versus Metal Stocks

Gold versus Gold stocks. A topic near and dear to my heart. One that I have studied relentlessly for the past several years. I am no mining expert. I am not the one that can point you to the next "ten bagger" in the junior mining sector. But I have been right in insisting that my subscribers favor Gold over Gold stocks and I continue to favor Gold (and silver) over the companies that dig these metals out of the ground. This is sector analysis, not an individual firm analysis.

Gold stocks are undervalued say the Gold stock bulls. The fundamentals are improving thanks to a rising "real" price of Gold. These things are true. But a "value trap" is believing that things that are cheap can't get cheaper. They can.

Now, I trade Gold stocks, I don't hold them for the long term. My long term investment for this secular precious metals bull market is physical Gold held outside the banking system, and a little bit of silver. Why? Because Gold stocks are not Gold, they are a paper derivative of Gold. And when the poop hits the fan, like it did briefly a few short weeks ago, Gold stocks get thrown out with other stocks. Sure, they may hold up better than base metal stocks or banking stocks, but a break even proposition when Gold is rocketing higher seems like a poor trade to me. I'd rather hold the GLD ETF and make some fiat money rather than be loyal to the Gold stock cause and not make any money.

When the Gold sector is healthy and in "proper" alignment, the juniors should be leading the seniors higher. One can use a ratio of the GDX ETF (i.e. the senior miners) to the GDXJ ETF (i.e. the junior miners) to get a sense of whether the seniors or juniors are outperforming. Here's the data during one of the bigger bull runs of this secular Gold bull market (a GDX:GDXJ ratio chart over the past 6 months):





This is the opposite of what a strong Gold stock bull market looks like. Now, the flip side of this argument is that the senior Gold stocks can lead the move and the juniors follow later. Perhaps, but we are not exactly at the beginning of this move in Gold are we? Others would argue that Gold stocks were dragged down by the stock market and thus this is not a fair period to analyze. I would argue that we are headed for a full-on poop storm after this dead cat bounce in common equities completes and that Gold stocks better get used to it!

Also, the junior mining sector, as represented by the GDXJ ETF, is clearly showing a big head and shoulders top here, which could of course be negated at any time. For now, though, caution is clearly warranted and hope is not a good strategy. Here's a chart of GDXJ over the past 18 months to show you what I mean:





And what of the micro-cap Gold stocks or the explorers? The GLDX ETF, a representation of this sector, looks terrible! Here's a chart of the daily action of GLDX since its inception in early November of 2010:





I am very bearish on the stock market once this bounce in general stock markets completes. I know that this is not 2008, but that is only because the problems are worse and the outcomes in financial markets should be even more severe. Gold is the premier asset class for this cycle. Gold stocks may be on sale again after the carnage is complete and I plan to have some dry powder to buy them if things work out as I think they will. I advise Gold stock bulls to use caution here. If the head and shoulders pattern in the GDXJ ETF reverses, I'll be there to notice and switch to a bullish posture. But for now, I still prefer Gold over Gold stocks.

Few Gold stock bulls realize that some of the best gains in Gold stocks occurred AFTER the Dow to Gold ratio bottomed on a secular basis. It happened in the 1970s and in the 1930s. I am no permabull on the precious metals other than as a long-term buy and hold for the physical metal. Gold and silver stocks are a trade to me, not a religion. Gold, on the other hand, is the anchor of the international monetary system, whether it is officially declared to the sheeple or not. Cash is king during a bear market and there is no better form of cash than that which cannot be conjured up by decree.

If you are crazy enough to try to trade in this market environment, I invite you to try my low-cost subscription service, which focuses on Gold, silver and Gold and silver mining stocks, but also trades opportunities that arise in other markets. My long-term investment advice is free and hasn't changed for years: buy and hold physical Gold until the Dow to Gold ratio gets to 2 (and this ratio may well get below one this cycle).

The Other Side...

I always smile when I see some mainstream article about a market rout or discussion of a market swoon on "TOUT" (i.e. sucker) television. They love to show a distressed professional trader on the stock market trading floor after the markets are down. Something like this:





The flip side of this guy is the Gold bull out there with physical metal that knows enough not to trust the stock market. For every sad guy (and gal) on the NYSE floor getting hammered, there are others out there growing in number that look like this:




Sorry, but we traders and investors out here ain't all fraught with despair over the current market movements. Those crazy, weird people who invested in shiny hunks of metal with no intrinsic value (according to CNBC) are doing quite well, thank you.

And as the Dow to Gold ratio descends upon 2, and we may well go below 1 this cycle, we out here eating physical Gold will continue to smile at not falling for the fraud that is known as Wall Street and for doing our homework on where we are in this economic cycle from a long-term perspective.

Technical Analysis Put to the Test

Tea leaf reading (i.e. technical analysis) is not a hard science, but it beats the efficient market hypothesis in my opinion. One has to start somewhere when trying to learn how to trade and invest. For example, Gold is in a beautiful, clear and undeniable secular uptrend. Easy to see and hard to dispute unless you are a paperbug.

I would like to show a chart and predict an outcome based solely on technical analysis. Now, I admit, I am cheating a little since I know something about the fundamentals being that my soul is stationed in the area of interest related to this instrument, but nonetheless, the charts speak louder than my understanding of the fundamentals in my opinion.

The chart is a 1 year daily chart of "high yield municipal debt" (i.e. junky local government U.S. debt) thru today's close:





My prediction is not wishy-washy. I believe a major decline will occur in this instrument and I don't think we will make it thru August before it begins.

Let's see if technical analysis works in real time. Of course, if it doesn't, one could certainly argue that it is the practitioner that is at fault rather than the art...

Paperbugs Won't Get It Until It's Too Late

A brutal cyclical common equity bear market within this secular bear market for common stocks has already begun. Meanwhile, the parabolic phase in the uncommon Gold secular bull market has just begun with the latest thrust higher. Please don't mistake the forest for the trees: Gold should be correcting now and common stocks are due for a dead cat bounce higher. But these shorter-term considerations are not where the big money is made for retail investors now are they?

A shiny piece of metal continues to trounce common equities and this trend is set to continue. The best way to view this for American investors is by using the Dow to Gold ratio (i.e. $INDU:$GOLD), a chart I have been harping on long before I started ranting on the internet. How now Dow over this secular period of stock investor misery? Let's look at a 20 year monthly chart of the $INDU:$GOLD ratio:





This ratio is going to 2 and we may well go below 1 this secular cycle. The paperbugs still talk of dividend yields and how they are higher than the bond yield. This is true, but what good is a 3% dividend yield if the stock goes down another 50% over the next few years? And, using the dividend yield with an appropriate historical perspective (next chart stolen from a piece by Mark Lundeen), we are near a top in the stock market, not a bottom:





Trust me, we will get back to a 6% yield in the stock market before this secular bear is done mauling the paperbugs. A double digit yield wouldn't be surprising. The calls for a bottom here with a continuation of the cyclical equity bull market are amazing to me and show just how entrenched the belief in infallible central banksta wizards has become. These wizards are powerless to stop the new cycle now that the tide has turned, just like in late 2007. Manipulation works well only when it is in the direction of the trend, otherwise a few days to a few weeks is about it. The fact that Europe had to ban short selling to get a bounce in their markets suggests that we likely will make one more low before a multi-week dead cat bounce. This dead-cat bounce could be anemic or fast and furious - I don't know. A fast and furious bounce would be anticipated and better to keep the bulltards in this thing as long as possible before wiping them out.

Folks, we are already in a bear market in the majority of the world's equity markets by the standard definition: a 20% loss. Here's the list from peak to trough for multiple markets, in no particular order:


China ($SSEC): August 2009 peak to this week's lows: 30% loss
Brazil ($BVSP): November 2010 peak to this week's low: 35% loss
India ($BSE): November 2010 peak to this week's low: 22% loss
Russia ($RTSI): April 2011 peak to this week's low: 29% loss
France ($CAC): February 2011 peak to this week's low: 31% loss
UK ($FTSE): February 2011 peak to this week's low: 22% loss
Germany ($DAX): May 2011 peak to this week's low: 28% loss
United States ($SPX): May 2011 peak to this week's low: 20% loss
Italy ($INE): October 2009 peak to this week's low: 44% loss
Other PIGS countries: A little bit more than 20% down... (sarcasm off)


Get the picture here? I understand buying stocks here AS A TRADE, but not as an investment. We are going much, much lower in common stocks. And what of Gold? Ah, the shiny, worthless, barbaric metal that is the best performing asset over the past decade. Let's just say things are about to get hot to the upside after the current correction concludes.

Looking at Gold on a weekly chart gives us a clue as to what comes next. Here is a 12 year log scale weekly chart thru Thursday's close to show you what I mean:





This type of MACD shift to a higher range has been seen in multiple prior secular equity bull markets as the parabolic phase higher began. I don't think this time is an exception. It's just that time in the investment cycle, nothing more. And the fundamentals support this fledgling move completely. While US Dollar-based deflationists call for a massive US Dollar rally, they will be shocked to see how high Gold goes relative to the US Dollar during a deflationary crash when no one trusts their governments and confidence is lost. And the US Bond permabears will be shocked how well government debt in the US holds up as the herd flees the stock market.

And for all those who say that this is not a replay of 2008, I agree. Things are much, much more serious now and the corresponding bear market has the potential to be even more devastating. When the banking system is broke plus many nations in the world are broke and at the breaking point, you are talking about a replay of the last year or two of the 1929-1932 bear market. It will be more drawn out this time (will it end in 2014?) due to endless apparatchik interventionism, which will fail again and again, as it always has in the past. Being a bear will become dangerous, as events in Europe this week related to abrupt banning of short selling demonstrate. Paper Gold may be banned or curtailed as things spiral out of control, so don't say you weren't warned.

Physical Gold held outside the banking system and away from the prying eyes of bankstaz and governments is the single best investment option out there. Period. The Gold bull market is not over by a long shot. Some physical cash under the mattress (i.e. outside the banking system) to cover short-term expenses is also not a bad idea.

If you're crazy enough to trade these dangerous and heavily manipulated markets, consider giving my trading service a try. We trade Gold, silver and Gold and silver stock indices, as well as other markets when opportunities present themselves.

The Global Equity Bear Market Is Back

The global cyclical bull market in equities is over. What we saw last week isn't a correction in an ongoing bull market. This bear market is likely to be nasty and protracted. Before it is over, the early 2009 lows are at risk of being breached for just about every stock market in the world (excluding Greece, which is already far below the March, 2009 lows). Forget peripheral Europe, the core is now in big trouble. Ditto for the United States and United Kingdom. And did Japan ever really get out of trouble? China is toast for the intermediate term and so are the rest of the BRIC emerging markets.

Short-term, we are way oversold and due to find a bottom and bounce. Intermediate and longer term, it is time to get very defensive. I think Gold, the U.S. Dollar and short-term U.S. debt will continue to function as safe havens for the time being. Longer-term, the U.S. is in trouble and they will likely do the wrong thing - the deflation bogey man can quickly turn into the heavy to hyperinflation bogey man with one more major misstep. I like the U.S. Dollar around these levels for those that like to trade currencies, but I'll stick with physical Gold held outside the banking system and will sleep very well at night. Even if we do get another 2008-like correction in the Gold price (if you can't handle a 25% correction, you will be shaken off this secular Gold bull long before it is over), this would only provide another stellar buying opportunity. Physical Gold is an investment for me, not a trade.

The Dow broke its 2009 lows on a weekly closing basis when priced in Gold. This is a big deal and portends a further major loss of purchasing power for those remaining in common equities. Here's a log scale weekly chart of the Dow to Gold ratio (i.e. $INDU:$GOLD) over the past 5 years to show you what I mean:



The "real" bear market for the Dow Jones Industrial Average started in August of 2009 as the above chart shows, but the herd doesn't recognize the pernicious inflationary effects of trying to reflate that which cannot be reflated at this point in the cycle until it is too late. Much like the 1970s, attempting to keep the stock market afloat will require inflation to be high enough that the actual retail investor loss for a buy and hold strategy during the secular bear market of the 1970s in the U.S. was as great as the 1930s on an inflation-adjusted basis. We are facing a crisis that is at least an order of magnitude greater for the US this time around, so the amount of inflation that will be needed this time around to maintain some semblance of the illusion of prosperity makes a 5 digit Gold price a reasonable proposition if policy makers do the wrong/expected thing.

If you thought the last bear market in 2007-2009 was nasty, what happens when whole countries are going under instead of just big banks? The amount of paper that will have to be emitted to "fix" this problem is mind-boggling. If a massive and unprecedented policy response isn't forthcoming, a deflationary-type crash where the Dow may well go to less than 5,000 will be the outcome. I think the political and popular will will favor massive inflation as the only palatable policy response. That doesn't mean it will stop the cyclical global equity bear market that has begun, but it may mean that the 2009 lows will hold or be only slightly breached in some countries.

Specific trading recommendations are reserved for subscribers. My subscribers and I made a profit last week while most market participants lost a significant amount of money. If you're crazy enough to gamble in this environment, consider a one month trial subscription to my trading service - it's only $15 (for now). The focus of the service is on precious metals and precious metal stocks but other markets are analyzed and traded when the opportunities arise.