Calling the Bottom in Precious Metals

Now that my subscribers and I are fully into bullish positions in the precious metals sector, I hope they won't mind me telling you that I called for the bottom in Gold stocks on Thursday morning (12/29). I believe the bottom is in for silver, Gold and their respective stocks, although the metals may need a re-test of the bottom while I think Gold or silver stocks (as sectors) will only make higher lows on any corrective action.

There are some major bells ringing in the sentiment department for the PM sector that should not be ignored. First up, a chart from Guy Lerner (link to article pasted onto the chart), which plots the Market Vane sentiment (i.e. percentage of bulls, bottom of chart) against the price plot of Gold:





Since this chart was published, according to Richard Russell via a blog post on King World News (I don't subscribe to Market Vane, so I'll take Sir Richard and King World News at their word), the number has dropped further down to 56%. As the chart above shows, major bottoms in Gold have been formed in the 50s range on this sentiment indicator. We are there.

Next up, a chart I created in Excel for the Rydex Precious Metals Mutual Fund using the net asset value of the fund, which measures the flow of money into and out of the fund. When the plot in the chart covering the last 5 years below is low, the herd is bearish (i.e. bullish from a contrarian perspective):





The persistent multi-month malaise in this sentiment indicator I think is indicative of the lethargy in the Gold stock bull camp. Gold stocks have sucked over the past year or so, let's be honest. "Gold up, Gold stocks down" is not the way to build enthusiasm among Gold stock investors, to be sure. But these sentiment indicators tell us that the time to be bullish on the precious metals sector is at hand.

Furthermore, Gold and silver have complete-looking corrections to me using both time and price. The late September swoon in the metals (Gold to low 1500s and silver to low 26 level in USD terms) was enough price damage, but the current re-test satisfies a time dimension that was needed to reset the sentiment in the sector. Now that we have re-tested the lows, all the experts have intelligent and coherent reasons for why the PM sector will continue to decline. I wish them well, but I am betting against them with everything I've got. I am now 100% long Gold stocks in my trading account and my physical metal stash has been improved by some timely holiday gifts of silver from Mrs. Claus.

And how about that COT report for silver? It was bullish last week and this week added a sliver of further bullishness to the picture. See prior post and here's the current COT report courtesy of Software North:





Meanwhile, the Dow to Gold ratio is stretched to the upside like it has been only a few times in the past decade (14 year log scale chart of $INDU:$GOLD follows), indicating a significant reversal has likely already begun this week:





The Gold stocks tend to rise when the Dow to Gold ratio is falling (outside of meltdowns/crashes like in 2008) and who hasn't seen a chart of the Gold stocks to Gold ratio telling us that Gold stocks are cheap on a relative basis (12 year log scale chart of Philadelphia Gold and Silver Mining Index to Gold price ratio [$XAU:$GOLD]):





While others are bearish on Gold, silver and Gold and silver stocks, I am staunchly bullish here. And please keep in mind that I have been bearish on Gold stocks since August. See my late August post that elicited hate-type email from Gold stock bulls. And now that we reached the low 20s in the GDXJ ETF as predicted in late August, I am very bullish on the GDXJ ETF and all Gold stock indices.

In my subscription service, I send out weekly updates as well as interim updates when indicated and email trading alerts when I think it is time to pull the trigger on a trade. Here is the interim update I sent out to subscribers Wednesday night (12/28/11), which was followed up by an email trading alert Thursday morning advising subscribers to buy Gold stocks (as well as metal, although I think the metal stocks will outperform this cycle):


Gold Versus Paper December 28 2011 - Interim Update


Only time will tell if my call for the bottom Thursday morning was right. If you are interested in analysis like this consider giving my low-cost subscription service a try. I am a secular permabull when it comes to Gold, but I am pragmatic in my paper trading account and will go long or short any sector (including shorting the PM sector) if I think there is opportunity there. Right now, the opportunity is in the precious metals sector from the long side and I think my subscribers and I are going to make lots of money to start 2012.

Seriously Silver

The latest COT report on silver is sure to be the talk of the town among precious metals bulls. It is, in short, amazingly bullish. Without any further rambling, here is the latest COT report for silver courtesy of Software North:





To see the commercials at 42% bullish on silver is mind blowing for those silver bulls that follow these reports. To put the current set-up in perspective, here's a 4 year chart of the weekly COT data in a different format, courtesy of timingcharts.com:





What does this set up mean? Well, it means you should be buying silver! Specific trading recommendations reserved for subscribers.

Chinese and Indian Tails Wagging the Global Equity Dog?

There is no significant decoupling in our current global economy. As I am typing this, the Chinese stock market (Shanghai Index or $SSEC) is making new lows (intraday basis) for the current decline it has been undergoing. Is the Chinese market signaling what comes next for developed stock markets like the US and Germany? Is the tail predicting what the dog will do? I think it is.

Here's a 2.5 year daily chart of the $SSEC with a daily plot of the S&P 500 ($SPX) below the $SSEC plot thru today's US market close:





I think another decent decline is imminent in "advanced" economy stock markets that haven't already experienced it. Japan is already in the midst and another BRIC economy market, that of India, looks very weak here. Here's a 6 month daily chart of the $BSE Bombay Index thru the close on 12-21-2011:





The Volatility Index ($VIX) is also screaming for equity bears to come out of hibernation. Here's a 6.5 year daily chart of the $VIX thru today's close:





Meanwhile, the "Gold versus paper" ratio is settling in and trying to find a bottom here. There is now an ETF that allows traders to bet on this ratio, a double leveraged ETF with ticker FSG. It represents a double-leveraged way to bet that the Gold to S&P 500 ratio (i.e. $Gold:$SPX) is going to go higher. Here is a 6.5 year daily log scale chart of this ratio thru today's close, using the GLD:$SPX ratio as a proxy:





Of course, the easiest way to play the "Gold versus paper" trade, which is the secular trade of the past decade (and it is not close to ending), is to buy physical Gold and avoid paper financial assets like stocks altogether. For those who like to trade with a portion of their capital, however, we are very close to the re-entry point for this ratio trade in my opinion.

Until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle), Gold will continue to outperform paper. It's really that simple. The twists and turns give commentators like me a chance to hear ourselves talk and traders a chance to try to juice the gains of a "buy and hold" strategy, but they are simply noise for conservative investors who understand the current secular trend. If you are crazy enough to try and trade in this environment, consider giving my low-cost subscription service a try. My subscribers and I have recently been and are still short emerging markets and are waiting for a good entry point to go long Gold stocks as our next trade.

Lower Lows For More Important Items

As someone in the USA who tends to read more US-centric commentary, I continue to see analysts look almost exclusively at the US markets. Because US stock markets have been relatively strong recently, a frequently read conclusion is that the US economy is holding up well and terms like "de-coupling" are making their way back into the financial lingo. This is a ridiculous concept in the current global economy, but people want to believe good times are just ahead just like when "green shoots" and "goldilocks" were bandied about in prior cycles.

The US is not decoupling, it is lagging. Just as emerging (and other) markets topped later than the USA in the 2007-2009 bear market, so the US is the laggard this time. It doesn't mean the USA will avoid the pain or another nasty bear market (one has already begun in my opinion, but the "slope of hope" is alive and well). I am continuing to document the signs of this bear market for those interested in preserving their wealth through what promises to be turbulent times, indeed.

I previously pointed out markets making lower lows below their October lows in a previous post. Continuing along that theme are some very important additions to the list. First up, China, using the Shanghai Index ($SSEC). Here's a 6 month daily chart thru today's close:





Next up, India ($BSE):





For commodity bulls, are you paying attention to the CCI Commodity Index ($CCI), which is more balanced and less oil-weighted than the $CRB Index?





Here are the so-called BRIC nation returns since their cyclical bull market peaks thru today's close:

Brazil: Down 21.6% since Nov. 2010 peak
Russia: Down 36.5% since April 2011 peak
India: Down 24.6% since Nov. 2010 peak
China: Down 34% since Aug. 2009 peak

The engine of global growth has been gummed up with bad debtor paper and declining demand. The global recession has already begun and the exact timing of each market making its biggest declines is the only game worth playing in my opinion. Meanwhile, the precious metals (PM) and PM stocks continue to decline. A very important buying opportunity is approaching in my opinion in the PM sector, but I don't think we're there yet.

My subscribers and I are currently short emerging markets while waiting to go long in the PM sector. If you're crazy enough to try trading in these markets, consider my low cost subscription service. Otherwise, just keep buying physical Gold on price dips and sleep well at night knowing you own the world's oldest and most reliable currency.

Gold - The Simple Secular Thesis

It's more subtle and sophisticated than "buy Gold and get rich." But in the end, not much. Traders and speculators are always looking for the edge - much like the hares racing the tortoise. But the tortoise method of investing for this secular cycle is important and should comprise a significant portion of one's portfolio regardless of your preferred time horizon when investing and/or speculating/trading. After all, when MF Global can happen in one of the so-called safe haven countries (i.e. the USA), then isn't a component of safety without counter party risk important? Holding paper fiat currency and stuffing it under the mattress requires infinite faith that the apparatchiks and central bankstaz pulling the strings will not fall into the trap of human nature that has plagued every currency, including those backed by Gold, since currencies were first invented. I am speaking of debasement and debauchery.

And understand that currency under the mattress and certificates of confiscation (i.e. government bonds) may outperform equities and real estate as general investment sectors over the remainder of the cycle. I am not sure and I don't care, as this is a game I am not willing to play with my hard-earned capital.

The bottom line is this: the charts and secular trends scream that we are in a secular private sector credit contraction, also known as a depression in impolite company. For uttering the word "depression" is an admission of failure and we all know that confidence must be maintained, regardless of reality. Close your eyes, stamp your feet and repeat after the apparatchik: "Remain calm. All is well."

Here is the skinny on the secular trend for at least the next few years and potentially a decade or more: it's actually pretty easy. Hard assets, using general commodities as a proxy, have been and will continue to outperform financial assets such as common stocks, corporate bonds and real estate (individual specific opportunities and travesties aside, as I am speaking in broad sector-type terms). Additionally, Gold will continue to outperform general commodities and will continue to rise relative to all major paper currencies (i.e. outperform paper cash, as "hard" cash is preferred to paper promises in our current secular environment).

Don't believe me? Look at the charts! First up, the ratio of commodities, using the CCI Commodities Index (i.e. $CCI, which is more balanced than the oil-heavy CRB Index) relative to the Global Dow Jones Stock Index (i.e. $DJW, a less-than-perfect proxy for global equities). Here is a 20 year monthly chart of the $CCI:$DJW thru today's close:






Next up, the Gold ($GOLD) to commodities ratio chart (i.e. $GOLD:$CCI) over the same period of time using the same monthly log-scale format thru today's close:






That's it. The only subtlety comes in because of the issue of "nominal" versus "relative" return. In other words, if Gold goes to $700 US/oz from here and general commodities and the global stock market indices go to zero or near zero, you may show a "loss" on paper, but will gain immensely in relative wealth and won't have to pay capital gains tax. This is the scenario Robert Prechter of Elliott Wave fame envisions. In this scenario, just hold paper US cash and do better than everyone else. I think Gold is the perfect hedge, as it has already proven that it can hold its value this cycle even in severe deflation. Remember 2008? Everyone talks about how Gold dropped from $1000 US/oz down to $700/oz but they always fail to mention that by February of 2009 Gold was back at $1000/oz while the stock market continued to fall! In other words, Gold was flat, just like US Dollar cash was flat. To say that the US Dollar index rose more than Gold is only relevant to traders playing in the currency markets. Holding paper cash and physical Gold netted the exact same return during the worst deflationary wave of this generation: 0%.

And then what happened after the dust settled in March of 2009? Did physical Gold double in value or did paper cash under the mattress? 'Nuff said. Those who say 2008 can't happen again are wrong, but they usually miss the point. Gold hedges against this outcome while providing upside potential if a repeat of 2008 doesn't occur, while paper US Dollars hedge against a repeat 2008 outcome with no upside potential on the other side of the deflationary wave and further loss of purchasing power if 2008 doesn't repeat. Paperbugs, wake up!

Bottom line: ask the Greek people. Their stock market ($ATG) is now down about 90% from the 2000 peak, which is slightly worse than the 89% loss in the Dow Jones from 1929-1932. A deflationary-type stock market collapse by any reasonable standard applied. Did people in Greece earn a better return holding paper Euro notes or paper US Dollars (or short-term government debt denominated in these currencies) since 2000 or better holding Gold? Again, 'nuff said.

Gold stocks are a hybrid. Gold they are not, despite what bulls say (and what I used to believe before I took the time to investigate the actual facts market history provides for those interested). Gold plus counter party, business and political risk is not the same as unencumbered physical Gold held outside the banking system However, the potential speculative gains in Gold stocks are significant. This is one of the areas I focus on in my subscription service. Once a core position of physical metal is secured, then speculation with a portion of one's capital may be appropriate for those seeking higher returns.

So, knowing these secular trends have existed is one thing, but when will they end? Well, the usual sign posts are not archaic relics to be laughed at and degraded as CNBC likes to do. When the dividend yield on general common stocks reaches greater than 6% on average, then perhaps it will be time to start looking to trade some metal for some paper. And when my favorite secular ratio, the Dow to Gold ratio, hits 2 (and we may well go below 1 this cycle) then it may be time to start trading Gold for paper.

Until then, I'll stick with the secular theme that has worked wonders so far. History is repeating right in front of our eyes. This time won't be any different. My advice is to buy physical Gold, hold it outside the banking system, and enjoy the fireworks with your wealth intact (and likely increased) and your purchasing power enhanced.

For those crazy enough to speculate in this environment, consider my low cost subscription service. My subscribers and I are currently short emerging markets and waiting for a bottom in the precious metals sector to start speculating in Gold stocks from the bull side.