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).