Contrarian Gold Stocks

Successful investing requires buying low before later selling high.  And stock prices are the lowest when they are the most deeply out of favor.  That perfectly describes gold miners’ stocks these days, this sector is loathed and despised after a horrendous year so far.  But these battered stocks are now offering epic buying opportunities for contrarians who have steeled themselves to be brave when others are afraid.

Our subscribers have made fortunes trading gold stocks over the past decade.  Between November 2000 and September 2011, the flagship HUI gold-stock index rocketed up an astounding 1664%!  This dwarfed gold’s 603% gain over that same span, and the general stock markets as represented by the mighty S&P 500 actually lost 14%! Gold stocks were almost certainly the past decade’s best-performing sector.

Though their secular bull has truly been glorious, it’s been far from an easy ride.  The gold miners have always been a very volatile sector, with massive swings that can persist longer than anyone expects.  I’ve seen them loved near major highs and loathed near major lows.  But the visceral antipathy towards them these days is something special.  It’s the worst I’ve ever seen, even exceeding that in 2008’s stock panic.

Contrary Gold Futures

Futures speculators are extraordinarily bearish on gold today.  Their short positions on it are extreme and unprecedented, the highest seen by far in gold’s entire dozen-year secular bull.  They expect downside gold momentum to persist indefinitely.  But despite their reputation for sophistication, futures speculators are notorious for betting wrong at extremes.  Their bearishness is a very bullish contrarian omen for gold.

Given gold’s horrendous 2013 so far, you really can’t blame futures speculators for being so pessimistic on it.  Down 16.2% year-to-date, gold has never suffered a worse calendar-year start in its secular bull.  American stock traders spawned a fierce gold headwind that global buyers couldn’t overcome.  To help raise cash to plow into the euphoric, levitating stock markets, they aggressively dumped gold ETF shares.

The epic differential selling pressure on the flagship GLD gold ETF forced it to sell massive quantities of gold bullion to keep tracking its underlying metal.  Despite the lower gold prices sparking enormous physical demand, particularly out of Asia, the wildly unprecedented deluge of ETF gold overwhelmed all buying.  As gold was pushed lower and lower, it ignited a vicious circle that slaughtered futures traders.

Futures are very different from any other market, they are a hyper-leveraged zero-sum game.  Leading into mid-April’s unheard-of gold panic, American futures speculators could control 100 ounces of gold worth $156k for just over $5k.  Their maximum leverage was an insanely-risky 29 to 1, radically beyond the decades-old limit in stock markets of 2 to 1.  Just a 3.5% move against them would totally wipe them out!

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Weekly Market Update Excerpt

June 7, 2013

Morris Hubbartt

Jun 4, 2013

1. The gold bears may have gotten themselves into a bit of hot water.  Please click here now.  Double-click to enlarge.
2. That’s the daily chart for DUST-NYSE, which is a triple-leveraged bet against gold stocks.  There’s a massive double top pattern in play now, featuring an important RSI non-confirmation.  The technical target of that top formation is $30.
3. Please click here now.  Double-click to enlarge.  That’s the weekly DUST chart, which portrays the big picture.  It looks like a technical “train wreck”; almost every technical indicator and oscillator on this chart is flashing a substantial sell signal.
4. The meltdown on the DUST charts should be good news for gold stock investors, and I think it is.  Please click here now.  Double-click to enlarge.

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Weekly Market Update Excerpt

May 24, 2013

Morris Hubbartt

SLV Bullish Divergence

Silver has suffered horrendously in 2013’s opening months, plunging dramatically to miserable lows.  This exceptional weakness has naturally kindled extreme bearishness.  Predictions abound for silver to continue selling off indefinitely.  But amidst this severe carnage, the silver bullion held by the flagship silver ETF has remained flat.  This is an extraordinary bullish divergence in the face of rotten sentiment.

Silver is almost certainly the most volatile of the world’s more-popular markets.  When silver starts moving, it often moves fast.  Fortunes are won and lost in a matter of months, a very exciting or terrifying prospect depending on which side of the trade you are on.  The key to silver’s price action has always been gold.  Silver follows gold, usually dramatically leveraging the yellow metal’s fortunes.  Silver is a gold play.

Over the past decade I’ve sometimes teased silver’s hardcore enthusiasts, calling the white metal “gold’s little lapdog”.  While flippant, technically this is absolutely true.  Silver’s current secular bull was born near $4 way back in November 2001, a whopping 11.5 years ago.  Ever since, its daily price action has had a correlation r-square with gold of an astounding 92.7%!  That is just off-the-charts high statistically.

Over the entire 2,895 trading days of silver’s secular bull, nearly 93% of all its daily price action is directly statistically explainable by gold’s own!  Gold’s fortunes are the only thing that matter for trading silver, its commanding driver.  Silver is so exciting because it leverages gold’s moves.  When gold rallies, silver amplifies its gains.  When gold falls, silver magnifies its losses.  Gold paves the way for silver to move.

So silver’s miserable year is a direct consequence of gold’s miserable year.  The only reason the white metal has plummeted 26.4% year-to-date is the yellow metal has plunged 18.3%.  Silver simply can’t buck such a hurricane-force gold headwind.  The speculators who fuel silver’s big price moves are not willing to buy when gold is weak.  Falling gold crushes silver psychology, leaving those traders quick to sell.

SPX Topping Extremes

The levitating stock markets continue to seductively entrance traders, powering to new nominal record highs day after day after day.  No one believes a meaningful selloff is even possible anymore, thanks to the vast deluge of central-bank monetary inflation.  Sheer euphoria has set in as all perception of risk has vanished.  This makes these stock markets extraordinarily dangerous, they are truly at topping extremes.

As of Wednesday, the flagship S&P 500 stock index (SPX) had rallied to new nominal record highs in 11 of the past 13 trading days.  It blasted 4.8% higher over this short span.  If sustained for an entire year, this blistering rate of ascent would nearly double the stock markets!  This latest euphoric surge extended the cyclical stock bull that was born way back in March 2009 to a massive 145.2% gain over 50.2 months.

This move, particularly the one-sided 22.6% melt-up in the last 6 months, has bred unmistakable euphoria.  Wall Street vehemently tries to deny this truth, but the definition of euphoria is “a feeling of great happiness or well-being, a feeling of great elation”.  Does that not describe the outlook for the stock markets today?  There are no bears left, everyone is incredibly bullish and expects no material selloffs.

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Weekly Market Update Excerpt

May 17, 2013

Morris Hubbartt 

Super Force Signals

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Weekly Market Update Excerpt

May 10, 2013

Morris Hubbartt

SPX Topping Valuations

As the US stock markets keep on levitating, the bulls continue to rationalize this inexplicable melt-up by claiming stocks are still cheap.  They use this as a justification to buy high.  But is this true?  Not by a long shot!  Today the US stock markets are just as expensive in classic valuation terms as they were back in late 2007 when the last cyclical bull topped.  That led to a brutal cyclical bear, the same risk faced today.

When investors talk about stocks being cheap or expensive, they are referring to valuations.  This concept reveals how any individual company’s stock price compares to its underlying earnings or dividends.  Since the only way to multiply capital in the stock markets is to buy low and sell high, prudent investors want to pay as little as possible in stock price for each dollar of profits.  So they carefully watch valuations.

The most common and most important valuation measure by far is the classic price-to-earnings ratio.  It is as simple as it sounds.  It takes any stock price and divides it by that company’s annual earnings per share.  The resulting P/E ratio shows how expensive that company’s underlying profits are.  A P/E ratio of 20x, for example, indicates that each $1 in annual profits costs investors $20 in stock price to purchase.

Margin debt and the next stock market crash

The latest fear on Wall Street is that record levels of margin debt may end up toppling the stock market rally.

NYSE margin debt recently reached its highest level since 2007 before the last major stock market peak and credit crash.  Stephen Suttmeier, technical research analyst at Bank of America, noted that margin debt, rose 28% in March from a year ago to $380 billion. That figure is slightly below the July 2007 peak of $381 billion, although analysts speculate that April’s margin debt totals (which haven’t yet been released) have already surpassed this mark.

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We Take Every Trade Ourselves!

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Weekly Market Update Excerpt

May 3, 2013

Morris Hubbartt

Gold-Mining Margins 3

Gold mining is a very tough business.  Not only is it highly capital-intensive and chock-full of environmental risks, its revenues are entirely at the mercy of a volatile commodity.  It requires some serious mettle to succeed mining gold.

But despite super-high barriers to entry and the countless risk factors that come with mining, the world needs gold, and somebody’s got to produce it.  And believe it or not, a lot of money can be made in this business.

At a high level gold mining is like any other business.  Produce your product at costs less than what you sell it for, and you ought to prosper.  And the wider that spread, the more you prosper.  But unlike most other business, the “what you sell it for” is an uncontrollable variable that can violently move in either direction.

For gold miners the dangling carrot is a rising gold price.  And naturally the best of times ought to occur over the course of a bull market for the metal.  Gold has of course been party to one heck of a bull run over the last decade or so, with its price soaring by a staggering 638% from its 2001 low to 2011 high.  Given this kind of gain, many gold miners have easily chomped that carrot on the way to big gains of their own.

How the Fed creates bull and bear markets

Bull and bear markets don’t just happen – they’re created by the Federal Reserve.  While few investors dispute the power that Fed interest rate policy has on the market, the extent to which it influences the direction of stock prices in both directions is often downplayed.  Moreover, the health of the economy is often decided by the Fed’s interest rate policy.

While it’s no secret that loose monetary policy on the Fed’s part benefits stocks and can lead to credit bubbles, researchers tend to underestimate the effect tight money policy has in creating market crashes and economic recessions.  Restrictive money policy on the Fed’s part has frequently led to falling stock prices.  The extent and duration of the monetary tightness is what determines the severity of the bear market.  The longer the Fed restricts money, the more severe the downturn will be.

Consider the bear market of 1973-74.  The Dow Jones Industrial Average experienced a decline of 40 percent, which at the time was the worst bear market since the Great Depression.  The Dow peaked in early 1973 at an all-time high of 1150 before commencing a Chinese water torture type decline for the next two years.  The decline was precipitated by tight money on the part of the Fed, which began raising interest rates in early 1972.

Apr 30, 2013

1. Recently, many bullish gold analysts have started questioning their own theory that money printing causes inflation.
2. Commodity prices have fallen, despite accelerated QE.  I would argue that money printing does cause inflation, but only if what is printed overwhelms the assets that are destroyed, in global markets.
3. The Fed continues to buy billions of dollars of illiquid and arguably-worthless OTC derivatives each month, with printed money.  If the Fed printed more money than what is required to purchase those assets, inflation would likely be much higher than what it is now.  So far, that’s not happening. 
   
4. Quantitative easing is not the same thing as just printing money and pushing it into the banking system.
5. The inventory of marked-to-model OTC derivatives held by commercial banks is gigantic, so it could be many years before serious “cost push” inflation envelops America.
6. The Fed believes in a business cycle that lasts for about 8 years.  The last cycle probably ended in 2007, which means that the current upswing could continue to about 2015.
7. From 2015 onwards, the Fed is likely to become much more dovish than they already are, in an attempt to counter a likely downturn in the business cycle.
8. The actions of global central banks, in the 2015-2022 timeframe, are likely to usher in cost push inflation.  Clearly, investing in gold requires lots of patience!
9. Please click here now.  You are looking at my monthly “big picture” HUI chart.  I’ve lighted the price zones where gold offers value with blue HSR (horizontal support & resistance) lines.
10. Also, note the action of the Stochastics indicator.  I call this situation, “Close, but no cigar!” A crossover buy signal for long term investors has not yet been generated, but it’s very close.
11. Many bank economists and technical analysts are stating that the current gold rally will fail, and gold will break the lows near $1320.  It’s hard to know how such a decline would affect gold stocks, but I doubt it would be a positive experience for investors.
12. Put options are like fire insurance; nobody likes to pay the premiums, but if there is a really serious fire, you’ll be glad you bought them.
13. If you are afraid that gold could fall and break the $1320 area lows, you may want to consider looking into this type of insurance policy, for your portfolio.
14. Cash is another form of insurance.  The gold market is probably many years away from offering a “back up the truck” type of market to investors.
15. I wouldn’t be overly concerned about drawdowns (gold is a high quality asset), but some cash should be kept on hand, so you can buy more gold if it goes surprisingly lower.
16. In the short term, gold stocks are grinding higher, but volume is a big concern.  Please click here now.  That’s the GDX daily chart.  Some technical analysts see a bearish flag pattern in play.
17. On up days, volume has been stronger than on down days, but the overall pattern is one of declining volume, and that’s bearish.
18. My “stokeillator” is highlighted at the bottom of the chart. It suggests that even if gold stocks are “doomed” to make fresh lows, the rally could continue further.
19. Please click here now.  This chart provides a closer look at GDX, using 2 hour bars.
20. Note the top of the price gap at about $32.  If you were able to buy some stock at lower prices, I would book some profit at $31.90, $33.50, and $35.25.
21. Many physical metal enthusiasts have noted the enormous surge in demand in Asia and at mints around the world, but most bank analysts are projecting lower prices.
22. I think gold needs to consistently trade above $1500 to put some real fear into the bears.  So far, that hasn’t happened.
23. From the $1590 area highs, gold fell about $270, to the $1320 zone.  It’s retraced about 60% of that decline now, and Fibonacci traders are probably quite aggressive sellers in the $1480-$1500 area.  I suggest very light selling now, and more between $1500 and $1550, if we get there.
24. Gold probably can get over $1500 on this move, but only if both the FOMC meet and Friday’s job reports provide more bullish fuel to the “golden race car”!
    

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Weekly Market Update Excerpt

April 26, 2013

Morris Hubbartt

Gold-Stock Panic Levels

Gold stocks have to be the most despised sector in all the markets.  Mainstreamers barely even know they exist, while even the vast majority of so-called contrarians scorn them.  The sheer contempt for this sector is amazing considering gold stocks were almost certainly the best-performing sector of the past decade.  This universal antipathy has driven them to panic levels, by far the markets’ best fundamental bargains.

Gold stocks weren’t always held in derision.  From November 2000 to September 2011, the flagship gold-stock index known by its symbol HUI catapulted an astounding 1664.4% higher!  This was over a very long 10.8-year secular-bear span where the broad stock markets as measured by the mighty S&P 500 fell 14.2%.  After multiplying their investors’ wealth by 18x, they should have been the most-popular sector.

But Wall Street has always hated gold, so there has never been adequate or fair coverage of the secular gold bull or the resulting secular gold-stock bull.  When gold stocks are strong, they are ignored.  CNBC might spend a few minutes a day on them even if their gains trounce every other sector’s.  And when they are weak, they are mocked.  What kind of fools would want to grow their capital 18x in a secular stock bear?

That ride was far from easy, let me tell you.  We’ve been trading great gold stocks and silver stocks, and recommending them to our subscribers, for this entire secular gold-stock bull.  It’s always taken hardened contrarians to weather this sector’s intense volatility.  Like everything else, gold stocks don’t move in a straight line.  There were plenty of incredibly painful sharp plunges and big corrections along the way.