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?).
Adam Brochert
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!
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