Oct 30

Like, Doh! Gold Miners Aren’t Gold

Gold Price Comments Off on Like, Doh! Gold Miners Aren’t Gold
But it bears repeating for investors wondering if the mining-stock rout is a “buy”…
 

WEDNESDAY was a serious gut check for investors in the mining sector, writes David Nadig at Hard Assets Investor, in a story first published at ETF.com.
 
Is there a knife to catch?
 
There are charts and there are charts. But there’s no way to parse this one as anything but ugly:
 
 
I’m not a big believer in technical analysis, but I know an awful lot of traders are, which means a lot of folks are looking at the line for Market Vectors Gold Miners ETF (NYSEArca:GDX) and seeing it plow through its resistance, with nothing to support it but “air” here.
 
So what are the lessons to learn here?
 
Gold miner stocks are volatile
It doesn’t take math to look at the difference between the lines on this chart and pick out the craziest one. I picked GDX as one of my ETFs to rally in 2014, and while that was still a solid call until a few days ago, it’s now looking pretty darn terrible. On a year-to-date basis, GDX is down just over 7%. Just this August, GDX was up more than 30% on the year.
 
Gold miners are still companies
Yes, there’s a significant correlation between the price of gold and the performance of gold miners. Consider this graph of the monthly correlations between GDX and the SPDR Gold Trust (NYSEArca:GLD)…
 
 
Certainly, more often than not, GDX and GLD will move in the same direction, but that relationship breaks down all the time, and it breaks down very, very quickly when it does. And because GDX is made up of companies run by human beings, there are far more things at work than just the price of gold.
 
Which brings me to…
 
Equities are ultimately about earnings
If you look at the holdings of GDX, you find, as you might expect, significant winners and losers. Detour Gold Corp., a relatively small Canadian miner, is about to turn profitable for the first time, and is up almost 100 percent on the year. That’s helping offset once-profitable Coeur Mining, which is down more than 61% on the year on rapidly declining revenues.
 
See the picture there? Gold miners, perhaps more than any small niche I can think of, are a collection of wild fortune-telling cards. That’s part of the allure of gold miners – that one might “hit it big” and all of a sudden have vastly more gold, or higher production than you might expect. Unfortunately, it cuts both ways.
 
Gold is about currency
The last point, which I think many folks forget, is that gold is a weak-Dollar play. Any time you trade in your Dollars to hold something, you’re effectively saying, “I’m shorting the Dollar to buy X.” Gold in particular lives in an odd crux between currency and commodity. But since it’s priced in Dollars, you should expect that, all else being equal, a strong Dollar means you can buy more gold per Dollar; that is, the price of gold should go down as the Dollar gets stronger.
 
This chart tracks the price of gold (XAU) relative to the U.S. Dollar Index (DXY):
 
 
It’s hardly a perfect relationship, but it’s safe to say that it’s very hard for gold to rally at the same time the Dollar is rallying. It’s the same pressure we have on oil prices, and frankly all commodities at the moment.
 
Fishing for value?
I am quite sure that there will be plenty of ETF investors who see a few terrible days in a solid ETF like GDX and are tempted to pull the trigger.
 
My only concern would simply be this: If you head to the Van Eck website and look at GDX, you see a reported price-earnings ratio for the stocks in the portfolio of 18.54. That makes it look like plain-vanilla large-cap equities – after all, the S&P 500 has a P/E right now of about 18.6.
 
But that belies the fact that a huge portion of GDX holdings are actually losing money. From companies like Newcrest Mining (5 percent of the portfolio) to Royal Gold (4 percent) to little Silver Standard Resources (0.35 percent), all those losses add up, making the true P/E – not magically forgiving the losses – negative 12. Far from value, gold miners are looking like a wildly speculative bet at the moment.
 
So just be careful when you’re reading those fact sheets on your value hunt.
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Oct 29

Don’t Get Bullish on Gold Below $1350

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This month’s “triple bottom” is not, repeat NOT, confirmed says this technical analyst…
 

WAYNE KAUFMAN is chief market analyst at Phoenix Financial in New York.
 
Regularly quoted in the media and interviewed on Fox, CNBC and the BBC, Kaufman produces a daily report for Phoenix, is a member of the Market Technicians Association, and has taught level 3 of the MTA’s three-level online course for Chartered Market Technician candidates.
 
Here Kaufman speaks to Mike Norman on behalf of Hard Assets Investor about how he sees the big picture right now…
 
Hard Assets Investor: We’ve seen some crazy gyrations in gold, in the Dollar, in oil, even in stocks. Summarize how it looks to you.
 
Wayne Kaufman: In terms of US equities, we’ve been watching a deterioration of underlying market breadth, that hasn’t shown up, or had not shown up in the major indexes until the last couple of weeks. But for the last three or four months, we’ve been watching small-caps get decimated. And then the midcaps followed. And then the large-caps, S&P 500, had a peak recently. But the breadth was terrible.
 
And now the stocks have rolled over. It’s to the point where you’ve only got about 18% of S&P 1500 stocks over their own 50-day moving average, less than one in five. About one in three are still over their 200-day moving average. So that underlying deterioration came through and pulled down the majors.
 
HAI: Now with small stocks weak like that, wouldn’t that suggest general economic weakness, or at least a tipoff to that effect, that we’re seeing basically small, medium-sized businesses not doing very well?
 
Kaufman: Definitely. You’re right. You’re talking about changes taking place. The question in the mind of investors right now is, we’re seeing the weakness in China, in Europe, in Germany suddenly rolling over. You’ve got the price of oil. It’s all of these things that are turning dramatically. Is this a long-term trend change? Or is this just going to be short term? Is it just typical October stuff, in the case of equities? That’s what we’re going to find out over the next few weeks.
 
HAI: But is there really a downside, when people know the central banks are going to be there, push comes to shove?
 
Kaufman: There, at a point, is only going to be so much that the central banks can do. I was recently asked by a news outlet to give my projections for the S&P, and my reasoning. My No. 1 reason for being bullish is central banks around the world will do everything possible to prevent a global recession. Are they really able to do much more? We know they’ll try. Are they going to wait too long before they do? How effective can they be?
 
HAI: Last time you were here, you were negative on gold. And that play worked out pretty well. How do you see things panning out from this point?
 
Kaufman: I see short-term, over-sold and over-bearish sentiment. So a bounce is definitely in the cards, especially if there’s some short covering by people who are short the futures. But when I was here last time, I said I couldn’t get bullish unless gold broke $1400 or so. Now that number is a little lower.
 
HAI: Where is it?
 
Kaufman: $1300. I need to see $1350 at least, because you do have a potential triple bottom. A lot of people say, “Oh, triple bottom.” It’s a potential triple bottom that doesn’t get confirmed until you break unimportant resistance. Unless we can get above $1350, I’m not going to start thinking about getting bullish, except for oversold, over-bearish bounces.
 
HAI: We had a guest recently talking about the death of gold. Reminds me of the death of equities back on the infamous 1979 Business Weekcover. What do you make of that?
 
Kaufman: I agree. That’s why I’m saying I could see a bounce here, because it’s oversold, and it’s over-pessimistic. Levels of pessimism are extreme. And when you see that, that’s a good time to take the other side of that trade. The question is, how much staying power? You’re talking about commodities going down. The Dollar has been strong, which is a little too much bullishness in the Dollar. That certainly can be capped here.
 
But oil is just amazing. For years, you always said that the Saudis controlled the price of oil. You were 100% right. Because they’re the only country that really has significant excess capacity. Right now, are the Saudis purposely trying to drive the price of oil down, so that they can try and put a cap on fracking and energy exploration and production here in the States?
 
HAI: The shale guys, the shale producers.
 
Kaufman: Potentially an amazing tactical war going on between the Saudis and the US, in terms of oil production.
 
HAI: I saw an example of that back in the ’80s, when I was an oil trader on the floor of this very exchange, when they crashed the price down. That was a message sent to the non-Opec producers, the North Sea guys in particular. So I think you’re absolutely right. 
 
You mentioned the Dollar. That was a surprise to most people, because we had this narrative, for a long time, about money printing, and central banks, and quantitative easing, and hyperinflation and the Fed doing all this. Yet, look at the Dollar.
 
Kaufman: I don’t want to seem like I’m complimenting you because you’re the host, but you said this a long time ago.
 
HAI: Don’t hold back…
 
Kaufman: You said a long time ago, all the inflation guys, that they were wrong, they were going to be wrong. You were 100% right. So it was a big surprise. Now, as a technician, I called the Dollar going up at a point when I saw it giving me buy signals. I don’t do it the intuitive or the economist way. It’s extremely overbought. And it’s extremely over-bullish. It has been taking a pause. I think it’ll continue to pause here. It’s just too many people on that side of the trade at this point.
 
HAI: We heard comments recently from New York Fed President William Dudley, to the effect that a Dollar that’s too strong might hinder our ability to achieve our goals. Hint, hint, a little bit of code words there…
 
Kaufman: You’re right. But the problem they have is that the strong Dollar is going to hurt exports, obviously. But you’ve got S&P 500 companies due in the neighborhood of 40% of revenues, 50% of profits overseas. So, whether it’s from the strong Dollar or just because the economies overseas are very weak right now, no matter how you go on that, it’s going to be a problem. And the world economy needs to clear up. We’re not an island unto ourselves; it will affect us. And I think that’s what equities are starting to show.
 
HAI: Good points. Wayne, always great to have you here. Thanks very much.
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Oct 28

"Peak Gold" Here to Stay

Gold Price Comments Off on "Peak Gold" Here to Stay
But that won’t deflect a possible dip to $1000 per ounce first, says this leading German newsletter analyst…
 

OLIVER GROSS is a passionate resource expert, prudent investor and adviser with more than 10 years of experience in the mining and junior sector.
 
Chief editor and analyst of the newsletter Der Rohstoff-Anleger – which is published by Germany’s online GeVestor Financial groupm, and specializes in the global junior resource sector – Gross here tells The Gold Report why gold prices could get washed down to $1000 per ounce before the fundamental fact of “peak gold” drives a new bull market…
 
The Gold Report: Earlier this month, the broader equities markets suffered huge losses as gold made significant gains. Then, after the broader markets recovered, gold fell. Is there now an inverse relationship between the health of the broader markets and the price of gold?
 
Oliver Gross: This kind of inverse relationship between gold and the broader equity markets isn’t really new. It has been observed since fall 2011, when the price of gold peaked. Since then, gold has fallen more than 35%, while the S&P 500 has risen 70%.
 
The current situation resembles the early 2000s, when the broader equity markets were in the final phase of the dot-com bubble, while gold traded as low as $340 per ounce ($340 per ounce). Then, of course, the broader equities markets collapsed, while gold rose above $1900 per ounce.
 
TGR: Some analysts believe that the broader equities market is dangerously overvalued. To give one example, Netflix was recently trading at 144 times earnings. What do you think?
 
Oliver Gross: After a 5-year bull run leading to new all-time highs in the broader equity markets, there are many signs of bubble formations in the Internet, high-tech and biotechnology sectors. Again, this feels like the early 2000s. The extremely high price-to-earnings ratios in stocks such as Netflix indicate investor euphoria and huge amounts of speculative capital provided by the central banks.
 
It is shocking to compare valuations in the broader sectors of the equity markets to valuations in the precious metals space. 
 
TGR: How should investors react to this bubble?
 
Oliver Gross: Speaking for myself, as one who follows an anticyclical strategy, I like to invest when there is blood in the streets, and that is certainly what is happening with precious metal equities. Today, investors can buy gold and silver stocks at decade-low valuations and historically low bullion-to-equity valuations.
 
Nobody cares about precious metals equities today, but when the bubble in the broader markets bursts, we will see a massive shift in market sentiment and in the behavior of investors. That said, investors must stick to best-in-class stories and must demonstrate constancy and patience.
 
TGR: Could the collapse of the bubble lead to a crisis similar to that which occurred in 2007-2008?
 
Oliver Gross: Yes, the possibility of another Lehman Brothers event is there. When the largest and most influential players in the financial industry want to exit this market, we could see a 2008-like selloff very, very fast. I also think that it is only a matter of time before a further big player in our financial industry will go the same way as Lehman.
 
TGR: Geopolitical turmoil today is greater now than it has been for quite some time: Gaza, ISIS, Ukraine and now Ebola. Traditionally, this would have resulted in a significantly higher gold price, which has not happened. Is what we have seen this year an anomaly, or is the price of gold no longer affected by external events?
 
Oliver Gross: That is a question not easily answered. Traditionally, gold has been regarded as the ultimate crisis protection, so geopolitical turmoil usually resulted in a higher gold price. What has changed is the incredible power of the central banks. They have changed the rules of the game. This is a major financial experiment with no historical precedent. The combination of unlimited liquidity, historically low interest rates and historically high debt levels has, for the moment, mitigated geopolitical risk factors and guaranteed faith in the US Dollar as the world’s reserve currency.
 
Gold has fought incredible odds since fall 2011. It is the most hated asset class, the official enemy of the US Dollar reserve and our global monetary system. And so the biggest financial institutions have no interest in higher gold prices. They still control the gold futures and the paper-gold market, so it is easy for them to attack the gold price. But this can’t continue forever, and it’s just a matter of time before all the money created since 2008 will no longer simply inflate asset bubbles. Inflation will return, and gold will again respond positively to external crises.
 
TGR: Where do you see gold and silver prices going in the short term?
 
Oliver Gross: I see a 50% chance of a final panic selloff across the gold and silver space. In this scenario, gold could fall to $1000 per ounce, and silver could fall as low as $12 per ounce.
 
TGR: Wouldn’t such prices lead to widespread curtailment of bullion production?
 
Oliver Gross: The current all-in costs of gold producers are now above $1150 per ounce, even after massive cost reductions and a focus on higher-grade mining. Such expedients can have only a temporary effect. At a gold price of $1000 per ounce, there will be many shutdowns.
 
We need a gold price of at least $1400 per ounce to support sustainable production, and that number will rise, as early as 2015 or 2016. We have reached Peak Gold, and it’s here to stay. The highest-grade and most-profitable deposits are gone. The bear market in the gold mining space has been so long and painful that the major producers have their backs to the wall. 
Most discoveries of the last five years need a far higher gold price to be mined. In addition, many recent discoveries are located in jurisdictions with high country or environmental risks and lack infrastructure, resulting in multibillion-Dollar capital expenditures (capexes).
 
TGR: As a result of the factors you’ve mentioned, can we now expect a big increase in mergers and acquisitions (M&As)?
 
Oliver Gross: Not so much among the majors. Most of them have weak balance sheets and too many in-house projects to risk expensive and dilutive takeovers. 
 
TGR: What are the attributes possessed by those companies likely to be taken out?
 
Oliver Gross: When the influential players in the gold mining space think that the gold price bottom is in, and a new bull market is likely, M&A interest will grow big time. Such a consolidation could create a perfect storm for the strongest junior gold producers and quality gold developers with robust, competitive projects.
 
Specifically, takeover targets will have financeable mine capexes with a good relation to the discounted net present value (NPV) of their projects. They will be profitable with gold at $1100 per ounce, and at least break even at $1000 per ounce. Their projects will be in pro-mining jurisdictions with stable laws, the sustainable support of regional and local communities, and solid infrastructure.
 
TGR: What about management?
 
Oliver Gross: Takeover targets must have managements with strong track records, or, failing that, existing investment from the larger precious metals companies or previously successful strategic investors. And, of course, healthy financials. There are many evaluations to be made, and there aren’t any “no brainers” here. Due diligence and continuous research are critical. When you think you haven’t spotted any weaknesses, you’ve likely missed something.
 
TGR: You are now more bullish on uranium companies, correct?
 
Oliver Gross: Uranium prices have just enjoyed their first recovery in years. We may have seen the bottom here, so I think investors should put uranium stocks back on their watchlists. 
 
TGR: Finally, given that so many current investors in gold companies want out, does the M&A flurry you’ve suggested offer a special opportunity for contrarians?
 
Oliver Gross: Absolutely. Both specific and general valuations are among the lowest for the last 30 years, so this could be the most attractive environment for contrarian investors in a couple of generations.
 
TGR: Oliver, thank you for your time and your insights.
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Oct 19

I See Two Horsemen

Gold Price Comments Off on I See Two Horsemen
Patience needed, but the Dollar has been rising with the Gold/Silver Ratio…
 

The BLACK LINE is where we have been, writes Gary Tanashian in his Notes from the Rabbit Hole. The blue line is a projection of what a typical correction (whether a healthy interim one or a bear market kick off) might look like.
 
 
We used real charts of the Dow, S&P 500 and Nasdaq 100 to gauge the entry into the current correction and now the resistance points to the expected bounce off of the US market’s first healthy sentiment reset in quite some time. But our cartoon above gives you the favored plan on how the correction could play out.
 
Last week, the market bounced on what can only be viewed as a sad attempt by a Fed member (a perceived Hawk, no less) to jawbone a stop to the impulsive bearishness. The strength of the US Dollar and first decent correction since 2011 seems to have spooked the folks over at Policy Central and suddenly they are talking QE again. That does not inspire confidence, if you are a bull.
 
Be that as it may, we have been due for a bounce to clean out the over bearish and over sold conditions. We are making no claims to know whether or not this is a bear market kick-off because when the process is complete per the sketch above, a trade-worthy rally should materialize when a notable low is ground out.
 
An impulsive straight line drop, to support though it is in many cases (ref. the real charts of the Semiconductors and the Banks), and recovery on policy makers’ jawboning is not usually a path to sustained recovery.
 
NFTRH is managing a bounce (the first ‘up’ phase of the blue line above) until/unless it proves it is more than that. Traders should be nimble. If the projection proves out, a renewed decline into November could follow, which should come out of a good setup for bearishly inclined traders.
 
Moving on, volatility is back and while it seemed to come out of nowhere, it was easily readable in advance by steadily declining junk vs. quality bond yields spreads, declining index and sector participation rates and of course, the strong US Dollar (which is decidedly not on the favored agenda of asset-friendly policy makers), among several other indicators we tracked into and through the first part of the correction.
 
Per the scenario above, in the likely event a bottom has not yet been registered, one will eventually be ground out and it should be good for a trade at least. Personally, I have positioned for a bounce right here but that is not recommended for anyone who is not willing to trade on a dime, in-day and in-week. The answer to the question ‘cyclical bull ender or not?’ does not need to come yet, but there is going to be data galore going forward. We’ll work the data as it comes in. Meanwhile, an intermediate bear trend is in force.
 
We had gauged the outperformance of the Emerging Markets (EEM vs. SPY) for much of this year, but when the ratio broke down we noted it in real time. So we shorted the EM’s and prepared for coming bearishness in US markets. We have been charting Europe’s decline for months now, initially shorting Spain, which had previously been our guide to the upside speculative impulse that took hold in Europe.
 
Global markets are nearly but not yet broken with Europe and the World index at key big picture support, the Emerging Markets having made a false breakout and failure, China actually looking interesting here, Japan playing the ‘push me, pull you’ game with its currency and Canada doing some bearish things as the TSX not only loses its blue sky breakout, but starts snapping support levels. The TSX-V (CDNX) is leading the way down and is flat out destroyed right along with any speculative spirits in the world of scammy little Canadian ‘resource’ plays.
 
Early in 2014 we charted the CCI index of commodities, and its hold of critical support at 500 as well as its resistance to the breakout and rally that followed. More recently we managed the decline to and through that support level while maintaining a “not interested” stance the whole way. Commodities can bounce with any ‘inflation trade’ bounce (watch TIP-TLT and other inflation expectations indicators) that may manifest.
 
We were not interested in commodities because we were given no reason to have a favorable view of inflation expectations, which through the TIP-TLT ratio were gauged to be burrowing through the floor week after week. This was also another negative for the US stock market, which had been feasting like Goldilocks on the bears’ porridge.
 
Foremost among the indicators have been Yield Curves generally favoring US stocks and hurting gold, until the curve burst upward beginning last week. This has not surprisingly come with the US stock market correction. If the market bounces, the curve can decline and junk-quality bond spreads can bounce. Also, the VIX needs a rest.
 
The big daddy of indicators however, has been the Two Horsemen, i.e. the Gold-Silver ratio and the US Dollar rising together. This was an indicator of failing liquidity which NFTRH and indeed our public website, noted in real time.
 
It is the indicators even more so than straight up technical analysis that will help us decide whether or not the bull market has ended as we move forward through coming data points.
 
Deflationary and economic growth troubles across the globe are blamed for the recent strength in the US Dollar and to a degree that holds merit. The other support has been the very real economic recovery in the US (beginning with the Semiconductor sector) born of very unreal (i.e. unnatural and unsustainable) policy inputs.
 
Naturally, it stands to reason that if Dollar compromising policy is promoted to keep assets aloft, then a strong Dollar is unwelcome. Because not only would it begin to eat away at exporting sectors like manufacturing, but it would also make assets less expensive. But that should be a good thing, no? Declining prices in things like oil, food and services? Not on the one-way street that is our current system of Inflation onDemand.
 
The Yen is strong lately and the Euro can gain a bounce bid. This means that the USD can continue to weaken from its impulsively over bought and over loved levels. But on the big picture USD has been moving upward from a long-term basing pattern.
 
Gold is meantime favored over silver, given the move in the Gold/Silver Ratio and diminishing global liquidity. Beyond that, gold’s fundamentals have not been constructive for some time now, no matter how often idealists click the heels of their ruby slippers.
 
That was then, this is now. Gold is counter cyclical per the Gold-Commodities chart in this post. This one chart is the very reason that NFTRH never did take its focus off the biggest picture view of an ongoing global economic contraction in progress. This would be the gateway to a real bull market in gold mining stocks, but it is also the more difficult pathway because the inflationists get weeded out along the way as silver does not go to the moon and lazy analysis gets punished, not rewarded.
 
Gold stocks are counter cyclical and macro indicators, and they say we may be at the start of grinding out a counter cyclical phase. But note the word grind. That’s what it has been and what it could continue to be for a while yet. As gold slowly asserts itself vs. cyclical commodities, cost-input fundamentals gradually improve in the industry and as gold slowly asserts itself vs. stock markets an important component of investor psychology slowly comes into place.
 
Patience…the macro does not pivot over night.
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Oct 08

Dollar "Blow Off" Missing. But Stocks?

Gold Price Comments Off on Dollar "Blow Off" Missing. But Stocks?
The Gold/Silver Ratio already signals tight liquidity. A rising Dollar will hurt equities…
 

USING Tom McCellan’s article discussing a “blow off” move in the US Dollar as a starting point, I would like to talk about the Dollar and gold, writes Gary Tanashian in his Notes from the Rabbit Hole, and how they each fit in to the global macro backdrop.
 
We could add silver into the mix as well because its failure in relation to gold (see the gold/silver ratio’s breakout last week) is the other horseman (joining Uncle Buck) that would indicate a changing macro.
 
Starting with the McClellan piece at MCOscillator.com, ‘Commercials Betting on Big Dollar Downturn‘, first I would question the term “blow off” when talking about the USD.
 
Markets that have come off of long-term basing patterns and broken above resistance with plenty of overhead resistance still to come have not blown off. A blow off is Nasdaq 2000, Uranium 2007, Crude Oil 2008, Silver 2011, etc.
 
Reviewing the monthly chart below, we see nothing of the sort currently when considering a “blow off” move in USD. What we see is a currency that made its real blow off move in 1985 to climax the Volcker interest rate hiking regime.
 
There is no blow off in USD. What there is is a savage upward move that we charted all along from its birth to its now mature and hysterical potential pivot point.
 
 
USD appears to be rising in response to a narrative taking shape about Fed Funds rate hikes by mid-2015. This is brought about by the strong economic performance that has taken place since we clearly anticipated it in early 2013.
 
Let’s not over complicate this. The currency’s strength and associated rate hike talk are in play because of economic performance, which has been good in key areas like relatively high-paying manufacturing and generally with the improved employment (and unemployment) data.
 
The chart below shows a disjointed but mostly positive correlation over 3-plus decades between the Fed Funds rate and USD. The little hook upward at the end of the green dotted line is not a blow off, is it? No, it is a projection by the market that the Fed will be compelled to raise interest rates because of economic strength and their own stated targets for employment (currently 5.9% unemployment).
 
 
Since we know full well that it was policy that created this phase of strength, the stock market, with its most recent in a string of corrective mini-blips, seems to be working a narrative that says a withdrawal of that policy (ZIRP) would be a bad thing for stocks. Our oft-shown S&P 500/ZIRP/Money Supply and S&P 500/Corporate Profits charts agree wholeheartedly.
 
 
The chart above states that it has been policy and policy alone (in the form of the nearly 6 year old ZIRP, along with QE’s 1, 2 & 3) that has driven the economy and along with it, money supply and asset market speculation. The chart below states that corporate earnings may have begun to stall slightly in conjunction with a firming and now impulsively strong US Dollar.
 
 
But our theme has been that the US Dollar and the Gold/Silver Ratio (GSR) are running mates, the two horsemen that would change the macro. The precious metals are declining hard along with the commodity complex and inflation expectations in general. People not willing or able to make macro interpretations are getting lost in a “Where’s the inflation??” hysteria.
 
But the macro theme is that it is moves like this that bring turning points. These turning points are not always what inflationists – probably champing at the bit to get back on the soap box again – want to see. The ‘inflatables’ have been wiped out by the rise in the GSR and with the USD finally making a move as well, the economy is at risk because policy is no longer serving to do what it set out to do to begin with, which is to compromise the currency in favor of assets.
 
 
Certain gold bugs are calling “Crash!” now in gold. The ones who have called so many bottoms they would look ridiculous getting on the “Gold to sub-$1000” train have simply gone quiet.
 
Imagine that, a quiet gold bug. Well, it’s happening. Most of the loud ones now are the ones trying to be square with the bearish backdrop.
 
Being a former life-long manufacturing guy (to 2012) that is the area I’ll continue to keep the pulse on. US manufacturing has experienced a re-shoring mini boom as the ‘China outsource’ play had many holes in it from quality and service perspectives even before I left the sector.
 
The 1990s’ theme that we are a consumer-driven economy (with all our manufacturing outsourced) and our ‘King Dollar’ will allow us to consume our way to prosperity at the expense of the rest of the world no longer holds water. The public (ie, consumers) has disproportionately not participated in this economic rebound.
 
Further, the strength in the USD takes aim directly at manufacturing, which is a sector with relatively good wages. Combined with the message of the GSR’s global liquidity drainage along with various global markets on the wane, the US economy and its stock markets do not want to see a perpetually strong domestic currency.
 
Going back to the McCellan article and indeed all of our data presented to date showing an over loved US Dollar, despised Euro, bombed out commodities and precious metals all at extremes, it may be time for a rebound in the ‘inflation trade’, with the USD resuming its role as an anti-asset foil. But the US Dollar is bullish based on its impulsive move up from a basing pattern.
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Oct 03

Mr.Fat Head Returns to the HUI

Gold Price Comments Off on Mr.Fat Head Returns to the HUI
Gold and silver mining stocks are setting up for a big fall. Maybe…
 

BACK in February of 2013 we noted the big fat head on the HUI Gold Gugs miner stock index’s massive head and shoulders pattern, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
It was reviewed again in April of 2013 after it broke the neckline in a very bearish move. Mr.Fat Head’s technical objective was and is 100 on the HUI (IndexNYSEGIS:HUI).
 
Why is this being revisited? Because I have gotten a couple emails noting that it is showing up again out there amidst the very bearish backdrop. If anything, if every gold bug on the planet is planning for 100, the ingredient is in place for this final indignity that they are so well prepared for, to maybe not happen.
 
But a target is a target and it is there for a reason; namely that its source – Mr.Fat Head in this case – has not been eliminated from the picture. Here he is updated…
 
 
There are other considerations…
  • MACD is crossed up
  • RSI is well below 50 and its EMA 50
  • AROON is and has been trend down
  • HUI is below thick resistance around 250
  • It has notable support at current levels
  • A higher low to 2008 is still in place
  • A trend is a trend until it is broken, and it is down on all time frames.
A lot of people think technical analysis sucks because a lot of TA’s try to baffle people with b/s, ascribing greater power to charting than it deserves.
 
Still, it is a handy tool as it irrefutably gave warning signals on the bear market. Signals 1, 2 (which is when NFTRH went into full-risk management mode on gold and silver miners as HUI lost 460 in November of 2012) and 3.
 
Dial ahead to today. A final and terrible drop may indeed come about. But here again I remind you not to take anyone with just a chart and an overly bullish or overly bearish thesis too seriously. It stimulates the greed and fear response and right now everyone in the gold sector is well gripped in fear. There is much more to any given narrative.
 
For reference on why charting in a vacuum is not good, I trot out to you my one time 888 projection for HUI (I just love owning this one) based on a pattern that was every bit as bullish as Mr.Fat Head is bearish. Just as I ask you now to take 100 for what it’s worth, I noted the same thing for the 3 Snowmen (888) back then.
 
Targets are just targets/measurements, not directives. For reference I offer my own screw up and the S&P 500’s target off a very similar pattern that has happily gotten most of the way to target.
 
 
TA is a guide (subject to ongoing revision), not a director. HUI has a target of 100 and so many other potentials in play. Only week to week management of not only the technicals, but especially the macro fundamentals will see us through.
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Sep 30

Making Money with Merchants of Death

Gold Price Comments Off on Making Money with Merchants of Death
Want a truly “ethical” investment? Just stick to profit seeking instead…
 

“WHEN did you people turn into shills for the military-industrial complex,” asked one of our subscribers in an email, writes Addison Wiggin in The Daily Reckoning.
 
“My security would be greatly enhanced if every damn one of ’em would go home forever and the entire machine would grind to a halt, so don’t try to pump this bilge my way.”
 
We hear you. And we agree.
 
We’re not much on socially responsible investing…even when we judge a certain investment vehicle to be thoroughly irresponsible, if not downright reprehensible.
“The insidious increase in power,” says retired army Col. Lawrence Wilkerson, “and the influence over foreign policy that the military has is very dangerous. And maybe in the long run, it’s even more dangerous than a coup.”
Wilkerson was Colin Powell’s right-hand man in the military under the first President Bush…and again in the State Department under the second. It was Wilkerson who vetted the intelligence that went into Powell’s now-infamous speech at the United Nations 10 years ago during the run-up to the Iraq War.
 
He admits he fell down on the job.
 
The “mobile bioweapons labs” were the fantasy of an Iraqi defector, egged on by the Pentagon. In retirement, Wilkerson has turned into a trenchant critic of the military-industrial complex Eisenhower warned about 52 years ago. As such, he is also the harbinger of the military’s slow-motion coup.
 
“What happens,” Wilkerson explained to radio host Rob Kall in November of 2012, “is the power shifts gradually, and gradually, and incrementally over to the war-making side, to where you wake up one morning and all you’re doing is making war. And you have so many people – from Lockheed Martin, to the Congress of the United States, to the armed forces, to you name it – who are making so much money off that war-making that you can’t stop it. That’s not a coup, but it is something worse, in my view. It is, ultimately, the destruction of our Republic.”
 
So why, you might ask, would we suggest investing in defense or cybersecurity stocks or – to use a phrase made popular when Americans were having second thoughts about World War I – the “merchants of death”?
 
Simply put, because there are pitfalls of “socially responsible investing.”
 
We’re not much on socially responsible investing…even when we judge a certain investment vehicle to be thoroughly irresponsible, if not downright reprehensible.
“Maximizing profits and conforming to social policies are separate endeavors,” wrote the late Harry Browne in 1995. “You can cater to one endeavor only at the expense of the other.”
Name almost any investment, and we can come up with a valid objection to it…and not on hippy-dippy “save the Earth” or “fair trade” grounds, either:
 
If you own a gold stock, there’s a good chance the company is stomping all over the property rights of someone whose land happens to sit on top of a gold deposit. Third-world governments routinely cut sweetheart deals with mining firms to seize land held in the same family for generations, with zip for compensation.
 
Or if you own any kind of government bond, your stream of income depends on the ability of that government to extract tax payments from the citizens in its jurisdiction.
 
Meanwhile, if you shun the stocks of the major banks because they accept government bailouts, you’ve passed up monster rallies going back to late 2011 – 59% on J.P. Morgan Chase, 79% on Citigroup and 130% on Bank of America. Just sayin’.
 
Run down all 10 sectors of the S&P 500 and we’ll find something objectionable. Health care? The government has totally co-opted the insurance industry and Big Pharma…or maybe vice versa. Telecom? All the big companies collude with the National Security Agency’s warrantless wiretapping. Consumer staples? Hope you don’t mind General Mills and Kellogg sucking up the corn subsidies for breakfast cereal (and adding to kids’ waistlines, which you’ll pay for years from now when they develop diabetes and go on Medicaid).
 
Okay, you get the idea.
 
Back to Col. Wilkerson’s interview. It reinforces our own thoughts about the empire having a logic of its own. The military’s silent coup “is something that just happens, and it directs American policy toward war in an increased and ever-dangerous manner, and we wind up one day with no money left, no economy, and the only thing we’re good at (and that’s going away fast, because you need money in an economy to support a military) is the military.”
 
We’re no happier about it than you or Col. Wilkerson. But if government is going to direct more and more of the economy going forward, it only makes sense to “follow the money” and channel your own investment flows into those areas that will benefit most.
 
“The stock exchange isn’t a pulpit,” wrote Harry Browne. “If you want to promote a particular environmental policy, political philosophy or other personal enthusiasm, do it with the profits you make from hardheaded investing.”
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Sep 29

Gold/Silver Ratio Leading the Dollar

Gold Price Comments Off on Gold/Silver Ratio Leading the Dollar
What the Gold/Silver Ratio said last year now the US Dollar is following…
 

WE’VE NOTED that Uncle Buck would be front and center in the markets, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Not because the strength in the (anti-market) currency was not expected (it was). But because our big picture theme of an ongoing economic contraction had remained intact (ref: gold vs. commodities ratio) over the long-term.
 
It is important here to remember that NFTRH would only stick with its big picture macro themes as long as indictors implied they are still viable. I will be damned if I will let us follow a Pied Piper off an ideological cliff, no matter what readers (including me) might want to hear. We must dedicate to know what is happening, not what our hopes, dreams, egos, etc. think or worse, hope will happen.
 
 
The correlation is loose but the monthly (big picture) patterns of the Gold/Silver ratio (GSR) and USD have generally been in alignment over time.
 
We made a big deal about the GSR’s breakout last year as a macro signal, potentially bringing on a phase of weakness for equity markets (usually including gold stocks) and strength for the USD. Well, how long these events take to play out. The stock market has been just fine to date but now the US Dollar, finally, is making its move to get in line with the GSR.
 
What would need to come next in the macro plan would be a follow-through in USD strength, the US economy fraying at the edges (manufacturing would be pressured by a persistently strong currency) and eventually stock market weakness, possibly leading to a bear market. So you can see that the picture is incomplete but may be in progress.
 
This is what the GSR did last week that caught my attention. The move looked impulsive as silver plummeted and it seemed a wake up call to asset markets.
 
 
Yet, another part of the macro plan and any future bullish view for gold, includes weakness in the US stock market, which has just not been happening outside of little ripples that barely qualify as corrections. US stocks are now quite over valued (though not in a bubble) by traditional metrics.
 
The bubble is in policy, not the stock market as the first chart below has made clear several times for us. The second chart shows the 10 year view of the S&P 500 vs. corporate profits. Profits are not yet in a negative trend, but in a negative divergence that bears watching as the market becomes over valued even by traditional metrics.
 
 
 
Returning to the GSR, we have a colorful monthly chart showing the GSR’s correlation to the S&P 500 over the last 1.5 decades. An indicator that has been reliable over the long-term has gone dysfunctional for the last 2 years as the SPX made the most impulsive leg of its journey upward despite a GSR that has ground upward as well.
 
 
Considering a potential drop off in corporate profits (here we remember that the manufacturing sector for one would not like a strong Dollar) if the impulsive move in the GSR on the daily chart above is indicative of things to come, one would think US stocks would be vulnerable, considering that the USD is part of the move now.
 
Ah, but we have been here before. Dare to call this market at risk and you get served with a heaping helping of bull. So there is price and momentum to consider as well. But just as we have stated for so long that gold was at risk from a macro fundamental standpoint, we now state clearly that so too is the US stock market. It’s not me or my bias speaking, it’s the indicators and data, just a few of which are illustrated above.
 
We’ll conclude the segment with another negative view of market participation. Similar setups in the recent past have led to minor or moderate corrections. Risks are gathering against the US stock market by this measure. Other indexes and sectors are showing similar divergence.
 
Per Stockcharts.com:
“The Participation Index (PI) measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope.”
 
Consider this another warning on the stock market for a coming correction at least. Timing, if this is destined to resolve bearish, looks like the next several weeks to a month or so. Now, will the market play ball as the red boxes imply?
 
The stock market has rendered certain individual indicators dysfunctional over the last 2 years. When several indicators start to gather toward similar conclusions, it is time to pay attention. Meanwhile, price momentum continues upward until it no longer does.
 
In much the same way we have noted gold’s macro fundamentals are not fully formed, the US stock market takes the other side of that trade and states that any negative macro fundamentals are not fully formed either.
 
Above we have noted some negatives gathering, but we should also realize that several indicators remain a-okay, from the declining 10yr-2yr yield curve (a declining curve tends to go with a strong economy and favor stocks), to a lack of inflation expectations (TIP-TLT tanked last week) to the sedate TED spread (admittedly, a laggard) to the long-running zero rate policy (ZIRP) that market participants are currently obsessing about.
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Sep 17

Mean Reversion to the Rescue

Gold Price Comments Off on Mean Reversion to the Rescue
Small-cap US stocks are lagging bigger companies. The lesson…?
 

SO FAR this year, writes Frank Holmes at US Global Investors, small-cap growth stocks have surprisingly been lackluster.
 
After 2013, when it gained a scorching 38.8%, the Russell 2000 has delivered a tepid 0.62% year-to-date (YTD).
 
 
Performance has been so poor, in fact, that the spread, or bifurcation, between the 12-month return residuals of small and large caps is at its widest since the dotcom bubble of the late 1990s and early 2000s. This bifurcation is one of the largest since 1975.
 
According to Morgan Stanley, we’re in the worst beta-adjusted period for small-cap stocks since the late 1990s. The 12-month return in August for small-caps was -9.7%, placing it in the bottom 6% of any 12-month period since the mid-1970s. 
 
 
The bifurcation is more than apparent when you compare the year-to-date (YTD) total returns of the big boys (those in the S&P 500 Index and Dow Jones Industrial Average) to their little brothers (those in the Russell 2000 and S&P SmallCap 600 Index).
 
The Russell, though it led the other indices in March, has failed to reach a new record high, which the S&P 500 and Dow managed to achieve in the last couple of months. 
 
 
Are we on the verge of another bubble? We don’t think so. History shows bubbles are associated with excessive leverage and lofty valuations. That is not the case this time.
 
In July, Federal Reserve Chairwoman Janet Yellen stated in her semiannual report to Congress that small caps appear to be “substantially stretched,” even after a drop in equity prices at the beginning of the year.
 
There may be some truth to Yellen’s remark, an ideological echo of former Fed Chairman Alan Greenspan’s now-famous “irrational exuberance,” his description of investors’ rosy attitude toward dotcom startups of the late 1990s and early 2000s.
 
Much of the valuation gap has evaporated. Looking at the price/earnings to growth ratio – 20x for the Russell 2000 and 18x for the S&P 500 – small caps have slightly higher yet reasonable multiples and may offer better long-term growth prospects.
 
The recent underperformance among small caps has been a headwind for a few of our funds, most notably our Holmes Macro Trends Fund (MEGAX),whose benchmark, the S&P 1500 Composite, tracks the performance of not just large- and mid-cap US companies, but small-cap as well. With a bias toward small-cap companies, the fund has underperformed compared to last year, when such stocks were doing well.
 
Because small caps tend to have higher beta than blue chips, you would expect them to outperform in a generally rising market – which we’re currently in. So it appears that a major rotation out of these riskier, more volatile stocks has inexplicably occurred, leading to the wide bifurcation between small and large companies. 
 
The good news is that, based on 20 years of historical data, stocks in the Russell 2000 tend to rally in the fourth quarter and continue steadily until around the end of the first quarter. Over this 20-year period ending in December 2013, the Russell has generated an impressive annualized return of approximately 10%.
 
 
Whether or not this fourth-through-first-quarter rally will recur in 2014 and early 2015 is impossible to forecast. What can be said, however, is that prices and returns do tend to revert back to their mean over time.
 
I discussed this concept in full last month in the second part of my Managing Expectations series,”The Importance of Oscillators, Standard Deviation and Mean Reversion“. Although small caps are underperforming right now, the concept of mean reversion suggests that they’ll return to their historical relationship with large caps eventually – just as they did following the dotcom bubble.
 
In his 2006 book The New Rules for Investing Now: Smart Portfolios for the Next Fifteen Years, investor James P. O’Shaughnessy makes the case that small stocks have a performance advantage over large stocks simply because, well, they’resmall. This might sound like circular logic, but as he writes:
“A company with $200 million in revenues is far more likely to be able to double those revenues than a company with $200 billion in revenues. With large companies, each increase in revenues becomes a smaller and smaller percentage of overall revenues. Small stocks, on the other hand, have a much easier time delivering great percentage growth in revenues and earnings.”
O’Shaughnessy examined every 20-year rolling time period beginning each month between June 1947 and December 2004. That’s 691 20-year rolling time periods. What he found is that “small stocks outperformed the S&P 500 84% of the time.”
 
 
If O’Shaughnessy’s research is accurate, it seems very reasonable to be optimistic in the long term. It would be myopic to look only at the Russell 2000’s recent underperformance and impulsively rotate out of small caps without also considering the decades’ worth of data showing the growth that can be achieved.
 
Comparing index funds to actively managed funds, Kiplinger columnist Steven Goldberg wrote last month: “[I]ndex funds are designed to give you all the upside of bull markets and every bit of the downside of bear markets. Only good actively managed funds can protect you from some of the pain of a bear market.”
 
We at US Global Investors agree with Goldberg’s attitude toward good active management. Although MEGAX might be temporarily underperforming right now as a result of the sentiment-driven and disappointing performance of small-cap stocks, we’re confident that they will eventually revert back to their historical pattern as fear over Fed tightening settles down and fundamentals prevail.
 
In the meantime, we will continue to apply our dynamic management strategy of picking stocks in the fund using the 10-20-20 model: we focus on companies that are growing revenues at 10% and generating a 20% growth rate and 20% return-on-equity. This approach has served us very well in the past and enabled us to select the most attractive growth-oriented companies for our clients. 
 
On another note, and as I explained in a recent Frank Talk, a strong US Dollar could spell trouble for commodities such as gold, which tend to have a historic inverse relationship to the Dollar.
 
 
When the Dollar does well, investors often choose to store their money in paper rather than bars. Though September is statistically the best month for gold, with the Dollar rising almost two standard deviations above its mean, this month might not be kind to the yellow metal and other commodities.
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Sep 16

Russian Stocks: Betting on the Now

Gold Price Comments Off on Russian Stocks: Betting on the Now
Moral rules meet simple logic in the search for cheap assets…
 

OCTOBER is coming. Excess liquidity is disappearing. And with the S&P 500 on a trailing P/E of 19.7, the index is fast approaching “sell territory”, writes Bill Bonner in his Diary of a Rogue Economist
 
Watch out. 
 
Having finished with investment theory, now we turn to practical application. 
 
There are three parts to the investment world. The first part is Aristotelian, Cartesian, Pythagorean. It is a world of logic and calculations. He who calculates best wins. 
 
The second part is Socratic and Emersonian. The investment world, like the rest of the world, follows moral rules. When you do something “wrong” you will pay the consequences. 
 
For example, when you forget to pay a parking fine…you will probably regret it. Leave a rake lying in the yard, turned up the wrong way, and you will almost surely step on it. Buy an expensive “story stock”, recommended to you by a broker you’ve never met, calling from Boca Raton, and you will most likely lose money. 
 
That is true in a larger sense, too. An economy that goes too deeply into debt will have to bear the consequences. No amount of QE or negative real interest rates will make those consequences disappear. They can only distort and displace them. 
 
This is not to say that moral rules will play out the way you expect in every instance. It is wrong to kill. But had you snuffed a certain housepainter in Vienna at the turn of the last century, the world might not necessarily be a worse place. 
 
Likewise, not every foolish bet goes bad. Still, you’re probably better off believing it will. 
 
The third part of the investment world is completely unpredictable and unfathomable. Mr.Market gets up to mischief from time to time; he drives moralists mad and logicians to drink. 
 
The numbers we presented last week show that the average investor does not beat the indexes…not even close. 
 
According to data from Dalbar, he consistently lags just about every asset class there is. This leads the Efficient Market Hypothesis crowd to say: Just buy an index fund. You can’t beat the market. 
 
But our Simplified Trading System (STS) tells us there’s a good time to buy and a bad time. 
 
“Buy low and sell high,” is the basic rule. US stocks are now expensive. The trailing P/E for the S&P 500 is 19.7. The 10-year cyclically adjusted P/E ratio (Shiller P/E of CAPE) for the index is even higher – at 26.3. 
 
What do you do when when US stock valuations are so high? 
 
Well, you need to find markets that aren’t so pricey. Such as the Russian stock market! 
 
There, the trailing P/E is under 6.
 
You’re thinking: “Hmm…Russian stocks are treacherous. Everybody says so. And with the war in Ukraine and the sanctions regime, they could go much lower.” 
 
One of our own clever readers, Bradley P., warns:
“The downside on Russian stocks is still 100% from here. Mathematically that is the maximum loss one can have buying Russian stocks. 
 
“Once in the last hundred years that happened; when the Bolsheviks closed the stock market in 1917 […] 
 
“Since US stock markets have never lost 100%, while Russian ones have, by a historical perspective US stocks, even at 20 times earnings, are likely a better investment than Russian stocks (never mind whether they use an accounting system you can trust). 
 
“Just wait until Russia closes the market to foreign investors, issues capital controls and the ADRs and ETFs go to zero.”
Bradley may be right. But we don’t presume to know – neither what is really going on now…nor what it will mean for the future. Neither in Russia nor in the US. 
 
All we know is that our calculations (as primitive as they are) tell us you get more value per Dollar in Russia. 
 
And our “moral” rule tells us that you don’t make money speculating on the future. You make money by buying wisely in the present. 
 
Our guess is that Mr.Market aims to make fools of as many investors as possible. And right now, there are far more investors who are short or out of Russian equities than there are those who are long.
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