With the US stock markets falling sharply since the
elections, shell-shocked investors are scrambling for the exits. And this
mass exodus is certainly rational in light of 2013’s record tax hikes
looming for American investors. But with interest rates near record lows,
cash yields nothing and bonds are hyper-risky. So a fantastic alternative for
capital is the precious metals, which are very cheap technically.
For many contrarians, the investment potential of
precious metals is blindingly obvious. Over the past decade or so, gold and
silver have rocketed 638% and 1105% higher at best! But despite these
stupendous gains, investment in precious metals remains low. The financial
establishment has long discouraged investors from buying gold and silver, as
they don’t generate all kinds of fees like stocks.
This chronic underinvestment is easily illustrated
by the amounts of capital in stocks versus the leading gold and silver ETFs.
At the end of last month, all 500 elite companies in the flagship S&P 500
stock index had a collective market capitalization of $13,349b. Meanwhile the
total holdings of GLD and SLV were only worth about $73b and $10b respectively,
just 0.5% and 0.1% of the capital invested in stocks!
So despite their long secular bull markets, gold and
silver still have lots of room left to run. Investors remain radically underinvested in precious
metals, even though they were the best-performing asset class of the past
decade. And fortuitously for the legions of investors now dumping stocks to
avoid the fiscal-cliff disaster, gold, silver, and their miners are actually
very cheap technically. Now is an
excellent time to buy.
Today’s bullish precious-metals technicals are readily apparent in long-term price
charts. The goal of investing is to buy low and sell high, and gold, silver,
and their miners’ stocks are definitely on the low side of historic
precedent today. I doubt any other major destinations for stock-market flight
capital offer a better combination of proven performance and near-future
appreciation potential than the PMs.
Before we delve into the charts, some background is
in order. In any bull market, prices rise and fall. They advance two steps
forward in mighty uplegs before retreating one step
back in sharp corrections. Prices eventually run too far too fast in uplegs, becoming overbought.
Then corrections force the other extreme, prices falling too far too fast
which leaves them oversold. Soon
after is the best time to buy.
But in order to time buying within ongoing secular
bulls, investors need some objective
way of measuring price action. That removes the deadly emotions of greed and
fear, which seduce naive investors into buying high late in uplegs and selling low late in corrections. The
buy-low-sell-high mission is to do the
opposite, sell after prices have rallied too far too fast and buy after
they have dropped too far too fast.
Thus many years ago I created a simple tool to
indeed objectively measure price action, called Relativity. It considers
prices relative to a
slowly-changing baseline, their 200-day moving averages. When this metric is
charted over time, it reveals a horizontal trading range. If you aren’t
familiar with this wildly profitable trading tool, you really ought to read
my latest essay on Relativity Trading to
quickly get up to speed.
Today gold, silver, and the flagship HUI gold-stock
index are all low in their relative trading ranges. They are far closer to
being oversold, the time to buy, than overbought. These Relativity charts are
compelling. In each the relative multiple, the price divided by its 200dma,
is slaved to the left axis in red. And then the actual price is overlaid in
blue tied to the right axis. The
are very bullish today.
In any ongoing bull, a price pulls away from its
200dma in uplegs before returning in corrections.
When the blue gold price above is divided by its black 200dma, the red
Relative Gold (rGold) line is the result. It
effectively flattens the 200dma line to horizontal at 1.0x and render’s
gold’s movements relative to it in perfectly-comparable percentage terms over time. rGold has formed a well-defined
horizontal trading range.
It ranges from gold trading at 1.05x its 200dma on
the low side to 1.25x on the high side. The 1.05x
line, shown in light green, is gold’s relative support. Whenever gold trades at or below this level, it
is usually a great time to buy. With the exceptions of that crazy stock panic
in 2008 and a high consolidation earlier this year, gold embarked on major
rallies soon after it witnessed depressed sub-1.05x rGold
Just this week, rGold was
trading under 1.04x. Gold was only 3.7% above its
200-day moving average, meaning it is technically oversold. This metal has fallen deeply out of favor recently.
This shouldn’t be a surprise, as it always happens after any major upleg peaks. Prices need to either correct sharply or
grind sideways long enough to bleed away all traders’ excessive greed
and euphoria from the preceding topping.
Look at how gold prices have behaved in the past
after gold fell below 1.05x its 200dma. In every case gold
subsequently rallied, and the longer the time it spent below 1.05x the larger
its subsequent gains. The most extreme example was during the stock panic,
after which gold blasted 167% higher in 2.8 years! It is provocative that rGold was once again near
panic levels this past summer, incredibly oversold.
Leading into its most-recent euphoric topping in
August 2011, gold was wildly overbought as
I warned at the time. Greed was excessive, with traders assuming the metal
was going to keep on surging indefinitely. But trading above 1.25x its
200dma, it had advanced too far too fast to be sustainable. So in order to
bleed off that greed, it started to grind sideways. This consolidation has
now lasted 15 months, averaging around $1675.
The result is gold has fallen deeply out of favor,
greed has been totally eradicated. The corrections or consolidations that
follow major uplegs exist to do just that. So we
are in a situation today where gold is essentially loathed, where the vast
majority of investors have largely given up on it. But this is a dream come
true for contrarians willing to fight the crowd, a chance to buy low today before the next upleg.
Secular bull markets are a function of supply and
demand, and gold’s stellar fundamentals
assure its bull is far from over. While global investment demand grows, its
supply remains heavily constrained. More and more investors are gradually
turning to gold, yet finding and mining this metal remains more challenging
and expensive and risky than ever before. Prices rise when demand exceeds
So fundamentally another upleg
is inevitable, yet gold remains oversold in relative terms. The last time it
spent so long languishing under its 200dma was during 2008’s stock
panic, and after that it nearly tripled
over the subsequent few years. So the stage is set for a truly massive gold upleg in the coming months and years, an enormous move
higher. This is fantastic news for investors exiting the risky stock markets.
And as goes gold, so goes silver. The white metal is
a leveraged play on what the yellow metal is doing. When gold is rallying, silver
amplifies its gains. And when gold is correcting, silver falls faster. So it
shouldn’t be surprising that the Relative Silver situation today
mirrors the bullish technicals seen in gold. Silver
has actually been consolidating considerably longer than gold at 21 months,
giving it more potential to soar.
Since silver is far more volatile than gold, the rSilver trading range is naturally wider. Silver is oversold
when it falls under 0.95x its 200dma, and overbought when it exceeds 1.40x. After a massive upleg far
more extreme than gold’s that topped in the spring of 2011, silver has
been consolidating around $34 ever since. This has given traders nearly two years to get comfortable
with today’s price levels as the new normal.
The result of this sideways grind is rSilver near 1.05x this week. While no longer oversold
and wildly undervalued
like it was this past summer, the white metal still remains low in its
relative range. Look at what happened after past episodes where silver was
trading near 1.05x after emerging from a support
approach. It soon rallied sharply in major uplegs.
Odds are this precedent will again repeat soon.
Before this past summer, the last time silver spent
so much time so far under its 200dma was during the stock panic. And after
falling so deeply out of favor in that episode of extreme oversoldness,
silver ultimately blasted a staggering 443% higher over the subsequent 2.4
years. It’s provocative that this metal was once again trading near
similar panic levels this past summer, implying a major new upleg is now underway.
All short-term price action is dominated by
sentiment, greed and fear. And traders’ collective emotions swing back
and forth between these two extremes like a giant pendulum. The last
sentiment extreme witnessed in silver was fear and despair this past summer,
which means the great emotional pendulum is slowly starting to swing towards
the opposite greed end of its arc. Only a
major upleg can generate such greed.
Provocatively one thing that is going to help drive
a renaissance in gold and silver investment demand is the Fed’s massive inflation. The Fed’s
recently-announced third quantitative-easing campaign is
open-ended, which is incredibly bullish for the precious metals.
Washington’s central bank is rapidly expanding the money supply to
help monetize the Obama
Administration’s unprecedented record debt growth.
And few things are more bullish for precious-metals
demand than monetary inflation. While the fiscal cliff is dominating the markets’
attention now, gradually the Fed’s rampant inflation will creep into
the limelight. The general knowledge of relatively more dollars chasing
relatively fewer ounces of gold and silver will lead traders to quickly bid
up their prices. Gold and silver certainly won’t remain so cheap
technically for long.
For over a decade now, we’ve been formally
advising our subscribers to invest in physical gold and silver coins held in
their own immediate possession. I started recommending gold coins in May 2001
when it traded near $264, and silver coins in November 2001 when it was just
over $4. So to me and our subscribers this whole gold and silver thing is old
hat, we’ve already earned fortunes in this secular bull.
Thus today miners of gold and silver are far more
exciting than the metals themselves. This final chart looks at the leading
gold-stock index, commonly known by its symbol HUI (“huey”). While gold and silver have fallen out of
favor in the recent consolidations, their miners’ stocks have been shot
and left for dead. They have fallen so far behind the gold and silver bulls
that their prospects are phenomenally bullish.
Like silver, the PM stocks are far more volatile
than gold. So the HUI’s relative trading range in recent years has also
run between 0.95x its 200dma on the low side to 1.40x
on the high side. Gold stocks are overbought and due to correct when the rHUI exceeds 1.40x, but they are
oversold and likely to rally in a new upleg when
this metric falls below 0.95x. As of the middle of this week, the rHUI slumped to 0.97x.
Examine this chart and look what happened after
other times the HUI traded near 0.95x. Most of the
time major advances soon followed. When PM stocks are oversold and fear
reigns, the great majority of the near-term sellers have been squeezed out.
So buyers picking up the cheap stocks regain the balance of power and the
capital inflows soon drive rallies. The rHUI is
positioned perfectly today for another one.
There were a couple major exceptions, when the HUI
remained under its 200dma for way longer than normal. The first was during
the stock panic, and the second thanks to a brutal gold-stock capitulation
this past spring. That once-in-a-lifetime fear superspike
ignited by the panic was self-explanatory in crushing PM stocks. Realize that
afterwards the HUI soared 319% higher over the next 2.9 years!
So to see the rHUI once
again slump near panic levels this
past spring and summer is super-bullish. The PM stocks have rarely been so
out of favor, which means the sentiment pendulum is overdue to swing
forcefully towards the greed side again. And only a major new upleg can generate this emotion. With the short-lived
exception of the panic’s bowels, we’ve never seen a better buying
opportunity in this entire bull.
The PM stocks are wildly undervalued relative to the
prices of the metals they mine, which drive their profits and hence ultimately
their stock prices. The HUI has effectively been consolidating around 450 for 60 months now, dwarfing the
consolidations in gold and silver. When the HUI first hit 450 in November
2007, gold was trading near $825 and silver had just crossed $15! It was a very different world.
So to see the PM stocks in aggregate trading at the same levels today with gold
near $1725 and silver near $32 is ludicrous. As I showed in an essay this
past summer, the gold stocks have never been more profitable in an absolute
sense. Their valuations are
lower than the general stock markets’, in true value territory! And
they continue to trade near panic levels relative to gold,
which simply isn’t sustainable.
With gold stocks dirt-cheap and low technically, the
opportunities in this sector are vast beyond belief. They could easily double
or triple from here during the next gold and silver uplegs.
I fully realize virtually no one thinks PM stocks will ever rally again these
days, but that is part of their allure. The best investors are the
contrarians, that rare breed smart and tough enough to be brave when everyone else is afraid.
I started buying and recommending gold and silver
stocks in 2001 when the HUI averaged 60. Just after a mighty secular bull in
general stocks, the small fraction of mainstream investors even aware of the
precious metals thought anyone buying them was insane. Despite their massive
runs in the decade-plus since, PM stocks have always been a highly-contrarian
realm. They never captured mainstream acclaim.
So if you are relatively new to PM stocks and their
recent years’ consolidation has discouraged you, realize that this tiny
sector has always been an uphill battle psychologically. The commentary on PM
stocks is usually bearish, and after corrections or consolidations
predictions of doom abound. Nevertheless, the HUI still rocketed 1664% higher
at best over a decade where general stocks were flat at best!
As is always the case when sentiment is the most
rotten, the precious metals are great buys today. Their prices are low
technically, which is very fortuitous for the flood of capital leaving the
risky general stock markets. If you are exiting stocks and need a place to
park capital that will stay well ahead of the Fed’s inflation and
probably even multiply your wealth, it is impossible to beat gold, silver,
and their miners.
At Zeal we’ve been taking advantage of these
bullish PM technicals since summer, buying and
recommending some of the highest potential gold and silver stocks. Unlike most, we’ve been
studying and trading the PM-stock sector for its entire secular bull. Our
hard work over the years has led to great knowledge and stellar gains. All
634 stock trades we’ve recommended in our newsletters since 2001 have
averaged annualized realized gains of +34.8%!
You ought to join us and share in the profitable
fruits of our labors. We publish acclaimed weekly and
newsletters for speculators and investors. In them I dig deeply into current
market action, looking at what is happening, why, and what specific
stock-trading opportunities it is creating. It certainly is a fantastic time
to deploy in awesome PM stocks, as all our trades are on sale this week. Subscribe today and
The bottom line is the precious-metals technicals are very bullish today. Gold, silver, and the
HUI gold-stock index are all low relative to their 200-day moving averages
following long consolidations. In the past, these very conditions have
ignited major uplegs. The rotten sentiment that
continues to plague this beaten-down and undervalued sector greatly amplifies
this bullishness. The PMs are truly due to soar.
And the timing couldn’t be more fortuitous
with the general stock markets rolling over. With much higher taxes and a
continuing weak economy to look forward to, investors don’t have many
appealing options. But the excessive government spending the Fed is
monetizing will lead to serious inflation. So gold, silver, and their best
miners’ stocks offer a fantastic refuge to grow your capital in a tough
So how can you
profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of
actual stock and options trading based on all the lessons we have learned in
our market research. Please consider joining us each month for tactical
trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Adam? I would be more than happy to address them through my private
consulting business. Please visit www.zealllc.com/adam.htm for more information.
comments, or flames? Fire away at firstname.lastname@example.org. Due to my staggering and perpetually increasing e-mail load, I
regret that I am not able to respond to comments personally. I will read all
messages though and really appreciate your feedback!
- 2012 Zeal Research (www.ZealLLC.com)