Before investors can sell high and multiply their wealth, they first
have to buy low.The lower any trades entry price, the greater its
ultimate profits.The best time to buy low is when stocks are deeply out of
favor, when few others are willing to buy.And that certainly describes gold
and silver stocks today.This sector is universally loathed despite fantastic
fundamentals, offering vast opportunities for brave contrarians.
Contrarian investing is simple in concept, yet very difficult in
execution.The fortunes of stocks flow and ebb, their prices rising and
falling.After theyve risen, they quickly become
popular.Everyone wants them and bids up their prices.Thats
when it feels the best to buy, so thats when the
great majority of investors rush in to chase the rally.But following the herd
leads to buying high, the recipe for failure.
Contrarians seek to buy low, which is only possible after stocks
have fallen.The very definition of contrarian is an
investor who makes decisions that contradict prevailing wisdom, as in buying
securities that are unpopular at the time.But
this is very hard psychologically, as fighting the crowd is never easy.All
our instincts scream against buying into a sector that the great majority is
utterly convinced is doomed.
the surest and safest way to grow your capital as history has proven
countless times.Stock prices are the lowest in unpopular left-for-dead
sectors.And if their fundamentals remain bullish, there is no doubt they will
recover.Contrarians buy low when few others want to, wait for the rest of
investors to recognize the value they saw early, and then sell into the
subsequent rally for huge profits.
I know fighting the crowd works because Ive
walked the walk, gradually forging myself into a contrarian through decades
of trading.And the results speak for themselves.Since I founded my
financial-research company in 2000, weve
formally recommended 637 stock trades in our pair of newsletters.Their
average annualized realized gains are +33.9%!This
includes all losers, in a secular stock bear no
And after dedicating much of my life to contrarian trading, Im marveling at the opportunity in gold and
silver stocks today.It is one of the best Ive ever
seen!This small mining sector wrests precious
metals, which remain in high demand globally by investors, from the bowels of
the Earth.Gold miners profits are a direct function of
the gold price, and universally in the stock markets profits ultimately
determine stock prices.
Yet gold stocks are trading today as if gold was far lower, as
if they had little hope of ever earning big future profits.There is a vast
fundamental disconnect between these miners and the price of the metal that
drives their profitability.This critical point is easily illustrated through
a simple construct known as the HUI/Gold Ratio.It divides the premier
gold-stock index, known as its symbol HUI, by the price of gold.
Charted over time, this HGR chronicles gold-stock prices relative to
the price of gold.Sometimes gold stocks outperform gold pushing this ratio
higher, and other times gold outperforms its miners
stocks forcing the HGR lower.The best time to buy gold stocks low and cheap
in fundamental terms is when they slump dramatically relative to gold.And
today the HGR is actually languishing near stock-panic levels!
Incredibly, the main reason gold stocks are so beaten down today
remains 2008s stock panic!That epic
fear superstorm was a psychological juggernaut that eviscerated this entire
sector, scarring most gold-stock investors of the time so deeply that they
would never come back.And so far, not enough new investors have stepped up to
take their place.So this sectors constituency remains woefully
Before that once-in-a-lifetime stock panic, the HUI spent 5 full
years meandering in a tight secular trading range relative to gold.You
can see it above, bound by the HGRs lower support line of 0.46x and
upper resistance line of 0.56x.The HGR average between mid-2003 and mid-2008
was 0.511x.In other words, the HUI tended to trade at just over half
the prevailing gold price.But the panic shattered that norm.
While gold was hit hard too, the gold stocks plummeted far faster than
the metal that drives their profits.So the HGR ultimately bottomed in the
unbelievable 0.21x range in late October 2008.The HUI had plunged 71% in less
than 8 months since its all-time high, so it isnt hard
to understand why the gold-stock investors of the time were so demoralized.It
was the biggest disaster imaginable psychologically.
But just because stocks are low doesnt mean their
prices are justified fundamentally.The heart of contrarian trading is
recognizing that popular sentiment swings between extremes like a
great pendulum.Near major highs, greed reigns supreme.But near major lows,
and the ones in the panic went far beyond major, fear dominates
everything.Fear leads to excessive selling, driving stock prices far below
where profit fundamentals merit.
If you werent paying close attention to gold
stocks in late 2008, believe me the depth of despair then made todays
bearishness look like a picnic.The great majority of investors truly believed
this sector was so catastrophically damaged in the stock panic that it would
never rise again.But as a battle-hardened contrarian, I sure didnt.Using
this same HGR analysis
then, we started buying and recommending gold stocks aggressively.
And the resulting profits were mind-boggling.Between October 2008 and
the HUIs latest bull-market high in September 2011, this
index rocketed 319% higher!Gold stocks more than
quadrupled over that post-panic span, more than doubling the underlying
gains in gold itself.The very time that gold-stock pessimism was the highest
ever seen proved to be the greatest buying opportunity of their secular bull!
The post-panic gold-stock rally was so fast initially that these miners
regained much ground relative to the gold price that drives their profits.By
late 2009, the HGR was back up near 0.44x.After that it stabilized,
consolidating sideways for the next year and a half or so.The gold stocks as
measured by the HUI kept on advancing to new all-time highs, rewarding the
brave contrarian investors who bought low after the panic.
But psychology was starting to shift again.Gold had soared
dramatically in an anomalous summer rally in mid-2011 during the US
governments last debt-ceiling
debate.Afterwards it was very overbought and a correction was due.As gold started correcting, the
still-fragile post-panic gold-stock sentiment crumbled.The gold-stock
investors were really worried, and pushed the HUI down faster than gold
itself was being sold off.
This bearish psychology ultimately culminated in this past springs gold-stock capitulation.The
HUI was hammered down to 376 as the great sentiment pendulum pegged itself on
the extreme fear end of its arc.The emotional selling was so overwhelming
that it battered the HGR back down to 0.24x.Gold stocks were back down at
levels relative to gold only seen before during 2008s once-in-a-century
And thats where todays amazing contrarian buying
opportunity in gold and silver stocks was born.The anomalous stock-panic lows
led to the biggest gold-stock rally by far of their entire secular bull.And
with gold stocks once again at panic levels relative to gold, with
fear at a similar extreme, shouldnt they have similar upside
potential in the coming years?I certainly think so,
and have been hammering home that point since May.
But being bullish on this hated sector is a hardcore contrarian
stance.And as the investment worlds rebels, contrarians are always
ridiculed when we buy low.The great majority of investors want to give in to
the excessive fear that spawns fundamentally-unjustified lows, so they look
for rationalizations.Mainstream non-contrarian commentators rush to
fill this void, dutifully arguing that gold stocks will never rally again.
If you are already a gold-stock investor, you are well aware of the
anti-gold-stock arguments permeating this sector.Gold stocks are dead because
stock investors are all switching to the GLD gold ETF
instead.Gold miners are doomed because they can no longer earn sufficient
profits with global mining costs rising.Gold stocks will never regain favor
because they cant attract any investors to bid them higher.
The problem is none of this stuff is true!It
is all rationalizations, contrived attempts to justify the popular fear and
despair plaguing gold-stock investors who crave being accepted by the
crowd.As a contrarian speculator running my own financial-research company, Ive
had lots of time to extensively investigate each major anti-gold-stock
argument.And they all quickly crumble, as their roots are fear instead of
On the GLD front, that awesome flagship gold ETF was born in November
2004.Between that day and the HUIs pre-panic all-time high years
later in March 2008, the premier gold-stock index surged 115% higher even
while GLDs bullion holdings soared around 8000%!Their gains are not mutually exclusive.GLD is great for
stock-investor portfolio diversification, but it doesnt
leverage gold like gold stocks.It was created for an entirely different
And on the profits front, our extensive research
proves those fears false.After this past Mays capitulation,
conventional gold-stock valuations as
measured by HUI components price-to-earnings ratios fell to their
lowest levels of the entire secular bull.They were much lower than during
the stock panic, and even lower than broad general-market valuations as
measured by the S&P 500 components!
Gold and silver stocks are earning big profits with prevailing
gold and silver prices so high.Weve been buying high-potential
small miners in recent months that actually had P/E ratios around 10x
earnings!All the anti-gold-stock arguments emotional
investors are using to attempt to justify their own fear are unfounded
rationalizations.The majority always hates and argues against heavily
But contrarians dont blindly buy into conventional
wisdom, we have to do our own research in order to be brave and tough enough
to buy low when few others will.And not only does the HGR now reveal one of
the best contrarian gold-stock buying opportunities since 2008s
crazy stock panic, the gold-stock performance trends are already subtly
improving.This final HGR chart zooms into just the post-panic period.
After the HGR plunged to panic levels during this past springs
brutal gold-stock capitulation, it has since been bottoming and climbing.There
is a new support line buttressed in the last couple months, an HGR uptrend
that is holding despite the rotten psychology plaguing gold since late
November.Even with the incredible bearishness permeating this sector, the HGR
has risen on balance for over 8 months now.
Note above that this is easily the longest period of gold-stock
outperformance relative to gold since the HGRs post-panic
uptrend failed back in mid-2011.Psychology is stealthily changing in
gold-stock land.The vast majority of the older emotional investors who drove
this sectors recent capitulation are gone, leaving newer
stronger investors who better understand the bullish fundamentals of
gold and gold stocks.
So even as gold weathered heavy fund selling in recent months
triggered by fiscal-cliff tax-hike fears, the beaten-down HUI largely held
its own.Gold stocks have certainly been weak, but nowhere near as weak as
they could have been in light of the relentless gold selling.A new cadre of
contrarian investors has been establishing positions in gold stocks with
their recent panic-like prices, buying low and holding.
And we are certainly among them.It isnt easy
psychologically buying gold stocks near panic levels relative to gold, but
that is the contrarian path to huge future gains.It is kind of funny too, as
the anti-gold-stock crowd often looks no farther than the HUI to claim gold
stocks are garbage.But we are already enjoying solid gains in many of our trades
despite the headline HUI lollygagging along near support.
Even this week with the HUI merely near 430, we are seeing great gains
in some of our elite gold and silver stocks.A silver stock we bought in May
had 57% unrealized gains.A gold stock we bought in late July was already up
125%.And a couple silver juniors we only bought in mid-December were already
both up over 40%.Buying low when stocks are wildly unpopular starts yielding
gains well before the crowd catches on!
If gold-stock fundamentals reassert themselves as they ought to, if
the gold-miner stock prices ultimately reflect their underlying profits
streams driven by prevailing gold prices, then sooner or later enough new
investors will enter this sector to catapult the HUI back to its pre-panic relationship
relative to gold.That was that 5-year secular-average HGR.This second chart
shows where the HUI would be at 0.511x the price of gold.
Its the yellow
line above.At todays gold prices,
which most investors have conditioned themselves to believe arent that great, the HUI would need to soar to 859
to trade at its pre-panic-average relationship with gold.That is a double
from current levels, a staggering gain!Interestingly
the gap between where the HUI is trading today and where it would be at this
pre-panic-average HGR is back near panic extremes.
And that panic anomaly happened to be the best gold-stock buying
opportunity of this entire secular bull, leading the HUI to more than
quadruple in the subsequent years.Could that happen again from the recent
spring lows?Absolutely!Universally in the stock
markets, stock prices are ultimately bid up to reflect their underlying
profits.And high gold prices drive big profits for the best gold-mining
Importantly for this loathed sector, underlying profit fundamentals always
trump sentiment in the end.Even if most investors who once owned gold stocks
are too discouraged today to ever come back, other investors will gradually
learn about this sector and deploy capital in it for the first time.New
investors, led by the vanguard of brave contrarians chasing this
extraordinary opportunity, will more than replace the fallen.
And its not like the
gold price will be static in the coming years, its secular bull will continue
powering higher on great fundamentals.This will both accelerate the migration
of new capital into gold stocks and expand their profits so they are
ultimately bid to much higher levels than todays
gold prices would support.And the elite hand-picked miners with the best
fundamentals will see gains dwarfing those of the headline HUI.
Gold stocks today are an incredible contrarian opportunity.I dont know of any other sectors that are so radically
undervalued, unpopular, and ripe for discovery by mainstream investors.Sooner
or later their stock prices will be bid up to reflect the large profits the
high prevailing gold prices drive.And the early contrarian investors will see
massive gains, just like we did after the last time gold stocks fell so
deeply out of favor.
If you have cultivated the mental toughness necessary to be a
contrarian, you ought to join us.At Zeal weve
been buying elite gold and silver stocks aggressively since the spring
capitulation.We are already seeing big gains on some, even with the HUI
languishing near lows.And as the great sentiment pendulum gradually swings
back from extreme fear towards extreme greed, gold-stock prices will explode
You too can easily share in the profitable fruits of our research.We
spend months at a time researching the entire population of certain groups of
stocks, like silver juniors most recently.Then we whittle them down to
our dozen fundamental favorites and profile each winner in fascinating reports.If you want to quickly get up to speed on the
high-potential gold and silver stocks with the best fundamentals, buy some reports today!
We also publish acclaimed weekly and monthly subscription
newsletters for speculators and investors.In them I draw on our vast
experience, knowledge, wisdom, and ongoing research to explain what is going
on in the markets, why, and how to capitalize on it with specific contrarian
stock trades as opportunities arise.Subscribe today
decades of proven contrarian acumen into your corner!
The bottom line is gold
and silver stocks now offer one of the greatest contrarian opportunities seen
in years.Sentiment has swung so far to the fear extreme that even in the
midst of a powerful secular gold bull the gold miners stocks have been left for dead.A
whole cottage industry has sprung up to rationalize these fears, trying to
convince investors they are right in believing gold stocks are doomed.
But contrarians know the
best times to buy low are when sectors with outstanding fundamentals slump to
great unpopularity.The markets are ever-cyclical, so sentiment extremes never
last for long.As the fear washes out old investors, new investors soon flood
in to chase the resulting bargains.This ignites major rallies that ultimately
attract in mainstream investors, leading to huge gains as contrarians sell
Adam Hamilton, CPA
January 18, 2013
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