December 2018 - MiningFeeds

Stock markets are forever cyclical, an endless series of alternating bulls and bears. And after one of the greatest bulls in U.S. history, odds are a young bear is now gathering steam. It is being fueled by record Fed tightening, bubble valuations, trade wars, and mounting political turmoil. Bears are dangerous events driving catastrophic losses for buy-and-hold investors. Different strategies are necessary to thrive in them.

This major inflection shift from exceptional secular bull to likely young bear is new. By late September, the flagship US S&P 500 broad-market stock index (SPX) had soared 333.2% higher over 9.54 years in a mighty bull. That ranked as the 2nd-largest and 1st-longest in U.S. stock-market history! At those recent all-time record highs, investors were ecstatic. They euphorically assumed that bull run would persist for years.

We humans naturally extrapolate present conditions lasting way out into the indefinite future. But long centuries of stock-market history have painfully proven that no bull lasts forever. Eventually they all lead to inherently-unsustainable fundamental, technical, and sentimental excesses. These can only be bled away and ultimately normalized by bear markets. So bull markets have always been followed by bears.

Bulls and bears are easily defined technically, 20%+ SPX moves uninterrupted by opposing 20%+ moves. The greatest stock bull in US history was the SPX’s 417.0% run over 9.46 years between October 1990 to March 2000. That climaxed in the tech-stock bubble, when wild optimism about stock-market fortunes reigned. Yet that soon gave way to tears as the subsequent bear mauled the SPX 49.1% lower in 2.6 years!

Stock investors suffering their wealth getting cut in half is typical in major bears. But the losses extend well beyond capital into far-more-scarce time. After that turn-of-the-century secular-bull peak, the SPX wouldn’t power decisively above those levels again until 12.9 years later in early 2013! That’s nearly a third of the 40 years average investors have between the ages of 25 to 65 to generate wealth to finance retirement.

If you can’t afford to lose half your stock-market wealth, and you don’t have time to wait for well over a decade for stock prices to fully recover, you better take this quarter’s market developments very seriously. Something snapped in the U.S. stock markets in early Q4’18, and the price action and volatility since reeks of a young new bear. While that diagnosis can’t be certain until the SPX falls 20%+, the signs are ominous.

As Q4’18 dawned, the U.S. Federal Reserve ramped its quantitative-tightening campaign to full speed. QT is necessary to start unwinding 6.7 years of quantitative easing ending in October 2014, during which the Fed conjured $3625b out of thin air to monetize bonds! QE was considered necessary to stimulate the economy after the Fed forced interest rates to zero in December 2008 during the first stock panic in a century.

Those trillions of dollars of QE capital injected by the Fed directly levitated the stock markets, artificially inflating an already-mature bull market to monstrous proportions. All those bonds accumulated on the Fed’s balance sheet, which skyrocketed 427% higher over that relatively-short QE span! The Fed can’t maintain $3.6t of bonds on its books forever, so it finally started letting them gradually roll off at maturity in Q4’17.

That unprecedented QT capital destruction started small, but was ratcheted up each quarter until Q4’18 when it reached its terminal velocity of $50b per month. The SPX achieved its latest all-time record high in late September, and then October was the first month ever of full-speed QT. The QE-levitated stock markets wilted under this QT onslaught, which was inevitable sooner or later. I warned about all this in advance.

Just a week after the SPX peaked in late September, I published one of my most-important essays ever. I unambiguously titled it “Fed QT is Bull’s Death Knell”, and it explained the stock-market impact of Fed QE in depth and why full-speed QT was certain to slay this bull. With the SPX just 0.6% under its recent record high on that final day of Q3’18, that warning fell on deaf ears. Maybe investors will pay attention now.

Fed QT is no flash in the pan, it is a long-term persistent threat to these lofty stock markets. In order to merely unwind half of that unfathomable $3.6t of Fed QE, full-speed QT at $50b per month will have to run for 30 months starting in Q4’18. Heading into 2019 the stock markets face another 27 months of this! And the Fed is loath to slow or stop its QT now underway on autopilot, as that could unleash panic-grade selling.

The Fed has long asserted the reason it is undertaking QT and has hiked rates 9 times since December 2015 is the US economy is strong. It wants to rebuild easing-ammunition stores to use in the inevitable coming recession. If the Fed caves on QT before its balance sheet shrinks much lower, traders will assume the Fed fears the US economy is in serious trouble. So they would flee stocks pummeling them far lower.

The die is cast on Fed QT, guaranteeing the long-overdue next stock bear. And the losses seen so far are just a small vanguard of what’s to come. This first chart superimposes the mighty SPX bull of the past decade on its so-called fear gauge, the VIX S&P 500 implied-volatility index. The recent Q4 trading action in both is unlike anything yet seen in this entire bull. It is looking far-more bear-market-like in character.

Major stock-market selloffs are defined based on size. Anything under 4% isn’t worth classifying, it is just normal market noise. Then from 4% to 10%, selloffs become pullbacks. In the 10%-to-20% range they grow into corrections. And of course beyond that at 20%+ they are in formal bear-market territory. This selloff snowballed darned close to beardom on Christmas Eve, the SPX plunging to a 19.8% loss over 3.1 months!

Just 4 trading days earlier before the latest FOMC decision, it was only down 13.1%. While that latest Fed rate hike was expected, the future-rate-hike outlook among top Fed officials wasn’t dovish enough for stock traders. Despite all the market carnage since the previous dot plot, their effective forecast for future rate hikes was merely lowered from 4 more to 3. So the SPX plunged 7.7% over the next 4 trading days!

Even before that this selloff hasn’t behaved like a normal bull-market correction. Their purpose is to vent excessively-bullish sentiment, rapidly bleeding off greed. Sharp selloffs are necessary to do that. Traders don’t get worried until stocks fall fast enough and far enough to shatter their complacency. So normal bull-market corrections are usually front-loaded with sharp selloffs that trigger soaring levels of fear.

Prevailing fear levels are inferred by the VIX, which technically measures the implied volatility in 1-month SPX options. Before last peaking in late September, the SPX suffered 5 bull-market corrections within its epic secular bull. Heading into July 2010 the SPX fell 16.0% in 2.3 months. That spawned some real fear, as evident in the VIX soaring to a 45.8 peak. The effective fear ceiling outside of panics and crashes is a 50 VIX.

The next SPX correction cascaded 19.4% lower over 5.2 months ending in October 2011. Despite its long span, the VIX skyrocketed as high as 47.5 in its midst. That was real fear, the kind necessary to slay exuberant greed and rebalance sentiment to keep an ongoing stock bull healthy. After that the SPX went a near-record 3.6 years without a single correction-grade selloff in an extraordinary levitation driven by the Fed.

That’s when its unique open-ended third quantitative-easing campaign was in full swing. QE3’s peak year was 2013 which saw the Fed monetize a staggering $1020b of bonds! The SPX soared 29.6% higher that year on such vast liquidity injections. But 2014 saw QE bond buying collapse to $450b as the Fed tapered QE3. The SPX only rallied 11.4% that year, its gains shrinking 62% in proportion with QE3’s 56% decline.

The QE3-goosed stock markets wouldn’t correct again until well after QE3 ended, the SPX sliding 12.4% over 3.2 months into August 2015. Again the VIX surged to 40.1, which is up in the very-high fear zone. The next debatable correction followed right after. The SPX didn’t achieve new highs after the previous one, so it was technically one compound correction instead of two separate ones. Analysts render it both ways.

That second correction or second part of the longer one saw the SPX fall 13.3% over 3.3 months into February 2016. That was the only bull-market exception that didn’t see a high VIX, it merely climbed to 28.1 at best. But since the VIX had just recently surged over 40 in a fear climax, another one apparently wasn’t necessary. That rolling-over SPX action into early 2016 actually looked more bear-like than bull-like.

Provocatively it took fully 13.7 months after that May 2015 topping for the SPX to finally hit new highs confirming its bull was alive. The thing that short-circuited what felt like a young bear was hopes for more European Central Bank easing after the UK’s surprise Brexit vote in late June 2016. Then the SPX again exploded higher in November 2016 after Trump’s surprise presidential victory with Republicans controlling Congress.

Optimism and greed exploded on hopes for big tax cuts soon, fueling a powerful stock-market surge into early 2018. The SPX then corrected sharply into early February with a 10.2% plunge in just 0.4 months. The VIX shot up to 38.8 on that, showing real fear. All bull-market corrections with the lone exception of the second part of that compound one exhibited telltale fear spikes averaging VIX peaks way up at 43.1.

But the recent SPX selloff of Q4’18 coinciding with the first-ever full-speed Fed QT looks way different. It has been mostly an orderly, gradual selloff generating modest fear. The highest VIX close between late September and pre-FOMC in mid-December was merely 25.8! Even on Christmas Eve it only hit 35.8. These are too low for normal sharp bull-market corrections, this fear profile is looking more like a bear downleg.

While bull-market corrections are supposed to shock and scare, bear-market downlegs start more subtlety. Instead of plunging fast then stabilizing, bear selloffs start slow then gather steam later. Bears begin in stealth mode, only gradually rolling over to prevent fear from spiking. Without big fear to wake them up and scare them out, investors complacently stay deployed as their losses slowly and inexorably mount.

Like the proverbial frog slowly being boiled alive, investors don’t realize the peril their capital is in during bear markets until way too late. The lack of normal bull-market-correction fear spike during this latest correction-grade selloff disturbingly suggests a new bear has awoken. And coming after such a massive and largely-artificial QE-inflated stock bull, the fearsome bear QT has to spawn should be proportionally large.

On Christmas Eve the SPX was forced close to a 20% bear-cub loss at 2345. That level was first seen in February 2017, and represents nearly 3/4ths of the post-Trump-election taxphoria rally being wiped out. 30% would drag the SPX back down to 2052, which were November 2014 levels right after the QE3 bond monetizations ended. 40% would crush the SPX to 1758, back to October 2013 levels killing 4.9 years of gains.

But after one of the biggest and longest stock bulls in U.S. history, it would be shocking if the subsequent bear didn’t lop off at least 50%. Especially given this bull’s artificial QE-inflated nature in an era where QE-conjured capital is being destroyed by QT. A 50% SPX loss from late-September’s peak would leave it at 1465. Those levels were first seen in this bull all the way back in September 2012, 6.0 years earlier.

While a 50%+ bear warning may sound sensational or overly dramatic, it’s actually fairly conservative. The SPX already suffered two bear markets since the tech-stock bubble peaked in March 2000. The first one ending in October 2002 mauled the SPX 49.1% lower over 2.6 years. The second one climaxing in the first stock panic in a century drove a far-worse 56.8% SPX decline in just 1.4 years ending in March 2009.

50% bears are totally normal after large bulls, even when they don’t have the amplifying dynamics of the first-ever colossal-scale Fed QE and QT. This overdue next bear has a great chance of growing bigger than normal after such a monstrously-grotesque bull. Most investors won’t figure this out until too late. Unlike bull-market corrections, high-fear VIX spikes soaring into the 40-to-50 range don’t ignite until later in bears.

While the extreme Fed tightening under this unprecedented full-speed QT campaign could easily drive a major stock bear alone, so could excessive valuations. When the SPX peaked in late September, its 500 elite stocks were collectively trading at literal bubble valuations! Extreme valuations are what usually cause stock bears, which exist to force stock prices back into line with corporations’ underlying earnings.

The classic honest way to measure valuations is through trailing-twelve-month price-to-earnings ratios. These take companies’ last four quarters of actual hard GAAP earnings, add them up, and divide them by companies’ prevailing stock prices. Unlike fictional forward earnings, real past results aren’t mere guesses about the future. Over the past century and a quarter or so, the U.S. stock markets averaged a 14x TTM P/E.

That’s long-term historical fair value, which is logical and reasonable. The reciprocal yield of 14x is 7.1%, an interest rate that is mutually beneficial to both pay and be paid for investment capital. Twice that at 28x earnings is the formal bubble threshold. As of the end of September just after the SPX peaked, its elite companies averaged a TTM P/E well into bubble territory at 31.4x earnings. They were dangerously overvalued.

This next chart looks at average SPX valuations in TTM P/E terms over the past couple decades or so. The 500 SPX components’ simple-average P/E is rendered in light blue. The dark-blue line shows it instead weighted by companies’ market capitalizations. The SPX is superimposed over the top in red, while a hypothetical fair-value SPX at 14x earnings is shown in white. This valuation picture is ominously damning.

The bubble valuations around the SPX’s late-September peak were nothing new. They had been above that 28x threshold continuously for 14 months since July 2017. Stocks were already expensive before Republicans swept the November 2016 elections kindling those exuberant big-tax-cuts-soon hopes. But they got a lot more expensive after that as stock prices soared way faster than corporate earnings since.

Again excessive valuations are what normally spawn stock bears. Stock prices get bid up too fast during bull markets for underlying earnings to justify. So bears follow bulls to drag stocks lower or just sideways for long enough for corporate profits to catch up with prevailing stock prices. These mean reversions after large bulls usually see valuations overshoot towards the opposite extreme before bears give up their ghosts.

So odds are this young stock bear won’t head back into hibernation until the stock markets’ average TTM P/E ratio per the elite SPX components actually falls under 14x. Major bears usually bottom with the SPX P/E in the 7x-to-10x earnings range, the former being half fair value when stocks are very cheap and screaming buys. Late in the last stock bear climaxing in March 2009, the SPX’s TTM P/E slumped to 12.6x.

But let’s be conservative and just assume this next bear, even with Fed QT, merely mauls stocks long enough to force a fair-value 14x P/E with no overshoot. Assuming corporate earnings don’t grow much which is a real possibility during a serious stock bear, that implies 51% downside from the SPX’s late-November levels. That was the latest month-end valuation data available when this essay was published.

Historical fair value sans earnings growth implies a bear-market bottom near SPX 1356, or 53.7% under late September’s peak! That’s right in line with historical major bear markets, nothing unusual. As bears generally last a couple years or so, modest underlying corporate-profits growth could lift that valuation-based bottoming target maybe 10% or so. That still implies a 49.1% total bear which isn’t to be trifled with.

The combination of wildly-unprecedented full-speed Fed QT slamming QE-inflated stock markets trading at bubble valuations is incredibly menacing. Seeing bear-market-like rolling-over selling behavior without big fear spikes in recent months strongly argues the overdue bear has awoken. But since all that selling has been concentrated fully within a single quarter, odds are most investors don’t realize how bad things are.

The biggest group of investors with the most capital are casual retirement investors who don’t closely follow the markets. They avoid much work and stress by paying other people to manage their money. These investors get statements showing their portfolios’ fortunes after every calendar quarter. At the end of Q3’18, everything still looked awesome with the SPX just 0.6% under its all-time high of a week earlier.

So the Q4’18 statements due out in January could prove shocking, spawning fear and galvanizing bearish psychology. The most-widely-held stocks in investment funds are the biggest and best ones led by the market-darling mega techs. While they were radically overvalued at the end of Q3, no one cared at that point. Everyone owned the largest US stocks including Apple, Amazon, Microsoft, Alphabet, and Facebook.

Add in the last FANG Netflix, and these 6 stocks alone commanded over 1/6th of the entire market cap of the SPX just before the Q4 selling started! Their average TTM P/E was a scary 80.2x earnings, 2.6x the entire SPX’s. Yet these beloved companies were believed to have such amazing businesses that they should be immune to economic slowdowns or stock-market selloffs. That myth was obliterated in Q4.

This SPX selloff first hit 10%+ correction territory on Black Friday with a 10.2% loss from its peak. On that same day, mighty Apple, Amazon, Microsoft, Alphabet, Facebook, and Netflix had collapsed 25.8%, 26.4%, 10.8%, 19.9%, 39.4%, and 38.2% from their recent all-time highs! They averaged 26.8% losses, or 2.6x the SPX’s. Many if not most investors’ Q4’18 portfolio results are going to look even worse than the SPX.

Will they start fleeing and adding to the selling pressure when these gaping holes in their precious capital are revealed? And while record Fed tightening and a mean reversion lower out of bubble valuations are the primary bear-market risks, they aren’t the only ones. The trade wars between the US and China and other countries are intensifying, and U.S. political turmoil will soar next year with Democrats controlling the House.

The epic corporate stock buybacks that helped levitate the stock markets in recent years will wane as the Fed forces interest rates higher. Trillions of dollars of these buybacks were debt-financed over the past decade. And as stock markets fall, Americans will feel poorer and spend less. This negative wealth effect will really weigh on record corporate profits, potentially driving them lower forcing valuations even higher.

The Fed’s QT isn’t the only howling central-bank headwind stock markets face. The European Central Bank is also halting its own massive QE bond monetizations starting in January! That will suck even more capital out of the system. Many of these bearish factors for stocks feed on each other too, with all combined wreaking more havoc on sentiment and stock prices than individual ones ever could in isolation.

Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from this young bear market. It’s only just beginning, with sub-20% SPX losses at worst a far cry from 50%+. Cash is king in bear markets, since its buying power grows. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half-price.

Put options on the leading SPY S&P 500 ETF which perfectly mirrors the SPX can also be used to hedge downside risks. But options trading is risky, with 100% losses possible if the timing doesn’t work out. And cash doesn’t appreciate in value. So the best bear-market investment is gold, which tends to rally on surging investment demand as stock markets weaken. Gold investment grows wealth during stock bears.

Gold surged 30% higher in essentially the first half of 2016 in a new bull initially sparked by those late-2015 and early-2016 SPX corrections. Investors fled burning stocks and flocked to gold. And the gold miners’ stocks really leveraged those gains, rocketing 151% higher in that same timeframe. The gold stocks are not only wildly undervalued, but just breaking out technically which should accelerate their upside.

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny the growing stock-market bear all the way down, we will help you both understand it and prosper during it.

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The bottom line is a young stock bear sure looks to be awakening. Q4’s rolling-over stock-market selling without big fear spikes is ominously classic bear-market behavior. And after such a monster bull, the next bear is long overdue. Unprecedented full-speed Fed QT colliding with bubble-valued U.S. stock markets artificially inflated by long years and trillions of dollars of Fed QE can’t end well. The reckoning is upon us.

Major bear markets follow major bull markets, often cutting stock prices in half over a couple years or so. And these inexorable bull-bear cycles are very unforgiving, as it can take over a decade for stock markets to regain bull highs once a bear starts ravaging. Gold is the refuge of choice, seeing investment demand surge as stock markets swoon. Prudent investors deploying in gold can grow their wealth during stock bears.

Adam Hamilton, CPA

December 31, 2018

Weary investors who endured the September and October stock market “crash season” felt they should be richly rewarded for their incredible patience… with a wondrous Santa Claus rally

Please click here now. The traditional Santa Claus rally has morphed into a hideous Santa Claws mauling of millions of US stock market price chasers. It’s a gruesome sight. The good news, clearly, is that my prediction has come true and both gold and senior miners have leaped into the limelight.

They are happily basking in their new role as safe haven beacons of safety for smart money investors. Please click here now. Double-click to enlarge this “Queen of Assets” gold chart.

While the stock market incinerates, gold is in a mighty uptrend. Note the fabulous flat line event taking place now on my 14,7,7 Stochastics oscillator at the bottom of the chart. This type of technical action is extremely positive. The world’s mightiest metal is poised to surge above the uptrend channel supply line and roar straight to my $1300 target price zone!

Please click here now. Double-click to enlarge. Silver has held its own against the dollar and higher price enthusiasts will likely get the rally they deserve in 2019. Because silver is used extensively in industrial applications, it tends to lag gold as the business cycle peaks. Demoralized stock market investors don’t see signs of aggressive growth in inflation yet, so they leave silver alone.

Once inflation begins to pick up more aggressively and US GDP growth contracts more substantially, silver will start to rally as aggressively as gold and the senior miners are rallying now.

I see that happening by the second half of 2019, but a three-day close over $15.20 would be a strong indication that commercial traders anticipate stagflation and are getting invested in this superb metal ahead of time.

As 2018 got underway, I urged investors to focus on President Trump’s success in the private sector and use his fabulous work ethic, organization, and planning skills as an inspiration to act professionally in the major markets.

Unfortunately, many investors believed that Trump’s power as president gave them a free pass to act unprofessionally in the major markets.

They believed the incredible success that America achieved in the 1880s “Golden Age” and the 1950s could be re-created by Trump… even though America’s demographics are now essentially the opposite of what they were in those two glorious time frames.

These investors essentially devolved into maniacal US stock market price chasers, and they ignored the clear “safehavenization” of senior gold stocks that was taking place.

The bottom line: Investors will always pay a price for sloppy actions in the market and they will always reap incredible rewards for high-level professionalism.

Please click here now. Double-click to enlarge. I developed the STL (Stewart’s Traffic Lights) system to provide clear green and amber light signals for an array of assets over both the short and long term.

Horrifically, the Dow Jones Industrial Average is now flashing a weekly chart amber STL. Amateur investors like to “wait for a rally” to sell. I like to obey traffic lights.

If the light turns amber, I don’t race my stock market car through the intersection, especially when a quantitative tightening freight train on central bank “auto pilot” is barrelling through that intersection. I don’t predict when the STL will turn green. I wait for it to turn green, and then I buy.

At my guswinger.com swing trade service, I have the “party people” short USD versus the yen, long GDX via triple-leveraged NUGT, and short the stock market via SDOW. It’s certainly a very Merry Christmas today for all the GU Swinger partygoers!

This year, America awakes on Christmas day with the socialist “demorats” back in control of the House, the stock market on a major sell signal… and with gold and the senior miners acting like the brightest Christmas lights in town!

Please click here now. Double-click this superb GDX “chart of champions”. As the Dow tumbled 600 points, GDX surged above the $21 resistance zone on a closing basis!

Note the enormous rise in volume. There’s also a flat line event taking place with the Stochastics oscillator. From a technical perspective, this chart is a bullish masterpiece that looks like Michelangelo created it.

Santa Claws came to U.S. stock market town, but Santa Claus came down every gold bug’s chimney with wondrous higher priced gold and senior miner tidings! Enjoy! Enjoy, because the current market themes in play are poised to dramatically accelerate in 2019. Best wishes to the entire global community!

Stewart Thomson

Graceland Updates

https://gracelandjuniors.com

www.guswinger.com

Email:

stewart@gracelandupdates.com

stewart@gracelandjuniors.com

stewart@guswinger.com

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

Are You Prepared?

As we’ve been saying, the stock market will have great influence on Gold. It has been easy to see in recent months.

The S&P 500 has cracked, losing both its 200-day and 400-day moving averages. Gold and gold stocks have benefitted and gained in recent months even with a stable to rising U.S. Dollar.

The past 65 years of history shows us that in almost any context (but not all) the time between the Fed’s last rate hike and first rate cut is exactly when you want to buy gold stocks.

We don’t know if December is the last rate hike. No one does.

What we do know is the stock market is approaching an extreme oversold condition and is likely to begin a counter trend rally very soon.

In the chart below we plot five indicators that can help define an extreme oversold condition. These include the Vix, the put-call ratio and several breadth indicators. All but the Vix are in extreme oversold territory.

As we pen this article, the S&P 500 is trading at 2436.

The 40-month moving average, which has provided key support and resistance over the past 20 years (including the 2016 and 2011 lows) is at 2395 while the 50% retracement of the 2016 to 2018 advance is at 2380.

The setup for a bullish reversal is in place.

Meanwhile, despite the recent carnage in stocks, precious metals have been unable to surpass resistance.

Gold is set to close the week right below a confluence of resistance at $1260-$1270. Perhaps it will close right on its 200-day moving average at $1258.

The gold stocks (GDX, GDXJ) have been strong since Thanksgiving but appear to have been turned back at their 200-day moving averages.

So in recent days the selloff in the S&P 500 accelerated but precious metals (at least to this point) failed to capitalize in a bullish fashion.

If the S&P 500 is within one or two days of a rally then we should not expect much more upside in Gold and GDX in particular. Those were the markets that benefited most from weakness in the S&P 500.

As we noted last week, the weakness in the stock market (and the economy) has not done enough to change Fed policy yet.

Over the past 65 years, the start of bull markets and big rallies in gold stocks coincided with the start of rate cuts. When the market sniffs the first rate cut, we will know precious metals are beginning a sustained advance and not another false start.

Until Gold proves its in a bull market (and the market begins pricing in a rate cut) it would not be wise to chase strength. There will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. To prepare yourself for an epic buying opportunity in junior gold and silver stocks in 2019, consider learning more about our premium service.

The dovish Federal Reserve lit a fire under gold and its miners’ stocks this week. As universally expected the FOMC hiked rates for the 9th time in this cycle. But it also lowered its 2019 rate-hike outlook bowing to the stock-market selloff. Traders dumped gold initially thinking that wasn’t dovish enough. But market reactions to the FOMC formed over a couple days, and gold surged overnight. Its post-Fed rally has great potential.

Gold-futures speculators dominate gold’s short-term trading action. They punch way above their weight in capital terms thanks to the extreme leverage inherent in gold futures. This week, the minimum margin for trading each 100-ounce contract controlling $125,000 worth of gold at $1250 was just $3400! These traders can run crazy maximum leverage as high as 36.8x, compared to the stock markets’ legal limit of 2x.

At 10x, 20x, or 30x leverage, every dollar of capital deployed in gold futures has 10x, 20x, or 30x more price impact on gold than a dollar invested outright. Further compounding speculators’ hegemony over gold prices, gold’s world reference price derives directly from US gold-futures trading. Naturally extreme leverage means extreme risk. At 37x a mere 2.7% gold move against positions wipes out 100% of capital risked!

In order to survive, gold-futures traders are forced to have an ultra-short-term focus. Their time horizons are measured in hours, days, and maybe weeks instead of months and years. And there is nothing that motivates them to trade aggressively like meetings of the Fed’s Federal Open Market Committee. Gold volatility often surges in their wakes, as speculators watch the U.S. dollar’s reaction and do the opposite in gold.

Gold-futures speculators are convinced Fed rate hikes are bearish for gold because they are bullish for the US dollar. They logically reason that the higher prevailing US interest rates, the more attractive the US dollar becomes relative to other currencies. And a stronger dollar usually means weaker gold since they are competing currencies. That all sounds rational, but the big problem is history doesn’t bear this out.

The FOMC started today’s rate-hike cycle way back in mid-December 2015, raising the federal-funds rate for the first time in 9.5 years. Gold-futures speculators fled leading into that, ultimately crushing gold to a deep 6.1-year secular low of $1051 the day after. But that oversold extreme marked the birth of a new bull market that would catapult gold 29.9% higher over the next 6.7 months! That same bull persists today.

In the 3.0 years since which includes this week’s 9th Fed rate hike of this cycle, gold is still up 18.1% and the US Dollar Index is down 2.1%. That’s no anomaly either. This is actually the Fed’s 12th rate-hike cycle since the early 1970s. During the exact spans of the prior 11, gold averaged strong gains of 26.9%! That was an order of magnitude higher than the stock markets’ 2.8% average gains per the flagship S&P 500.

Gold-futures speculators either don’t know market history or their extreme leverage forces them to run as a herd no matter how irrational that stampede is. They can’t afford to be wrong for long or risk suffering catastrophic losses. This week they apparently expected the FOMC to prove even more dovish on future rate hikes than it was. That led to volatile gold action surrounding this latest critical Fed decision on rates.

The FOMC meets 8 times per year, about every 6 weeks. But up until now, only every other meeting was accompanied by a Summary of Economic Projections and followed by the Fed chairman holding a press conference. That meant the Fed was only “live”, likely to hike rates, once a quarter at that every-other meeting. Incidentally Jerome Powell will start holding press conferences after every meeting starting in January.

That decision was made in mid-June, it had nothing to do with the recent stock-market volatility. Since the Fed doesn’t want to spook traders and ignite selloffs, rate hikes are well-telegraphed in advance. 3 weeks after each FOMC meeting, its full minutes are released. They are long and detailed, offering all kinds of clues about whether top Fed officials are thinking about hiking rates at the next FOMC meeting.

Market-implied Fed-rate-hike odds are always available through federal-funds futures trading. The big wildcard at each live FOMC meeting is a part of the SEP known as the “dot plot”. It collates where each individual top Fed official personally expects the federal funds rate to be in each of the next several years and beyond. It’s literally a bunch of dots plotted on a table, hence the name. It can really move gold futures.

Though Powell and other FOMC members stress the dot plot is not an official rate-hike forecast or outlook by the Fed, traders universally use it as such. A hawkish dot plot implies more future rate hikes than the previous one, and dovish less. Gold, currency, and stock-index futures speculators trade aggressively based on the quarterly changes in the dot plot. FOMC statements and press conferences also play roles.

At the FOMC’s previous meeting accompanied by a dot plot in late September, those forecasts implied top Fed officials expected this week’s rate hike, another 3 in 2019, and 1 final one in 2020. But market conditions were way different then. That decision came just 4 trading days after all-time record highs in the lofty euphoria-drenched U.S. stock markets. Top Fed officials are boldly hawkish when stocks look awesome.

In early October Powell doubled down on this hawkishness, saying in an evening speech that the federal-funds rate was “a long way from neutral at this point, probably” and that “We may go past neutral.” The very next day the stock markets started sliding and haven’t looked back since. By this Monday that selloff had gradually mushroomed into a moderate 13.1% correction in the S&P 500. Many blame it on Fed hawkishness.

Facing withering criticism led by president Trump himself, Powell tried to walk back his own many-more-rate-hikes-to-come outlook in late November after the S&P 500 had passed the 10% correction threshold. Powell said “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy…” Stock selling was softening the Fed.

While traders fully expected the rate hike of this cycle Wednesday, they were sure the dot-plot outlook of future rate hikes would be far more dovish than late September’s 5 including this week’s. Gold rallied nicely in anticipation, climbing from $1214 before Powell’s second speech to $1249 the day before this latest FOMC meeting. In the hours before this new dot plot’s release, gold was bid to a new upleg high of $1261.

Market expectations were for just 1 rate hike in 2019 compared to the previous 3 implied, followed by an actual rate cut in 2020! That seemed excessive, so I figured top Fed officials would kill one of the hikes next year leaving 2 in 2019 and remove 2020’s lone hike as well. While this latest dot plot was indeed dovish as expected, it wasn’t dovish enough. 2019’s outlook shrunk to 2 more hikes, and 2020’s kept that final one.

So instead of going from 4 future hikes down to 1 or 2 as hoped, the dot plot only retreated from 4 to 3. Both dollar-futures and gold-futures speculators expected more dovishness, leading to moderate gold selling after the dot plot. Gold fell from $1251 just before its release to $1242 a couple hours later, and closed 0.6% lower on the day. Stock markets fared worse, the S&P 500 falling 1.5% to a new correction low!

But the impact of FOMC decisions usually takes a day or two to settle out. They are released at 2pm New York time when Asian and European markets are closed. So until foreign traders get their chances to react to the Fed, the market outcome isn’t known. Even American traders have to get past their initial kneejerk reactions, so the next trading day following the FOMC is crucial as actual implications sink in.

Gold was slowly bid heading into Thursday in Asian markets, heading back up near $1248 by the time Europe was opening. And then gold quickly surged to $1256, a new closing upleg high. In U.S. afternoon trading the day after this FOMC decision, gold surged as high as $1266! Top Fed officials’ future rate-hike outlook falling from 4 to 3 might not have been dovish enough, but it was still certainly dovish absolutely.

Seeing the Fed waver on future rate hikes in response to the mounting stock-market selloff this quarter is super-bullish for gold and its miners’ stocks going forward. Both gold-futures speculators and normal investors remain way under-deployed in gold, with vast room to buy. Odds are this week’s dovish FOMC will accelerate major gold and gold-stock uplegs. That’s happened after past Fed rate hikes in this cycle too.

This first chart superimposes gold prices over the total gold-futures long and short contracts speculators hold, which are rendered in green and red respectively. All 9 Fed rate hikes of this cycle are highlighted in blue. Gold has often surged strongly on gold-futures buying in recent years following FOMC rate-hiking decisions, or more precisely dot-plot changes in the future rate-hike outlook. Gold is set up to surge again.

Again, this entire gold bull was born the day after the Fed’s first rate hike of this cycle, resulting in that big initial 29.9% gold upleg over 6.7 months in essentially H1’16. That left gold overbought so it started to correct like normal. But that was greatly exacerbated by Trump’s surprise election victory which ignited a monster stock-market rally on hopes for big tax cuts soon. Investors aggressively fled gold to chase stocks.

But gold bottomed in mid-December 2016 the day after this cycle’s second rate hike, and soon started surging sharply higher. Yet gold-futures speculators didn’t learn their lesson, and continued to dump gold heading into FOMC decisions with expected rate hikes. Gold rallied strongly immediately out of the 3rd, 5th, and 6th hikes of this cycle, and soon after the 4th and 8th. Rate hikes have definitely proven bullish for gold!

The 7th rate hike in mid-June 2018 was a major exception. Gold fell sharply in subsequent days as gold-futures speculators lapsed into a stunning extreme record orgy of short selling. Initially sparked by a U.S. dollar rally, that epic gold-futures shorting soon took on a life of its own driving total short contracts to their highest levels ever by far! That ultimately blasted gold to a deep and unsustainable 19.3-month low in mid-August.

Most of that shorting spree has been covered since, fueling most of gold’s young upleg since. But the long-side gold-futures speculators who control much more capital than short-side guys have barely started to buy. Short covering is legally mandated to repay the debts incurred by borrowing to short sell. But long buying is totally voluntary, speculators have to believe gold is heading higher to make leveraged bets on it.

At the end of November the day before Powell’s about-face on how far rates were from neutral, the total gold-futures longs held by speculators had crumbled to just 204.9k contracts. That was a serious 2.9-year low, levels last seen in late January 2016 just as this gold bull was starting to march higher. So gold-futures speculators are nearly as under-deployed in gold as they were near the end of its last secular bear!

That leaves vast room for them to buy to reestablish normal positions. Back in essentially the first half of 2016, speculators added 249.2k longs while covering 82.8k shorts to help catapult gold 30% higher. It’s amazing to see similar long-buying potential today, with speculators’ total longs running just 7% up into their past year’s trading range. We’re nearing the tipping point where short covering ignites far-bigger long buying.

Gold bull uplegs have 3 distinct stages that trigger and unfold in telescoping fashion. They all start out of major lows with that mandatory gold-futures short covering, the first stage. That eventually pushes gold high enough for long enough to entice long-side gold-futures speculators to return, the second stage. I suspect this week’s dovish FOMC meeting could prove the catalyst that ignites big stage-two gold buying.

This latest dot plot may not have been dovish enough for traders, but Fed dovishness will snowball with stock-market weakness. The lower the stock markets slide, whether or not Fed hawkishness is really to blame, the more pressure on the FOMC to slow or even stop its future-rate-hike tempo. Gold-futures speculators will crowd into gold to chase its upside momentum with their feared rate-hike boogeyman fading.

But all the stage-one and stage-two gold-futures buying that fuels young gold uplegs is just the prelude to far-larger stage-three investment buying. After gold’s upleg grows large enough and lasts long enough to spawn investor interest, their capital inflows soon dwarf anything the gold-futures speculators could ever manage. There’s also precedent in this cycle for Fed rate hikes soon leading to surging gold investment demand.

A great high-resolution proxy for gold investment-demand trends is the amount of physical gold bullion held in trust by the dominant GLD SPDR Gold Shares gold ETF. It effectively acts as a conduit for the vast pools of American stock-market capital to slosh into and out of gold. Just a couple weeks ago I wrote an essay on how GLD works and why it is critically important to gold prices, especially during stock selloffs.

This next chart looks at GLD’s holdings superimposed over the gold price, with all 9 Fed rate hikes of this cycle highlighted. While gold-futures trading usually dominates gold prices, it is still easily overpowered by material flows of American stock-market capital into or out of gold via GLD. Investors have started to return to gold again on the stock-market selloff, and this prudent reallocation should accelerate on Fed dovishness.

The last time American stock investors were worried enough about stock-market selloffs to redeploy into gold for refuge was that first half of 2016. Since gold is a rare counter-moving asset that tends to rally as stock markets weaken, investment demand soars when the S&P 500 slides long enough to ignite serious concerns. We’re certainly getting to that point again, as worries are mounting about this latest major selloff.

Gold went from being left for dead in mid-December 2015 to surging 29.9% higher in just 6.7 months solely on American stock investors returning! This is no generalization, the hard numbers prove it without a doubt. The world’s best gold fundamental supply-and-demand data comes from the venerable World Gold Council. It releases fantastic quarterly reports detailing the global buying and selling happening in gold.

Gold blasted higher on stock weakness in Q1’16 and Q2’16. According to the latest data from the WGC, total world gold demand climbed 188.1 and 123.5 metric tons year-over-year in those key quarters. That was up 17.1% and 13.2% YoY respectively! But the real stunner is exactly where those major demand boosts came from. It wasn’t from jewelry buying, central-bank buying, or even physical bar-and-coin investment.

In Q1’16 and Q2’16, GLD’s holdings alone soared 176.9t and 130.8t higher on American stock investors redeploying into gold after back-to-back S&P 500 corrections. Incredibly this one leading gold ETF accounted for a staggering 94% of overall global gold demand growth in Q1’16 and 106% in Q2’16! So there’s no doubt without American stock investors fleeing into gold via GLD this gold bull never would’ve been born.

Gold was holding those sharp gains throughout 2016 until Trump’s surprise presidential victory unleashed a monster stock-market run on hopes for big tax cuts soon. Gold was pummeled in Q4’16 as American stock investors pulled capital back out to chase the newly-soaring S&P 500. That quarter total global gold demand per the WGC fell 103.4t YoY or 9.0%. GLD’s 125.8t Q4’16 holdings draw accounted for 122% of that!

Fast-forward to summer 2018, and investors again started shifting out of gold to chase euphoric U.S. stock markets nearing new record highs. That forced GLD’s holdings to a deep 2.6-year low, investors hadn’t been so underinvested in gold since early in this bull market when they started flooding back in helping to catapult gold sharply higher. That gives them massive room to buy back in since their allocations are so low.

This mass exodus of American stock-market capital out of gold via GLD ended in mid-October the exact day the S&P 500 started plunging in what’s grown into this newest correction-grade selloff! Ever since GLD’s holdings have continued recovering on more capital inflows, helping to drive gold higher. This trend should only accelerate as stage-two gold-futures long buying on Fed dovishness further lifts gold prices.

Investors are often as momentum-driven as futures speculators, but over much-longer time horizons. So as this young gold upleg grows, gold is going to look much more attractive to them. Their desire to chase its upside performance is really intensified by material stock-market weakness. That makes gold stand out as not just a safe-haven capital-preservation hedge, but a way to grow wealth while everything else burns.

And as goes gold, so go the stocks of its miners. Last week I wrote a whole essay detailing the imminent major upside triple breakout in gold stocks likely to be triggered by a dovish FOMC. That indeed started to happen this week before the Fed, as this updated GDX chart shows! The GDX VanEck Vectors Gold Miners ETF is the leading gold-stock investment vehicle and benchmark, and remains poised for massive gains.

Three major resistance zones have converged at GDX $21. They include its 200-day moving average, past-year descending-triangle overhead resistance, and the old consolidation basing trend’s support. In anticipation of a gold rally on a dovish Fed, GDX closed above $21 on Tuesday. And in the hours before that FOMC decision Wednesday, it hit $21.47 intraday which was very-bullish decisive-breakout territory.

But when futures speculators bid the U.S. dollar higher and pushed gold lower on this latest dot-plot rate-hike outlook not being dovish enough, the gold stocks reversed hard. GDX plummeted a staggering 7.3% intraday across that FOMC decision! It closed 5.4% lower, making for absurd 9.0x downside leverage to gold’s small 0.6% Fed Day loss. That was a wildly-irrational downside anomaly that never should’ve happened.

In trying to figure out why after Wednesday’s close, I waded through dozens of gold stocks to see if there was some adverse news besides a not-dovish-enough FOMC. There was nothing. But provocatively in after-hours trading soon after the U.S. stock-market close, many if not most of the gold stocks had already regained 2/3rds to 3/4ths of that day’s crazy losses! So traders realized that kneejerk selloff wasn’t righteous.

Indeed right out of the gates Thursday GDX surged 4.1% higher erasing over 7/10ths of the extreme Fed Day losses. Remember market reactions to FOMC decisions usually aren’t fully apparent until the entire next trading day, after the implications have sunk in and overseas traders have reacted. Gold stocks’ major-upside-breakout thesis portending a powerful new upleg remains intact, the Fed likely accelerated it.

The beaten-down gold miners’ stocks remain the last cheap sector in the entire stock markets, a coiled spring ready to soar as gold returns to favor. The more shorts covered and longs bought by gold-futures speculators, and the more capital investors allocate back into gold, the greater the upside the gold miners’ stocks have as gold powers higher. Their potential gains are enormous, dwarfing anything else in 2019.

Again the last time major stock-market weakness rekindled gold investment demand was essentially the first half of 2016, when gold powered 29.9% higher. That drove a parallel monster 151.2% gold-stock upleg per GDX, making for huge 5.1x upside leverage. The gains in major gold stocks generally amplify gold upside by 2x to 3x, and smaller mid-tier miners with superior fundamentals tend to do much better than that.

The key to riding any gold-stock bull to multiplying your fortune is staying informed, both about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research through our popular newsletters.

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The bottom line is this week’s FOMC decision is very bullish for gold and its miners’ stocks going forward. While only seeing 1 of 3 projected 2019 rate hikes axed wasn’t considered dovish enough, it still showed the Fed’s hawkish resolve is cracking. That dovishness will mount the longer stock markets remain weak, further shortening and shrinking this rate-hike cycle. That green lights capital returning to gold in a big way.

There is massive room to buy back in, with both speculators’ gold-futures longs and stock investors’ gold held via GLD just modestly above major multi-year lows. Dovish Fedspeak, weaker stock markets, and higher gold prices will really motivate them to reestablish normal gold positions and portfolio allocations. The gold miners’ stocks will be the major beneficiaries of higher gold prices, nicely leveraging gold’s gains.

Adam Hamilton, CPA

December 21, 2018

The U.S. stock market continues to implode. At the same time, precious metals, bitcoin, and the Indian stock market are acting as superb safe havens.
Please click here now. Double-click to enlarge this great short term gold chart.
Note the positive bounce from buy-side support at $1237, and the inverse H&S bottom pattern. A fresh rate hike from the Fed tomorrow could crush the stock market again, but if there’s no rate hike, that could also crash the stock market.
That’s because money managers would believe the Fed thinks the supposed “world growth leader” economy is too weak to handle even a 2.5% Fed funds rate!
This Fed meeting could be an important catalyst that makes institutional money managers start to get serious about viewing gold as a respected asset class… that is here to stay.
On that note, please click here now. While an overdue import duty cut remains elusive, the citizens of India (and China) are the clear leaders in the quest to make gold the world’s most respected asset class.
On the government side, the Chinese government has been a leader in building gold market infrastructure to move price discovery from the dingy trading rooms of the Western fear trade to the more positive love trade environment of the East.
The Indian government is beginning to play “catch-up”, and that’s very good news for gold investors around the world.
Please click here now. There are currently about 400 million Indians who have internet access, and that is expected to double to 800 million quite quickly.
The World Gold Council (WGC) estimates that 3 million Indians buy gold online, and they predict that number will soon quintuple to 15 million!
In 2014 I predicted a “gold bull era” was being born and it would be founded on a gargantuan ramp-up in Chindian online gold demand.
Indians can already get physical delivery from most of the online platforms when total purchases reach just one gram of online-purchased gold.
Warren Buffett is buying into one of the platforms (Paytm). This man is an elephant hunter!
Please click here now. Double-click to enlarge this magnificent big picture gold chart.
An almost surreal array of positive love trade and inflation trade price drivers are converging at the same time.
This is happening as gold bullion begins a majestic ascent from the right shoulder low of a gargantuan inverse head and shoulders bull continuation pattern.
Sadly, to view something much less than majestic, please click here now. Double-click to enlarge. My proprietary “Graceland Traffic Light” on the weekly Dow chart has just turned amber.
This is a rare and ominous event. U.S. stock market investors who ignore these major traffic light signals risk tremendous portfolio damage.
If the signal stays amber as of Friday’s close, I’ll consider it a full U.S. stock market sell signal, and any positions bought above the Dow 10,000 level should be sold.
In global stock market downturns like the current one, Canadian money managers will throw the junior mining stocks baby out with the stock market bathwater.
Most of the smaller junior miners trade on the Canadian CDNX exchange, so it’s very important for all gold market investors to be properly diversified in what is obviously the world’s greatest asset class. Junior mining stock investors should own some of the bigger miners to get that diversification.
Please click here now. Double-click to enlarge this spectacular GDX chart. GDX put in another day of strong upside action yesterday, and it did so as the Dow fell almost 500 points!
On Saturday I urged my gublockchain.com subscribers to buy bitcoin (and some “alts”)… right before the latest upside blast that I predicted would be “explosive”. It was explosive, and I have the excited investors in profit booking mode now.
I’ll boldly predict that a few more daily closes above $20.50 are going to produce an equally explosive price surge for GDX and a huge array of individual gold stocks!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Juniors With The Juice!” report. While most junior miners have a lot of hurdles to overcome, I highlight six that are likely poised for five bagger gains in 2019! I include daily chart buy and sell points for each stock.

Stewart Thomson

Graceland Updates

Risks, Disclaimers, Legal

Are You Prepared?

If we want to know where Gold is going we should follow Gold. Right?

How about following gold stocks? At times, they lead Gold.

What about the U.S. Dollar? Wrong!

In 2019, one market more than any other will impact Gold.

That is the stock market.

History argues (within the current context) that when the Federal Reserve ends its rate hikes, Gold’s downtrend will be over and when the Fed cuts rates, the bull market shall begin.

Fed policy is dictated by economic data and financial conditions which of course can be reflected by the stock market, which is also a reflection of corporate profits.

Extended weakness in the stock market should bring the Fed that much closer to rate cuts. However, if the stock market is able to mount a decent counter trend rally in 2019, it could raise the possibility of another hike. Right now, the market expects no hikes in 2019 and even half of a quarter point cut in 2020.

Other than the cyclical bull market of 1985 through 1987, Gold has never enjoyed a real bull market without outperforming the stock market.

Below we plot Gold and Gold against the broad stock market (NYSE). Gold is still trading below a confluence of resistance ($1260-$1270) and the Gold to stock market ratio, while trading above its 200-day moving average has not broken out of its downtrend yet.

As we pen this, the stock market is breaking lower but Gold is also down and remains below a confluence of resistance at $1260-$1270/oz.

Is our thesis wrong?

The current weakness in equities has not completely changed Fed policy yet. Sure, the weakness in the equity market definitely could cause the Fed to pause its rate hikes and the market has already discounted that for 2019.

However, for the bull market in Gold to be ignited the Fed needs to move from a pause to the start of rate cuts. The current talk is about a pause, not rate cuts.

Hence, Gold is catching a bid and starting to perform better in real terms but has not reached bull market status yet.

Until Gold proves its in a bull market (and the market begins pricing in a rate cut) it would not be wise to chase strength. There will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. To prepare yourself for an epic buying opportunity in junior gold and silver stocks in 2019, consider learning more about our premium service.

The beleaguered gold stocks are recovering from their late-summer capitulation, enjoying a solid young upleg as investors gradually return. Their buying has pushed the leading gold-stock ETF near a major triple breakout technically. That event should really boost capital inflows into this sector, accelerating the rally. A major gold and gold-stock buying catalyst is likely imminent too, a more-dovish Fed this week.

The gold miners’ stocks have always been a small contrarian sector, a little-watched corner of the stock markets. But they’ve been even more unpopular than usual in recent months. That pessimistic sentiment is driven by price action, which has mostly proven poor in 2018. That’s really evident in the performance of the flagship gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF which is struggling.

As of the middle of this week, GDX was down 12.0% year-to-date. That leveraged gold’s YTD decline of 4.4% by 2.7x, which is perfectly normal. Because gold-stock earnings are heavily dependent on prevailing gold levels, gold-stock prices tend to amplify gold’s moves by 2x to 3x. That’s a double-edged sword, really profitable when gold rallies but cutting deeply when it retreats. The drawdowns are challenging to weather.

But gold stocks’ inherent leverage to gold is starting to work again on the upside, portending big gains ahead. This first chart looks at the major gold stocks’ technicals through the lens of GDX over the past several years. This sector soared in a new bull market, plunged with gold after Trump’s surprise election win goosed the stock markets, consolidated sideways to base, and then suffered an extreme capitulation selloff.

Investors and speculators often forget how explosive gold-stock upside is when gold is powering higher in an upleg. In largely the first half of 2016, GDX skyrocketed 151.2% higher in just 6.4 months! Capital just flooded back into the gold miners driven by a new gold bull’s parallel 29.9% upleg. That catapulted GDX to very-overbought levels and a 3.3-year high in mid-2016. So a normal correction got underway soon after.

GDX found support at its critical 200-day moving average, which is often the strongest support zone seen in ongoing bull markets. But that failed in November 2016 after an anomalous surprise. Trump defied the polling and odds to win the presidency while Republicans controlled both chambers of Congress. So the stock markets soared in that election’s wake on euphoric hopes for big tax cuts soon. Gold wilted on that rally.

So the gold stocks naturally followed it lower, again mirroring and amplifying its price action. After it had enjoyed stellar 5.1x upside leverage to gold in its powerful H1’16 upleg, GDX dropped 39.4% over the next 4.4 months. That leveraged gold’s own correction by 2.3x, relatively low in that usual 2x-to-3x range. GDX soon bounced sharply with gold and established a new consolidation trading range between $21 to $25.

The major gold stocks mostly meandered within that GDX range for 21.5 months. While it was vexing at times to see upside-breakout attempts fail, basing consolidations are very bullish. They provide time for bullish newer investors to acquire shares from bearish exiting ones, establishing new price norms well above previous bear-market lows. And the $23 midpoint of that GDX trading range proved relatively high.

This gold-stock bull was born out of fundamentally-absurd lows of GDX $12.47 in mid-January 2016. It peaked at $31.32 in early August that year. Oscillating around $23 on balance, GDX was basing 4/7ths up into its young bull’s entire range. The major gold stocks GDX holds were biding their time waiting for another major gold upleg to catapult them higher. They nearly broke out above $25 in early-September 2017.

But that attempt’s failure damaged psychology so traders gradually sold, this small contrarian sector left for dead. The subsequent lower highs over the next 10.4 months into mid-July 2018 formed a downward-sloping resistance line. Gold-stock prices were being compressed into a bearish descending triangle, as lower highs slumped ever closer to that major $21 support. This sector really needed a major gold rally.

Unfortunately the opposite happened this past summer, gold got hammered crushing the weakened gold stocks. The US stock markets were powering higher trying to regain record highs in July and August 2018, heavily retarding gold investment demand. On top of that the U.S. Dollar Index was surging too, both on expectations for more Fed rate hikes and an emerging-markets currency crisis led by the Turkish lira.

So gold-futures speculators started short selling gold at extreme record levels, blasting their aggregate downside bets far up into anomalous territory never before witnessed. Gold fell sharply on that record gold-futures shorting spree, dragging the struggling gold stocks down with it. So in early August GDX plunged and knifed through its longstanding $21 support. That major breakdown spawned self-feeding selling.

Gold stocks are an exceptionally-volatile sector not for the faint of heart. So it is essential to run loose trailing stop losses on gold-stock positions. While these protect investors from excessive losses, they greatly exacerbate selloffs. The lower gold stocks fell this past summer, the more stop losses were hit. These mechanical automatic sell orders then add to the downside pressure, pushing gold stocks lower still.

That vicious circle of selling begetting selling snowballed into an extreme capitulation in gold stocks, as GDX plummeted in August and early September. In just 5 weeks GDX collapsed 17.0%, far worse than gold stocks should’ve performed with gold merely slipping 1.4% lower in that span. That devastated already-shaky sentiment, leaving most investors and speculators to throw up their hands in disgust and flee.

But with GDX being pummeled to a deep 2.6-year low, the major gold stocks were wildly oversold. I explained all this in depth in an essay on gold stocks’ forced capitulation in mid-September. They were due to mean revert dramatically higher after that extreme selling anomaly. And that process has indeed been underway ever since. The gold stocks have been recovering, clawing their way out of those deep lows.

As usual gold stocks’ dominant primary driver has been gold, which has been grinding higher in its own young upleg as speculators cover their record gold-futures shorts. Investors started returning too when the lofty US stock markets began rolling over hard in mid-October. As of the middle of this week, GDX just hit a new upleg high of $20.45 on close. That extended gains since the capitulation low to 16.4% in 3.0 months.

Although considerable, the gold stocks’ rally still hasn’t grown large enough to return to the radars of contrarian investors. That could be about to change though as a rare triple breakout looks imminent! GDX, the leading gold-stock investment vehicle, is on the verge of simultaneous upside breakouts from its 3 major upper-resistance zones. That will likely unleash big gold-stock buying from technically-oriented traders.

These major resistance levels have all converged near $21. The first and most important is GDX’s key 200-day moving average, which was $20.78 this week. 200dmas are seen as the dividing line between bull and bear markets. When prices surge back above 200dmas after long periods underneath them, the upside momentum often explodes. Traders love chasing gains and 200dma breakouts portend big ones.

The past few years have several examples of gold stocks surging dramatically after 200dma breakouts. The main one was in early February 2016, when GDX rocketing back over its 200dma after deep lows confirmed a new bull market was underway. The great majority of its initial massive 151.2% upleg came after that 200dma upside breakout. Another upleg surged after a 200dma breakout in mid-August 2017.

The latest one came in late December 2017, although that was truncated early by gold stalling out. Realize that no technical line is more important to traders than 200dmas. When they see major gold stocks power decisively back over their 200dma as measured by GDX, they are likely to rush to buy in to ride the momentum. Like selling, buying begets buying. The more gold stocks rally, the more traders want them.

That imminent 200dma breakout will be all the more potent as a new-upleg signal because 2 other major resistance lines have converged there. That downward-sloping resistance line of the descending triangle has also extended right on $21. So once GDX powers decisively above it, this past year’s vexing trend of lower highs will end. Traders will see that as evidence the major gold-stock trend is reversing to higher.

The final resistance line of that triple breakout is the major $21 support of GDX’s consolidating basing range that held rock solid for over a year-and-a-half. When prices fall, old support zones often become new overhead resistance. Traders tend to want to sell again when those old support levels near. So when GDX decisively breaks back out above $21, technical fears of that former support level will vanish.

Once back over $21, GDX will return to its multi-year consolidation basing trend between $21 to $25. So the triple breakout above that old support line, downward-sloping resistance line, and 200dma would set the stage for a sharp surge back towards the top of that old trading range. While GDX $25 isn’t very high in absolute terms, it’s still another 22.2% above this week’s levels. Such a rally would spark some excitement.

Because historical gold-stock uplegs have been so enormous, generating life-changing wealth, there is always latent gold-stock interest lurking. Contrarian investors and speculators alike sour on gold stocks when they are weak, but quickly return when they show technical signs of life. A GDX triple breakout sure qualifies as that! And much-higher gold-stock prices are certainly justified fundamentally, long overdue.

Gold miners’ earnings and thus ultimately stock prices are largely a function of gold levels. Mining costs are essentially fixed during mine-planning stages. So higher gold prices flow directly through to bottom lines in amplified fashion. This is easy to understand with an example. A month ago I waded through the Q3’18 results of GDX’s major gold miners. Their average all-in sustaining costs weighed in at $877 per ounce.

That is what it costs them to produce and replenish gold, and $877 was right in line with their previous 4 quarters’ average of $867. Those collective costs will remain stable even as gold’s upleg accelerates. At gold’s own extreme-futures-short-selling-driven bottom of $1174 in mid-August, the major gold miners of GDX were still earning about $297 per ounce. Such solid levels prove that capitulation wasn’t righteous.

Last Friday gold hit a new upleg high of $1248, up 6.3% from its anomalous late-summer lows. Imagine this young upleg grows to 30% like the H1’16 one, which is quite small by historical standards. That would leave gold near $1525. At those $877 average GDX AISCs, the major gold miners’ profits would rocket to $648 per ounce. That’s 118% higher on a 30% gold upleg! Big gold-stock upside is fundamentally justified.

The ratio between the closing prices of GDX and the dominant GLD SPDR Gold Shares gold ETF is an easy approximation of the critical fundamental relationship between gold-stock prices and gold levels. This last chart is updated from a mid-October essay where I explained why gold stocks are the last cheap sector in all the stock markets. The GDX/GLD Ratio shows gold stocks have vast room to mean revert higher.

This GGR construct has averaged 0.186x during the 3.0 years of this current gold bull so far. This week the GGR clawed back to 0.174x, hitting its own 200dma. But at the gold stocks’ deep capitulation low in mid-September, the GGR plunged all the way down to 0.155x. That’s 0.031x below normal for this bull. After GGR extremes in either direction, this key ratio tends to mean revert the other way and overshoot proportionally.

That argues GDX is easily likely to surge far enough leveraging gold’s gains to regain a 0.217x GGR. That’s certainly not a high level even in the modest context of this gold bull. At this week’s $1245 gold levels which translated near $118 in GLD terms, GDX would have to surge to $25.56 to accomplish that normal mean-reversion overshoot. That’s another 25.0% higher, which would make for a solid upleg well worth riding.

And that GGR target is still incredibly low in longer secular context. In the 2 years before 2008’s first stock panic in a century, the GGR averaged 0.591x. Though gold stocks plummeted in the extreme fear that panic spawned, the GGR rebounded to average 0.422x in the 2 years after that epic anomaly. Over a longer 4-year post-panic span, it averaged 0.381x. So seeing it regain 0.217x is nothing, it should go far higher.

The bigger gold’s own upleg, the more the gold stocks will outperform by the usual 2x to 3x and force the GGR higher. At $1525 gold after a relatively-small 30% upleg, that 2009-to-2012 post-panic-average GGR of 0.381x would yield a GDX upside target around $55 per share. That’s 169% higher from this week’s levels, even without an overshoot! Gold-stock profits growth from higher gold prices justifies huge gains.

And rather conveniently on the verge of that GDX triple breakout, a major gold-buying catalyst is likely this week. On Wednesday December 19th, the Fed’s FOMC meets to decide on whether or not to hike rates for the 9th time in this cycle. That rate hike has been universally expected for months now, it is fully baked in. But the thing gold-futures and dollar-futures traders are really watching is the rate-hike forecast.

While the FOMC meets 8 times per year, at every other meeting it releases something called the dot plot. That summarizes where top Fed officials making the decisions think the federal-funds rate should be in coming years. The last dot plot was published on September 26th when the S&P 500 remained just 0.8% under its all-time record high from a week earlier. Fed officials are boldly hawkish when stocks are high.

But the stock markets soon fell apart in Q4’18, the first in history seeing full-speed quantitative-tightening monetary destruction by the Fed! Various Fed officials including the chairman have waxed more dovish since stocks started sliding. Fearing a negative wealth effect adversely impacting the US economy, their resolve to hike rates withers. So there’s a good chance this week’s dot plot will be more dovish than the last one.

Late September’s had effectively forecast 5 more Fed rate hikes including at next week’s meeting. So if this new dot plot shows less than 4 total rate hikes forecast in 2019 and 2020, dollar-futures speculators will likely sell motivating gold-futures speculators to buy aggressively. Fewer expected rate hikes are very bullish for gold, as proven in past dot plots. A great example was the 5th hike of this cycle in December 2017.

A year ago this week the FOMC hiked, but its dot-plot rate-hike forecast was dovish. Instead of upping it to 4 rate hikes in 2018 as traders expected, Fed officials left it at 3. So over the next 6 weeks, gold shot up 9.2% to $1358 on heavy gold-futures buying by speculators. A similar rally after next week’s meeting if the dot plot forecasts fewer rate hikes than the last one would drive gold right back up near $1360 again.

That’s on the verge of a major bull-market breakout which would likely unleash massive new investment buying. And any material gold rally will light a big fire under the gold stocks, rapidly driving them higher. That would put GDX’s triple breakout in the bag with haste. Nothing drives big capital inflows into the gold stocks faster than seeing them decisively rally. They are perfectly set up for major gains in coming months!

A big mean-reversion rebound higher is inevitable and likely imminent. While traders can play it in GDX, that’s mostly a bet on the largest gold miners with slowing production. The best gains by far will be won in smaller mid-tier and junior gold miners with superior fundamentals. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation than ETFs dominated by underperformers.

The bottom line is the gold stocks are nearing a rare triple breakout. Three major GDX resistance zones have converged just above current levels. Once the gold stocks surge decisively over, the technically-oriented traders will take notice. They will likely start chasing the momentum accelerating the gains, with buying begetting buying. And gold stocks are so undervalued big gains are totally justified fundamentally.

This bullish outlook should be really bolstered by this week’s FOMC meeting. Worried about the recent stock-market selloff and surging volatility, top Fed officials are likely to dial back their rate-hike forecasts for next year. That will almost certainly hit the US dollar and goose gold. If gold surges again on a dovish dot plot like it has after other rate hikes in this cycle, the gold stocks will blast higher achieving that triple breakout.

Adam Hamilton, CPA

December 17, 2018

Where are the populist government leaders who are cutting their outrageous government debts?
The answer, unfortunately, is that they do not exist.
Citizens riot in France over insane fuel taxes, central bankers resign in India, markets crash in America, and England’s citizens watch their Brexit turn into an overpriced wet noodle.
None of this fazes the world’s populist leaders. They believe they alone can fix what debt broke… with more debt!
Please click here now. Double-click to enlarge. In the middle of all the mayhem and madness, the uncrowned queen of the world, gold bullion, sits cooler than a cucumber. Gold is showcasing a nice steady uptrend on this medium-term price chart.
Please click here now. Heavyweight analysts at JP Morgan, Goldman, Wells Fargo, and other big banks are bullish on gold now, but many amateur analysts and investors are worried (with some sounding outright terrified) that gold is going lower.
This is a classic wall of worry rally, and I expect the upside price action to accelerate in January and February.
There’s also a real possibility that Trump piles on more destructive tariffs by March. If that happens, it would occur just as Chinese New Year gold buying really accelerates.
In that scenario, gold could surge towards the key $1400 area and the US stock market would likely crash like it did in 1929.
Please click here now. Double-click to enlarge. Investors must keep their eye on the big picture, which is all about the growth of the Chindian love trade and the rise of inflation, especially in the West.
A new pillar of gold bullion demand could also emerge now that India’s populist leader (Modi) has essentially taken control of the nation’s central bank. A fresh survey shows that 90% of Indian households see substantially higher inflation coming in 2019. That survey was done before the nation’s top central banker resigned yesterday!
The world’s populist leaders want interest rates to stop rising so their governments can borrow even more money and waste it on silly “people helper” programs.
Some of the populist leaders want to buy more bombs, some want more welfare programs, but what they all have in common is they want to spend more, and more, and more! This is highly inflationary.
Please click here now. While many amateur gold analysts have talked about their fear of lower prices, I’ve urged investors to focus on the epic upside breakout taking place on the world’s most important gold mining company. That company is: Barrick.
Junior gold and silver stock enthusiasts can expect to see their stocks begin to follow the Barrick leader. It’s already happening with many of the CDNX-listed stocks, and this morning’s pre-market “super surge” in Barrick’s price is going to start the next major wave higher for most of the junior miners.
What seals the deal? Answer: A weekly close above $14 for Barrick. I expect it to happen this week and investors who waste time reading the fears of the gold bears risk missing out on years of upside price action. The bottom line:
This is not the start of a gold bull market. It’s the start of a bull era that will last a hundred years.
I’ve predicted three U.S. rate hikes for 2019. Goldman was predicting four, but yesterday their chief economist Jay Hatzius reduced his forecast to three.
We’re on the same page now, with both of us predicting three hikes, a surprising rise in U.S. inflation, and GDP growth that fades under the 2% marker by the second half of 2019.
Ray Dalio is head of the world’s largest hedge fund (Bridgewater). Ray predicts an “inflationary depression” will envelop America within about two years. I think it takes three to four years, but given the danger, does the time frame really matter? The timing of a hurricane doesn’t change the fact that people need to get out of its way.
On that note, please click here now. Just as most big bank analysts are positive about gold now, they have increasingly negative forecasts for the U.S. dollar.
The policies of the world’s “spendaholic” populist leaders are extremely inflationary. The bank analysts know that’s bad news for dollar bugs and great news for gold stock investors.
Please click here now. Double-click to enlarge this magnificent GDX price chart. My short term guswinger.com swing trading service has caught all the key swings in the GDX base formation, reducing boredom while making investors richer! I focus on NUGT and DUST for the short term moves and unleveraged GDX for the home run plays!
We booked solid profits yesterday as GDX edged towards the important $20.50 price zone. After a brief pitstop at this minor resistance zone, the GDX bull is poised to drive its golden horns into the bears… and begin a magnificent charge up to $23.50!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Golden Outperformers” report. I highlight six GDXJ component stocks that are poised to immediately follow Barrick with major upside breakouts of their own! I highlight key technical signals and provide tactics to help investors book great profits.

Stewart Thomson

Graceland Updates

Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.

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Risks, Disclaimers, Legal

Are You Prepared?

In recent days we’ve seen the beginnings of an inversion in the yield curve.

The 2-year yield and the 5-year yield have inverted but not yet the the 2-year yield and the 10-year yield, the curve that is watched most. However, “2s and 10s” as bond traders would say appear headed for an inversion very soon.

We know that an inversion of the yield curve precedes a recession and bear market. That is good for Gold. But timing is important and the key word is precedes.

In order to analyze the consequences for Gold we should consult history.

First let’s take a look at the 1950-1980 period.

In the chart below we plot the Barron’s Gold Mining Index (BGMI), Gold, the Fed funds rate (FFR) and the difference between the 10-year yield and the FFR (as a proxy for the yield curve).

The six vertical lines highlight peaks in the FFR and troughs in the yield curve (YC), which begins to steepen when the market discounts the start of rate cuts. A steepening YC is and has been bullish for Gold except when it’s preceded by inflation or a big run in Gold.

Note that five of the six lines also mark a recession except in 1966-1967.

At present, the yield curve is on the cusp of inverting for only the third time since 1990.

The previous two inversions in 2000 and 2007 were soon followed by a steepening curve as the market sensed a shift in Fed policy.

The initial rate cut in 2000 marked an epic low in the gold stocks and the start of Gold strongly outperforming the stock market. In summer of 2007 the rate cuts began and precious metals embarked on another impulsive advance.

The historical inversions carry a different context but the takeaways are not so different.

Aside from the mid 1970s to the early 1980s, we find that a steepening of the curve (which accelerates from the start of Fed rate cuts) is bullish for precious metals. (This also includes a steepening in late 1984 that preceded the bull market in the mid 1980s).

With that said, the inversion itself is not bullish for precious metals because there can be a lag from then to the first rate cut and steepening of the curve.

I took a careful look at four of the previous inversions and counted the time from that point to the next significant low in gold stocks. The average and median time of those four is 10 months.

That appears to be inline with my thinking that the Federal Reserve’s final rate hike will be sometime in 2019.

In the meantime, precious metals are rallying but the inversion of the yield curve and Fed policy argue it would not be wise to chase this strength. There will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. To prepare yourself for an epic buying opportunity in junior gold and silver stocks in 2019, consider learning more about our premium service.

The recent stock-market selloff is persisting, fueling mounting worries among investors. The intensifying volatility and lack of a quick rebound higher is strangling euphoric sentiment, spawning self-reinforcing selling pressure. Scoffed at a few months ago, the notions that a young bear market is underway and a recession looms are gaining traction. The great beneficiary of this ominous stock-market downturn will be gold.

Gold has always been an essential asset class for prudently diversifying investment portfolios. Uniquely it tends to rally when stock markets weaken, offsetting some of the losses in typical stock-heavy portfolios. Gold acts like portfolio insurance, usually soaring when stock markets plunge on unforeseen news. All throughout history, wise investors have recommended everyone have 5% to 10% of their portfolios in gold.

But like insurance in general, the important role gold plays in portfolios is gradually forgotten when it isn’t needed. Just a few months ago, the U.S. stock markets seemed invincible. The flagship S&P 500 broad-market stock index (SPX) had powered 333.2% higher over 9.5 years by late September. That made for the 2nd-largest and 1st-longest stock bull in U.S. history! Investors were convinced that would last indefinitely.

The SPX had surged 9.6% year-to-date by that latest peak, while gold had slumped 7.3%. Thus investors felt no need to allocate virtually any capital to gold, they were and are radically underinvested in it. This is especially true of American stock investors, who were wildly optimistic after long years of big stock-market gains. Their effective portfolio exposure to gold was vanishingly small back in late September.

The 500 elite stocks of the SPX had an extreme collective market capitalization way up at $26,141.4b as that topping month waned. It is interesting contrasting that with the physical gold bullion holdings of the world’s dominant gold exchange-traded fund, the American GLD SPDR Gold Shares. GLD has long been the go-to destination for American stock investors looking to allocate capital for gold exposure in their portfolios.

At the end of September as stock euphoria peaked, GLD’s total holdings were merely worth $28.4b. That implies American stock investors were running trivial gold allocations around 0.11%! That’s on the order of only 1/50th the minimum 5% that’s been universally advised for centuries if not millennia. So it’s not much of a stretch to argue American stock investors had zero gold exposure, they were effectively all-out.

The sharp stock-market selloff in the few months since those halcyon all-time record highs has surprised most, but it shouldn’t have. As Q4’18 dawned, something ominous happened that was unprecedented in stock-market history. The US Federal Reserve upped its quantitative-tightening campaign necessary to start unwinding its $3625b of quantitative-easing money creation over 6.7 years to its terminal velocity.

October 2018 would be the first month ever to see the Fed’s monetary destruction ramp to a staggering $50b-per-month pace. And even to unwind just half of the Fed’s radical QE, QT would have to keep on destroying $50b per month of QE-conjured money for 30 months! At the end of September when the SPX was just 0.6% off its all-time record high, I explained all this in depth warning it was this bull’s death knell.

And indeed within a week of Fed QT going full-throttle, the SPX started to slide. There was no way QE-levitated stock markets could ignore QT obliterating that QE money. Every daily selloff since had its own unique story and specific drivers, which I discussed and analyzed in our subscription newsletters. These all added up to enough selling to spawn an ongoing stock-market correction, an SPX selloff exceeding 10%.

Blame it on Fed QT, stock-market bubble valuations, mounting US-China trade-war threats, Republicans losing the House, or whatever you want, but by Black Friday the SPX had fallen 10.2% over 2.1 months since that euphoric record peak. The stock markets staged some sharp rallies within that span, but they quickly fizzled proving to be dead-cat bounces. This recent action is ominously looking very bear-market like.

We can’t know for sure whether the long-overdue new bear market driven by epic record Fed tightening is indeed upon us until the SPX falls 20%+ on a closing basis. This recent correction would still have to double to hit that bear-market threshold. But gold has certainly been the main beneficiary of the recent stock-market weakness. Investors are starting to remember the ages-old wisdom of diversifying into gold.

This week’s chart looks at the US-dollar gold price superimposed over the SPX during the past 4 years or so. Despite gold being forgotten in recent years as the stock markets surged ever higher, it remains in a young bull market. And that was spawned by the last set of back-to-back corrections in the SPX, which catapulted gold sharply higher. We’re likely on the verge of another stock-selloff-driven major gold upleg!

GLD’s physical-gold-bullion holdings held in trust for its shareholders reveal how American stock investors feel about gold. This past spring they started slumping as gold was sold to move even more capital into the lofty US stock markets. For 5 months in a row ending in September, GLD’s holdings retreated as investors dumped GLD shares faster than gold was falling. By early October GLD’s holdings hit a 2.6-year low.

I penned a whole essay on this stock-euphoria-driven gold exodus in late September, explaining why it was happening and why it was likely to soon reverse. And that shift in gold-investment sentiment began the very day the SPX started plunging in mid-October! Up until October 9th the stock markets looked totally normal, the SPX had only drifted a trivial 1.7% lower from its peak. Everyone remained wildly bullish.

But something snapped on October 10th, that fateful day the SPX plunged 3.3% out of the blue on no catalyst at all. Heavy technically-motivated selling accelerated led by the market-darling mega tech stocks. For years investors had believed them bulletproof, their businesses so good they could weather any stock selloff or economic slowdown. Fears surged on the worst SPX down day since back in early February.

That very day American stock investors started returning to gold. They poured capital into GLD shares so aggressively they forced a major 1.2% holdings build. GLD’s mission is to track the gold price, but it has its own supply-and-demand profile independent from gold’s. So when GLD shares are being purchased faster than gold is bought, GLD’s share price threatens to decouple to the upside on that excess demand.

So GLD’s managers must vent that differential buying pressure directly into the physical gold market in order to equalize it and maintain tracking. They do this by issuing enough new GLD shares to satisfy all the excess demand, and then plow the cash proceeds into gold bullion. Thus rising GLD holdings show American stock-market capital is flowing into gold. That proved to be GLD’s biggest build in 6.7 months.

That fateful day proved a major inflection point for both near-record US stock markets and the extremely-unpopular gold. As the SPX continued to weaken over the next couple months, GLD continued to enjoy modest builds on investment gold buying. By late November GLD’s holdings had climbed a considerable 4.5% over 6 weeks. That has helped push gold 5.5% higher since its mid-August lows, a solid young upleg.

Odds are that gold buying via GLD by American stock investors is only beginning. The longer this stock-market weakness persists, the deeper their worries will grow. And the more their stock-heavy portfolios bleed, the quicker they will remember they should’ve allocated 5% to 10% to gold. Once gold investment demand is kindled by falling stock markets, it tends to balloon dramatically and take on a life of its own.

Gold’s young bull market today that was forgotten this summer began as 2016 dawned. Much like this year, in the first half of 2015 the US stock markets were powering to dazzling new record highs. Since it seemed like stocks could do nothing but rally indefinitely, gold was forgotten and shunned. It slumped to a brutal 6.1-year secular low by mid-December 2015, with investors really wanting nothing to do with it.

But their ironclad euphoria started to crack soon after the stock markets corrected. In mid-2015 the SPX finally suffered its first correction in an incredibly-extreme 3.6 years after being levitated by relentless Fed money creation from its third quantitative-easing campaign. Gold caught a bid on that 12.4% SPX selloff over 3.2 months, but then faded again into the expected first Fed rate hike in 9.5 years in mid-December.

Then the SPX fell into another 13.3% correction over 3.3 months into early 2016. Seeing menacing back-to-back corrections after long years without one really deflated gold-suppressing stock-market euphoria. So in early 2016 American stock investors began prudently rediversifying their stock-dominated portfolios into gold. That birthed today’s gold bull, and the gold-buying momentum fed on itself to drive a powerful upleg.

Gold went from being left for dead in mid-December 2015 to surging 29.9% higher in just 6.7 months solely on American stock investors returning! This is no generalization, the hard numbers prove it without a doubt. The world’s best gold fundamental supply-and-demand data comes from the venerable World Gold Council. It releases fantastic quarterly reports detailing the global buying and selling happening in gold.

Gold blasted higher on SPX weakness in Q1’16 and Q2’16. According to the latest data from the WGC, total world gold demand climbed 188.1 and 123.5 metric tons year-over-year in those key quarters. That was up 17.1% and 13.2% YoY respectively! But the real stunner is exactly where those major demand boosts came from. It wasn’t from jewelry buying, central-bank buying, or even physical bar-and-coin investment.

In Q1’16 and Q2’16, GLD’s holdings alone soared 176.9t and 130.8t higher on American stock investors redeploying into gold after back-to-back SPX corrections. Incredibly this one leading gold ETF accounted for a staggering 94% of overall global gold demand growth in Q1’16 and 106% in Q2’16! So there’s no doubt without American stock investors fleeing into gold via GLD this gold bull never would’ve been born.

Gold was holding those sharp gains throughout 2016 until Trump’s surprise presidential victory unleashed a monster stock-market run on hopes for big tax cuts soon. Gold was pummeled in Q4’16 as American stock investors pulled capital back out to chase the newly-soaring SPX. That quarter total global gold demand per the WGC fell 103.4t YoY or 9.0%. GLD’s 125.8t Q4’16 holdings draw accounted for 122% of that!

Gold’s fortunes are being driven by American stock investors’ collective buying and selling of GLD shares. And nothing motivates them to redeploy capital into gold to diversify their stock-heavy portfolios like major SPX selloffs. Recent months’ one has already proven serious enough to rekindle differential GLD-share buying. And as H1’16 proved, once investors start driving gold higher its rallies tend to become self-feeding.

The more physical gold bullion American stock investors buy via GLD shares, the more gold climbs. The higher gold rallies, the more investors want to buy it to ride the momentum and chase its gains. So buying begets buying, driving gold higher fairly rapidly. And when stock markets are sliding, gold is often the only asset class rallying. That makes it even more attractive to investors getting pounded by sliding stocks.

This latest SPX correction is even more damaging to sentiment because it is 2018’s second one. Back in early February the SPX plunged 10.2% in 0.4 months, which started to crack sentiment. Back when this gold bull was born it was the second of back-to-back SPX corrections that proved the coup de grâce in hurting stock-market sentiment enough to unleash a reallocation into gold. This scenario is playing out again.

Provocatively seeing the three major US stock indexes suffer two 10%+ corrections within any single calendar year is itself a super-bearish omen. 2018 joined 1973, 1974, 1987, 2000, 2001, 2002, and 2008 as the SPX’s only other dual-correction years. Those coincided with a 48.2% SPX bear, a 20.5% single-day SPX crash, another 49.1% SPX bear, and a third 56.8% SPX bear! All three bears triggered recessions.

This stock-market weakness isn’t only likely to persist, but the odds really favor it snowballing into another major SPX bear market. Gold investment demand will naturally surge as stocks burn, fueling a strong bull market. Gold’s 29.9% gain over 6.7 months at best so far in this bull is nothing. Gold’s last secular bull from April 2001 to August 2011 saw it soar 638.2% higher! Gold’s gains as the SPX rolls over should be massive.

With a trivial 0.1% portfolio allocation to gold, what happens to gold prices if American stock investors just return to a still-immaterial 1.0%? That’s still way under the 5% to 10% recommended in normal times, and plenty of great investors believe 20% gold allocations are necessary during stock bears. Gold’s upside from here with virtually-zero US-stock-market capital allocated to it is vast. And it could accelerate rather fast.

The timing of this current SPX correction is likely to magnify bearish psychology. It has occurred entirely within Q4’18. The SPX exited Q3’18 just 0.6% off its record peak from a week earlier. So I suspect a lot of American retirement investors have no idea just how much carnage their precious capital has suffered. When they get their quarterly statements from their money managers in January, they could really freak out.

Even worse, far too much of this retirement capital was allocated to the market-darling mega techs which were the biggest holdings across most funds. Their losses have far outpaced the SPX’s. As of that latest correction low on Black Friday when the SPX was down 10.2%, Apple, Amazon, Microsoft, Alphabet, Facebook, and Netflix had collapsed 25.8%, 26.4%, 10.8%, 19.9%, 39.4%, and 38.2% from their all-time highs!

The mega techs that nearly single-handedly pushed the SPX higher for years averaged 26.8% losses, or 2.6x the SPX’s! When investors who don’t closely follow the stock markets figure that out next month, the investment demand for rallying gold ought to explode. The first half of 2019 has a setup much like H1’16, where gold essentially powered 30% higher. A similar upleg from mid-August’s lows isn’t a stretch at all.

Another 30% run from $1174 would leave gold at $1525. And once gold climbs decisively back over its bull-to-date high of $1365 from early-July 2016, investment interest and demand will soar. Just like the mega tech stocks, the higher gold prices the more investors want to buy it. A mere 16% gold upleg off August’s lows, or another 10% higher from this week’s levels, would near that psychologically-huge bull breakout!

All investors should always have 5% to 10% of their investable capital allocated to gold. But almost none do today as a long-overdue bear market fueled by epic record Fed QT looms. If you don’t have that core gold allocation, you need to get it in place before stocks fall much farther and gold surges much higher. The gold miners’ stocks will greatly leverage gold’s gains too, their leading index soared 182.2% largely in H1’16!

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The bottom line is this stock selloff is boosting gold. Flagging gold investment demand turned on a dime when the stock markets started plunging in mid-October. Gold has rallied on balance since as American stock investors start redeploying capital. Their buying alone via GLD shares was fully responsible for gold’s sharp 30% upleg in 2016’s first half. That followed the last back-to-back corrections in US stock markets.

And between record Fed tightening running full-throttle, continuing dangerous bubble valuations, and the mounting trade wars, this recent stock selling is likely to persist on balance. So gold investment will look far more attractive. Coming from virtually-zero gold portfolio allocations, investors have massive buying to do. The higher they push gold, the more other investors will chase it. Especially as US stock markets weaken.

Adam Hamilton, CPA

Everyone has different reasons for investing or speculating in the resource sector. I believe, for the majority of the participants, it’s the allure of 10 baggers that attract them to the juniors.

While the appeal to windfall profits is attractive to almost anyone, I believe it’s exactly this mindset that keeps many investors from actually realizing the gains they are given in the market.

Too many times, I have spoken to fellow investors who haven’t taken money off the table when it’s there, and are left holding the bag until the market turns or the company successfully answers the next unanswered question.

First, if you are an investor who can stomach the ebb and flow of the market then taking a long-term position in juniors can work. Secondly, and key to the first point, it can only work if you are right about the junior company in which you are invested. Will they continue to get ‘yes’ answers as they pursue the development of their mineral deposit?

The juniors draw much of the attention in the resource market, however, I think that there are larger companies that have big upside potential, pay a dividend, and are actual investment-grade companies.

Let’s take a look at one of them!

Altius Minerals Corporation

I’m very bullish on both precious and base metals moving forward. However, the pragmatist in me is especially drawn to the base metals, as their value proposition in today’s society is so easily understood.

Today, I have for you an interview with Chad Wells, VP of Corporate Development of Altius Minerals Corporation (ALS:TSX). Altius is the sector’s only diversified base metal royalty and project generation company.

Currently, Altius has 15 producing royalties in copper, zinc, nickel, potash, iron, thermal and metallurgical coal. In addition, the project generation side of their business has drastically grown in overall equity value since 2016, moving from roughly $22 million to $68 million at September 30.

There are 54 new projects since Q1 2016 within Altius’ project generator portfolio and these will not only be the source of cash through equity sales in the future, but more importantly, will be the source of new cash flow by way of the royalties that are associated with most of the projects in their portfolio.

In my opinion, Altius is the best example of intellectual capital and how people are, by far, the most important commodity in any business.

As Wells mentions in our conversation,

“We’re a group that sticks to our guns, and believes in our own reasoning and rationale. At the end of the day, it’s about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.”

I have long been an Altius shareholder and, in my opinion, would say that if I could only own one company in the sector, it would be Altius Minerals, hands down.

Altius Minerals (ALS:TSX)

MCAP – $556 M (at the time of writing)

Shares – 43.0 million

Annual Dividend – $0.16 / share

Outstanding Debt – $120 million

Cash and Public Equity Holdings – $180 million ($33.8 million cash)

2018 Royalty Revenue Guidance – $64M to $69M

Brian: In my conversation with Brian (referring to CEO Brian Dalton) last November, he was super bullish on iron ore and, over the course of the year, Altius has taken big steps to capitalize on the iron ore market. First in March, by increasing your position in Alderon Iron Ore and, most recently in Q3, increasing your position in Labrador Iron Ore Royalty Corporation.

Can you please explain the opportunity you see in the iron ore market?

Chad: We’ve been a mainstay player in the Labrador Trough since 2004 and 2005. Originally, it was from an exploration perspective where we generated projects and sold them on to third parties. Alderon Iron Ore was created during that time, as a part of that strategy, and lead to us becoming very intimate with the iron markets. The Labrador Trough iron ore fits a niche portion of the global marketplace.

Brian (referring to Altius CEO Brian Dalton) has an innate ability to see around corners so he’s been predicting a bifurcation happening in the broader iron ore market this past few years for high grade iron ore with low impurities, compared to the lower grade, higher impurity stock coming out of the Pilbara. A lot of it’s being driven by Chinese pollution standards and emissions targets through their steel mills. You’ve seen the Chinese cut significant volumes of steel production last year because mills were burning lower purity met coal and iron ore.

That’s led to a premium for the high grade, low impurity products. While the quoted price for iron ore, let’s say is at $70 per ton, the high grade Trough products are getting better than $100 per ton, while low grade is trading at a discount.

Brian recognized the separation that was coming in the market between high and low grade long before the broader market did. For us, it spawned an investment thesis to buy a substantial share position in Labrador Iron Ore Royalty Company (LIORC) mainly accumulated with the Fairfax preferred money starting in early 2017. LIORC has a 7% gross revenue royalty on Iron Ore Company of Canada’s (IOC) Carol Lake operations, as well as a 15% equity stake. LIORC is a passive type issuer, taking the money that they get from the royalty and then dividending most of it straight to shareholders.

For us it was the opportunity to have exposure to a royalty on a premier iron asset in Labrador, at a time when we thought the market was going to start to take recognition of that.

Over the last year, we increased our Labrador Iron Ore Royalty Corporation holdings substantially. If you look at our average price, which was around $17 a share before we bought the most recent addition of another .4%, LIORC stock traded last week as high as $31. At the same time, the yield of the dividends that we’ve realized off the asset are quite pronounced. And of course, we treat it as royalty income, effectively, in our per annum royalty revenue. So it fills out some of that diversified commodity exposure. So it’s been really good.

Alderon was much more strategic. We were a founder, having discovered the underlying Kami deposit way back in 2005-06. Our recent doubling up, if you will, on Alderon, goes back to this bifurcation in the iron ore market thesis, which we believe is a real thing and that’s going to last. It’s also worth mentioning that we bought the additional $5 million stake from Liberty when we agreed to a friendly transaction buying out the balance of the potash royalties that we’d held together in a JV.

With that comes the reality that you’re playing Carol Lake, through LIORC. Also, we have a convertible debenture with Champion Iron. Champion is the company that bought the Bloom Lake assets for $10 million in cash plus assumed liabilities of around $43 million from Cliffs, who had sunk nearly US$3 billion of capital into the project during the last iron bull.

The way we see things playing out in the Trough, we believe IOC brings a lot of transparency and reality to the broader marketplace, of the niche, that Labrador iron fits. We think that spills over into Champion, which is a very high margin operation right now, but is flying under the radar. We think the market will take credence and recognition there.

And as this market continues to want more high grade, low impurity iron ore, the next shovel ready project in that district is Kami. For us to buy that stake, on favourable terms, in Alderon from Liberty, brings us back to being that major shareholder with a big stick , it makes a lot of sense for us strategically.

If you reflect back to the last cycle, it was the asset that would have tore the lid off the can for Altius as a royalty generative business. The thing that most of the marketplace doesn’t realize today is that Altius is a different type of royalty company. It’s not a Franco or a Wheaton, who grows through acquisition. We actually grow our royalty portfolio organically and Alderon is one example of that.

In the past bull market in iron, around 2011, when we thought that Kami was going to get built, Alderon raised a bunch of money with the Chinese partner, Hebei Group. It almost got through the window in the sense of raising the capital to build a new mine. If that had to have happened, not only would we made a couple hundred million on the equity, but we would have had an underlying royalty on that asset at 3% gross royalty that based on the feasibility numbers of the assessment at the time, it would have generated about $25 million per year of royalty revenue for Altius for 20+ years. The reason it didn’t happen is because the iron ore bull market ended so quickly when prices dropped from around $130 per tonne to levels less than half that. If you add the premiums to the current spot, we’re edging closer to $100+ again.

Alderon is an extraordinary opportunity of optionality and because of what’s happened in the bigger iron ore market and because of the strategic significance of Labrador iron product in general, I think it happens this cycle.

Kami still needs a billion dollars in capital to get it done, but consider what’s going on with Rio Tinto and IOC and the rumors of them IPO-ing their IOC stake, and, again, the success of Champion in restarting Bloom, and it seems a reasonable bet that Alderon will raise the capital this time around. It might get built. If it does, it will differentiate Altius from all of the others because the net asset value just from the royalty aspect that gets created from nothing, is profound.

Brian: That leads into my next question, generally speaking, in your opinion, how difficult is it to raise $1 billion to develop a mine, today?

Chad: Very difficult and, in saying that, today’s market is probably not the one to do it in. Will that market come? Of course it will. One thing that’s going to be very apparent in what I’ll call the pending bull cycle in commodities, is that the story is going to be about supply this time around, not demand.

What we’ve seen happen is the world has not developed enough copper, nickel and high grade iron ore mines to sustain just the static needs of society. So ultimately, it’s going to be a supply crunch and there’s just not going to be enough supply out there.

So that will incentivize commodity pricing, and incentivize capital, and more mines will get built. So will it happen? It will. The iron ore business is a bit different, because there is a lot of iron ore that came on through the last cycle through investment. But most of it is in this low grade or medium grade stuff. So it doesn’t have the strategic niche of this high grade, low impurity ore, which quite frankly, the Chinese need.

So is the capital there today? Probably not. Will it come? It will. Also, I’d say you don’t necessarily have to think that these things are going to be built by the market. There’s a lot of diversified miners out there that have good balance sheets, have made a lot of money here in the last few years, again, and are going to be looking for shovel-ready assets to acquire to develop themselves. Maybe some of these things get built in different ways, not necessarily going to be through the capital market conventions of a bull market, if you will.

Brian: Earlier this year, Altius entered the lithium market with the investment in a closed end limited partnership with Lithium Royalties Corporation. The deal gives Altius the rights to buy up to 10% of selected royalty direct investments.

Generally speaking, what criteria is Altius looking for in terms of the ideal investment in the lithium space? For example, does the lithium deposit type or jurisdiction matter?

Chad: We’ve always been a group that has focused on exploration and investment in bread and butter commodities, which lithium would not fit. We’ve seen a lot of these specialty themes over the years and we haven’t invested in them because their supply and demand fundamentals have been so wonky that we just weren’t comfortable with the volatility.

In the case of lithium and the battery metal craze in general, I’d say we missed it with lithium. We didn’t necessarily believe that it was going to be one of these bread and butter commodities. I think we’ve come to realize that it is something that we should have spent more time investing in earlier through our exploration business, but we didn’t. Because regardless of how much we try to minimize the forecasts of different battery chemistries in the EV build-out scenario, you just can’t ignore lithium. And the big correction in the pricing this year gives us a more comfortable entry point to be buying when prices are not so near the top. So it is a bit of a catch up game.

What we did do this year is we partnered with expertise. The guys at Lithium Royalty Corp., especially Ernie Ortiz, the CEO of that ship, he’s a specialist in the lithium world. He’s been an authority in lithium for many years starting as one of the first sell side analysts to take apart the EV forecasts as the story was unfolding for the future demand of lithium.

So, again, what Altius decided, in this case, is to partner with some really smart people who had the groundwork laid and had the best-in-class assets sized up and deals templated. We are investing basically side by side with them through an equity position into that company and our royalty co-vestment rights are pro rata with our equity ownership. But we can pick and choose which ones we actually fund – we don’t have to participate in every one of them, and in fact, haven’t participated in every one so far.It is a different way for us to do it, as typically we’ve always been the front men running our own ship, whether it’s a particular jurisdiction or a particular commodity or a particular idea. In this case, we weren’t the first men running, so we partnered with the first man running.

Brian: Warren Buffett is famous for saying, “You must learn from mistakes, but they don’t have to be your own.” I was wondering if you could parlay that into the 20-year history of Altius.

Are there any lessons in particular that stand out to you?

Chad: Absolutely. It’s all lessons. I’ll focus on my side of the business, exploration and project generation. In the last bull cycle, we made $200 million plus through our project generation efforts. How did we do that?

We took geological real estate that we had generated with boot and hammer prospecting and came up with big context and big ideas. Then, we effectively sold it on to a third party. In the case of where we made the money selling on to a third party, it was a market participant. What we did is we exchanged geological real estate which is generally illiquid for shares in a fairly liquid company on a stock exchange, versus up until that point in time, let’s say the first 10 years of Altius, we spent a lot of our time doing exploration deals with major miners.

Though that gave us a lot of technical credibility in the product that we generated and we were able to attract those third party endorsements, it was an illiquid business. What I mean is that even though you did a deal, you weren’t able to monetize your minority residual stake in the assets.

So the big learning experiment that we had when we look back at the last bull cycle is related to the way that we made money, it was actually trading geological real estate for shares. So when we enter this bull cycle, I don’t know that I’d call it a bull cycle yet, the phone started to ring. All of a sudden, here we were as an exploration group, we had assembled projects in nine jurisdictions globally from 2012 to 2016, when nobody gave a crap about the mining resources business, and certainly weren’t doing exploration. We were able to waltz into world-class jurisdictions, build meaningful land positions, generated a lot of geological real estate, and basically we sat on it and waited for the market to turn.

Since that time, we’ve sold 54 (working on 57!) projects and 17 different agreements in less than 24 months. It’s been extraordinary. I didn’t think it could get so good for us. Every deal we’ve done, except for one that we haven’t announced yet, is that we took our geological real estate, we’d trade it for shares in a third party junior company, or in special circumstances, we even facilitated the IPO of new entities.

Where at the same time, though, where did we end up? We ended up with a big share position in a company that now held the assets that we generated, while at the same time we retained blanket royalties to the underlying projects. Long term sewed up in terms of the mining operations, we get kicked back on our royalties, while at the same time, we’re so early into the cycle we’re effectively getting seed stock in juniors that go to explore our projects.

So these positions expose us to discovery opportunity off of our balance sheet, on somebody else’s balance sheet, at the seed level. It’s beautiful! So if you look at our juniors portfolio today, we’re sitting on 27 juniors with a value of about $65 million at the end of September.

I can’t make a promise, but I’ll say to you I have extraordinary belief that that $65 million will be worth the market capitalization value of the entirety of Altius, roughly $600 million, through the cycle.

We’re seeded up on the right deals, at the right time, in the right commodities and right projects that those things are going to deliver value.

It’s a cyclical business, you need to be able to, to some degree, trade those cycles. We’ve been able to create fundamentally long-term royalties that punch through the cycles, that we can realize on over 10, 20, 30 year increments. At the same time, we’re getting seeded up on equity that we can monetize and put a big surplus of cash into the bank, so when the market rolls over again, we can put it to work.

So, really, it was about realizing it’s all about liquidity and timing.

Brian: That’s a great answer.

The ramifications of confirmation bias should be a major concern for all investors, as human nature dictates that we love to reaffirm our beliefs with confirming evidence. As a manager, the same concern can be said for “yes” men; people who continually support the boss regardless of whether they think they are right.

Personally, in my career as a manager in steel manufacturing, I quickly learned how important it was to surround myself with people who weren’t afraid to tell me what they thought about the projects that were being proposed or the direction that I wanted to take.

In your experience, how important is it to find or listen to disconfirming information?

Chad: The resources sector more than in any other, you shouldn’t run with the herd. You have to go against it. The reality is that this business in general – exploring, mine development, mine construction, mine production – is extremely tough and tedious.

Additionally, you’ve got to realize that there’s a lot of different tiers and categories of humans that benefit from a story advancing versus not advancing. So, a lot of times, you’re always encouraged to keep spending and spending and spending, because to some degree it’s the mentality to keep things going.

We don’t get into that type of philosophy. We’re a group that sticks to our guns, and believes in our own reasoning and rational. At the end of the day, it’s about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.

The resource sector is like no other, it is feast or famine, it’s a herd mentality. To succeed you have to genuinely and truly be a contrarian. You have to be a no man versus a yes man.

Concluding Remarks

Altius Minerals is the cornerstone of my personal portfolio and will remain that way for the foreseeable future. In Altius, I see minimal downside risk outside of a broader market crash, which, in reality, would negatively affect just about every company’s share price.

Further, the upside potential from their project generation business looks very promising. First, looking at their development stage royalties projects: Excelsior Mining’s Gunnison copper project, Alderon Iron Ore’s Kami project or Evrim’s Cuale project, there is a lot of potential cash flow that could be soon flowing in Altius’ direction.

On the exploration side of their equity portfolio, you have Adventus Zinc Corporation (ADZN:TSXV), Aethon Minerals (AET:TSXV), Antler Gold (ANTL:TSXV), and Sokomon Iron (SIC:TSXV) to name just a few. Additionally, you have their latest spin out, Adia Resources, which is partnered with De Beers in the exploration for diamonds in Manitoba.

There are no guarantees in life, however, I believe that if you look at the short and long-term prospects of Altius, I think you will agree that they look tremendously bright.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Altius Minerals, Adventus Zinc Corporation, Aethon Minerals, and LIORC. All Altius Minerals analytics were taken from their website and press releases. I have NO business relationship with Altius Minerals or any of the other companies mentioned in this article.

December 4, 2018

The double bottom is the world’s most stressful chart pattern. It forms after a significant price decline. The first low in the pattern creates substantial panic and fear in most investors.
The second low in the pattern is “softer”, but no less dangerous to emotionally vulnerable investors. The volume is generally weak and the price action makes investors feel like they are in some kind of financial gulag.
Then the sun bursts out from behind those financial clouds, and glorious upside action begins! On that fabulous note, please click here now. Double-click to enlarge the spectacular price action on this daily gold chart.
The long term fundamentals and liquidity flows for gold should never be confused with the medium or short term. In the long term, the biggest driver of gold price appreciation is the Chindian “wealth effect”.
It’s all about Chinese and Indian citizens growing their standard of living and buying ever-more gold to celebrate the good times.
In the West, inflation is the most potent driver of the gold price and America is beginning an enormous inflation cycle that will likely continue for fifteen to twenty years.
As Chindians bring respect to gold as an asset class, Western gold bugs won’t need to hide in the closet when they buy it because everybody will be able to get it online from companies like Amazon.
It will be as mundane as buying a coffee at Starbucks is now, but much more profitable!
In a nutshell, the love trade of three billion Chindians combined with the inflation trade of at least 500 million Westerners will soon completely restore gold’s shimmer and place as the ultimate asset.
Please click here now. Double-click to enlarge. All investors should keep their eye on the price action taking place on this long term gold chart. Note the RSI oscillator. It’s poised to leap above 50 and that’s in sync with the arrival of Chinese New Year seasonality.
Some heavyweight money managers believe that an inflationary surprise is coming to America, and it could happen as early as this Friday’s jobs report.
On that very interesting note, please click here now. Double-click to enlarge. A surprising uptick in US wage inflation is imminent and it will be a tremendous tail wind for silver’s upside price action. I don’t know if that inflationary surprise happens in Friday’s jobs report or not, but I do want investors to be positioned to get richer if it occurs!
In the short term precious metals market, I might be shorting GDX via DUST (although the good news is that I currently hold NUGT), but that has nothing to do with the fabulous long term fundamentals in play for the entire precious metals market.
At my short term guswinger.com trading service the average NUGT/DUST or UDOW/SDOW trade lasts only a week or two. I increased my average trade size threefold yesterday… to enhance the adrenaline rush and the profits, with professionally managed risk. Investors should always separate trading accounts from long term core position investing accounts. They are as different as night and day.
Please click here now. Jay Powell had to “blink” with rate hikes and so did Donald Trump with tariff taxes or the U.S. stock market would have incinerated yesterday. So, when Trump “supersized” Powell’s blink with his tariffs blink, the US stock market rocketed higher and I promptly sold half my UDOW swing trade position as the market opened. From there, the rally faded. Pros sold the news.
In the big picture, I think most stock market bulls and bears are working a bit too hard to predict either “make my stock market great” higher prices or the end of the bull market.
It’s simply later in the U.S. business cycle now than it was a year ago, and it will be even later as 2019 gets underway. As the cycle matures, volatility typically grows and that makes analysts a bit desperate about trying to figure out what comes next.
Reality check: What comes next is vastly much wilder price action than has occurred at any point in this bull market! That’s just what happens as earnings fade and inflation rises in an environment of debt worship.
Please click here now. Whether it’s the U.S. government’s maniacal obsession with debt growth and citizen extortion via income and capital gains taxation, the emergence of wage inflation, the negative effect of quantitative tightening on corporate stock buyback programs, or the inverting yield curve, what matters is that it’s all happening in the late stage of the business cycle. Price volatility is poised to go “off the charts” in 2019 as these forces intensify dramatically and synergistically.
Stock market investors should not waste time trying to figure out what comes next. There’s only one course of obvious tactical action for long term U.S. stock market investors, and that is: Reduce trade size now!
With the daily gold chart looking spectacular, what can gold stock investors expect? Well, for 2018 I’ve predicted that the “tax loss selling” of the past few years will be confined mainly to the tiny CDNX-listed juniors. GDX, GDXJ, and SIL and their component stocks are in great shape and poised to join gold in a “shotgun” move higher for the medium term.
Please click here now. Double-click to enlarge this GDX daily chart. GDX is sporting dual inverse head and shoulders patterns.
From a technical perspective, GDX can be viewed as a sports car with twin technical turbos that is revving its engine now. GDX appears poised to rise to the minor highs around $20.50, and then race straight to my $23.50 target zone!
There could be some wild volatility around Friday’s jobs report and the December 19 Fed meeting, but the dual H&S patterns are a powerful technical force to be reckoned with. When both the short term technicals and the long term fabulous fundamentals are weighed carefully, most gold stock investors should be in great spirits and ready for the upside journey of a lifetime!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Back Up The Golden Truck!” report. I highlight six under the radar junior gold stocks that could stage five bagger gains or more in 2019. I include key buy and sell signals for each stock!

Stewart Thomson

Graceland Updates

https://gracelandjuniors.com

Email:

stewart@gracelandupdates.com

stewart@gracelandjuniors.com

stewart@guswinger.com

Risks, Disclaimers, Legal

Are You Prepared?

December 3, 2018

The junior gold miners’ stocks have spent recent months mostly languishing near major multi-year lows. That spawned a sentiment wasteland riddled by bearishness and bereft of bids. But these companies’ battered stock prices aren’t fundamentally righteous, as proven yet again by their latest earnings season. Faring far better in a challenging third quarter than stock prices imply, they need to mean revert way higher.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the U.S. Securities and Exchange Commission by 40 calendar days after quarter-ends. Canadian companies have similar requirements at 45 days. In other countries with half-year reporting, many companies still partially report quarterly.

The definitive list of elite “junior” gold stocks to analyze comes from the world’s most-popular junior-gold-stock investment vehicle. Mid-month the GDXJ VanEck Vectors Junior Gold Miners ETF reported $4.1b in net assets. Among all gold-stock ETFs, that was second only to GDX’s $9.0b. That is GDXJ’s big-brother ETF that includes larger major gold miners. GDXJ’s popularity testifies to the great allure of juniors.

Unfortunately this fame created serious problems for GDXJ a couple years ago, resulting in a stealthy major mission change. This ETF is quite literally the victim of its own success. GDXJ grew so large in the first half of 2016 as gold stocks soared in a massive upleg that it risked running afoul of Canadian securities laws. And most of the world’s smaller gold miners and explorers trade on Canadian stock exchanges.

Since Canada is the centre of the junior-gold universe, any ETF seeking to own this sector will have to be heavily invested there. But once any investor including an ETF buys up a 20%+ stake in any Canadian stock, it is legally deemed to be a takeover offer that must be extended to all shareholders! As capital flooded into GDXJ in 2016 to gain junior-gold exposure, its ownership in smaller components soared near 20%.

Obviously hundreds of thousands of investors buying shares in an ETF have no intention of taking over gold-mining companies, no matter how big their collective stakes. That’s a totally-different scenario than a single corporate investor buying 20%+. GDXJ’s managers should’ve lobbied Canadian regulators and lawmakers to exempt ETFs from that 20% takeover rule. But instead they chose an inferior, easier fix.

Since GDXJ’s issuer controls the junior-gold-stock index underlying its ETF, it simply chose to unilaterally redefine what junior gold miners are. It rejiggered its index to fill GDXJ’s ranks with larger mid-tier gold miners, while greatly demoting true smaller junior gold miners in terms of their ETF weightings. This controversial move defying long decades of convention was done quietly behind the scenes to avoid backlash.

There’s no formal definition of a junior gold miner, which gives cover to GDXJ’s managers pushing the limits. Major gold miners are generally those that produce over 1m ounces of gold annually. For decades juniors were considered to be sub-200k-ounce producers. So 300k ounces per year is a very-generous threshold. Anything between 300k to 1m ounces annually is in the mid-tier realm, where GDXJ now traffics.

That high 300k-ounce-per-year junior cutoff translates into 75k ounces per quarter. Following the end of the gold miners’ Q3’18 earnings season in mid-November, I dug into the top 34 GDXJ components’ results. That’s simply an arbitrary number that fits neatly into the tables below. Although GDXJ included a staggering 70 component stocks mid-month, the top 34 accounted for a commanding 82.9% of its total weighting.

Out of these top 34 GDXJ companies, only 3 primary gold miners met that sub-75k-ounce-per-quarter qualification to be a junior gold miner! Their quarterly production is rendered in blue below, and they collectively accounted for just 3.8% of this ETF’s total weighting. GDXJ is inarguably now a pure mid-tier gold-miner ETF, not a junior one. But its holdings include the world’s best gold miners with huge upside potential.

I’ve been doing these deep quarterly dives into GDXJ’s top components for years now. In Q3 2018, fully 31 of the top 34 GDXJ components were also GDX components! These are separate and distinct ETFs, a “Gold Miners ETF” and a “Junior Gold Miners ETF”. So they shouldn’t have to own many of the same companies. In the tables below I highlighted the symbols of rare GDXJ components not also in GDX in yellow.

These 31 GDX components accounted for 79.2% of GDXJ’s total weighting, not just its top 34. They also represented 31.7% of GDX’s total weighting. Thus nearly 4/5ths of this “Junior Gold Miners ETF” is made up by nearly 1/3rd of the major “Gold Miners ETF”! These GDXJ components also in GDX are clustered from the 11th- to 30th-highest weightings in that latter larger ETF. GDXJ is mostly smaller GDX stocks.

In a welcome change from GDXJ’s vast component turmoil of recent years, only 4 of its top 34 stocks are new since Q3 2017. Their symbols are highlighted in light blue below. Thus the top GDXJ components’ collective results are finally getting comparable again in year-over-year terms. Analyzing ETFs is much easier if their larger components aren’t constantly in flux. Hopefully changes going forward are relatively minor.

Despite all this, GDXJ remains the leading “junior-gold” benchmark. So every quarter I wade through tons of data from its top components’ latest results, and dump it into a big spreadsheet for analysis. The highlights make it into these tables. Most of these top 34 GDXJ gold miners trade in the US and Canada, where comprehensive quarterly reporting is required by regulators. But others trade in Australia and the UK.

In these countries and most of the rest of the world, regulators only mandate that companies report their results in half-year increments. Most do still issue quarterly production reports, but don’t release financial statements. There are wide variations in reporting styles, data presented, and release timing. So blank fields in these tables mean a company hadn’t reported that particular data for Q3 2018 as of mid-November.

The first couple columns of these tables show each GDXJ component’s symbol and weighting within this ETF as of mid-November. While just over half of these stocks trade on US exchanges, the other symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q3’18 production in ounces, which is mostly in pure-gold terms excluding byproduct metals often found in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable costs of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold and lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q3’17 is shown.

Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, sales, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the mid-tier gold miners as an industry are faring fundamentally. They actually did relatively well in Q3.

While this new mid-tier GDXJ is generally excellent, some decisions by its managers are utterly baffling. Out of all the world’s gold miners they could’ve added over this past year, they inexplicably decided on the giant largely-African AngloGold Ashanti. It produced an enormous 851k ounces of gold last quarter, the largest in GDXJ by far. It and the rest of the South African majors definitely don’t belong in GDXJ!

Remember that major-gold-miner threshold has long been 1m+ ounces per year. AU’s production is annualizing to well over 3x that, making this company the world’s 3rd-largest gold miner last quarter. Why on earth would managers running a “Junior Gold Miners ETF” even consider AngloGold Ashanti? It is as far from junior-dom as gold miners get. The same is true with the rest of the troubled South African gold miners.

AU, Gold Fields, Harmony Gold, and Sibanye-Stillwater mined 851k, 533k, 379k, and 309k ounces in Q3’18, all are majors. Yet they accounted for 13.1% of GDXJ’s total weighting. They are riddled with all kinds of problems too, from shrinking production to high costs to increasing stealth expropriations from South Africa’s openly-Marxist anti-white-investor government. Their inclusion heavily skews and taints GDXJ.

These South African majors’ Q3 production of 2.1m ounces was a whopping 41% of the GDXJ top 34’s total! And it still fell 7.0% YoY due to South Africa’s tragic death spiral. Excluding them and the amazing Kirkland Lake Gold which has grown so fast it was moved exclusively into GDX over this past year, the rest of the GDXJ top 34 grew production 3.4% YoY in Q3. The South African majors’ cost impact is even worse.

Mining in that country is very expensive thanks to very-old very-deep mines and endless new government interference via stifling regulations. In Q3 the South African majors’ cash and all-in sustaining costs came in really high averaging $925 and $1088 per ounce. The rest of GDXJ’s top 34 averaged $629 and $877, a massive 32.0% and 19.4% lower! The South African majors are really retarding GDXJ’s performance.

As struggling majors far larger than mid-tiers and juniors, they need to get kicked out of GDXJ posthaste. They can be left in GDX where they belong. AU effectively took KL’s place, which makes no sense at all fundamentally. Kirkland Lake produced 180k ounces of gold in Q3 at $351 cash costs and $645 AISCs. So unlike AU, KL remains solidly in the mid-tier realm and has been performing incredibly well operationally.

While GDXJ’s managers really dropped the ball including those South African majors, they deserve big praise for upping the weighting of the outstanding Australian miners. They are Northern Star Resources, Evolution Mining, Regis Resources, St Barbara, and Saracen Mineral. Their collective weighting in GDXJ grew to 21.7% at the end of Q3’s earnings season, nearly 2/3rds higher from their 13.3% a year earlier.

Unlike AU’s dumbfounding inclusion, the Australians’ rise is well-deserved. Their production surged 8.9% YoY to 686k ounces, or 23% of the GDXJ top 34’s total excluding those South African majors. And the Australian miners are masters at developing great gold deposits and controlling costs, as their cash costs and AISCs in Q3 averaged just $586 and $724! It’s fantastic GDXJ offers American investors this Aussie exposure.

GDXJ’s component list and weightings are a work in progress, and are gradually getting better. For years I’ve pointed out things like the South African majors that weren’t right, and GDXJ’s managers eventually seem to come around and change things for the better. Greatly helping that process is investors buying the better individual stocks like KL and shunning laggards like AU, readjusting their relative market capitalizations.

GDXJ and GDX are essentially market-cap weighted, with larger companies rightfully commanding larger weightings. These leading gold-stock ETFs’ managers can override this by deciding which gold miners to include in each ETF. So they can easily purge GDXJ of the deteriorating South African majors and add real mid-tier gold miners. But the true core problem is having so many of the same stocks in GDX and GDXJ.

Such massive overlap between these two ETFs is a huge lost opportunity for VanEck. It owns and manages GDX, GDXJ, and even the MVIS indexing company that decides exactly which gold stocks are included in each. With one company in total control, there’s no need for any overlap in the underlying companies of what should be two very-different gold-stock ETFs. Inclusion ought to be mutually-exclusive.

VanEck could greatly increase the utility of its gold-stock ETFs and thus their ultimate success by starting with one big combined list of the world’s better gold miners. Then it could take the top 20 or 25 in terms of annual gold production and assign them to GDX. Based on Q3’18 production, that would run down near 139k or 93k ounces per quarter. Then the next-largest 40 or 50 gold miners could be assigned to GDXJ.

Getting smaller gold miners back into GDXJ would be a huge boon for the junior-gold-mining industry. Most investors naturally assume this “Junior Gold Miners ETF” owns junior gold miners, which is where they are trying to allocate their capital. But since most of GDXJ’s funds are instead diverted into much-larger mid-tiers and even some majors, the juniors are effectively being starved of capital intended for them.

That’s one of the big reasons smaller gold miners’ stock prices are so darned low. They aren’t getting enough capital inflows from gold-stock-ETF investing. So their share prices aren’t bid higher. They rely on issuing shares to finance their exploration projects and mine builds. But when their stock prices are down in the dumps, that is heavily dilutive. So GDXJ is strangling the very industry its investors want to own!

Back to these mid-tier gold miners’ Q3’18 results, production is the best place to start since that is the lifeblood of the entire gold-mining industry. These top 34 GDXJ gold miners that had specifically reported Q3 production as of mid-November produced 5063k ounces. That surged by a massive 18.8% YoY, implying these miners are thriving. But that is heavily distorted by that huge 851k-ounce boost from AU’s addition.

Without the world’s 3rd-largest gold miner, the rest of the GDXJ top 34 saw their production slip 1.2% YoY to 4212k ounces. That reflected the peak-gold challenges the gold-mining industry is facing, as I discussed a couple weeks ago while reviewing the GDX majors’ Q3’18 results. The GDXJ top 34 are still outperforming the GDX top 34, which saw their gold production retreat 2.9% YoY in Q3 bucking historical trends.

Sequentially quarter-on-quarter from Q2’18 the GDXJ top 34’s production surged a dramatic 13.3%! And AU was already one of GDXJ’s top components then. That partially came from new mines ramping up at the world’s best mid-tier gold miners. It is far easier for them to grow production off lower bases than it is for the majors off high bases. That’s a key reason why the mid-tiers’ upside potential trounces that of the majors.

For all GDXJ’s faults, it does still offer investors exposure to much-smaller gold miners. The average quarterly production of all the top 34 GDXJ miners reporting it in Q3 was 163.3k ounces. That is 43% smaller than the 288.8k averaged by the top 34 GDX miners last quarter. And again AU’s crazy inclusion really skews this. Ex-AU, the GDXJ average falls to 140.4k. Without all the South African majors, it is 110.8k.

These annualize to 562k and 443k, both solidly in the mid-tier realm. Analyzing GDXJ’s production and costs requires breaking out those heavily-distorting South African majors that have no place in a mid-tier gold-miner ETF. Again their production fell 7.0% YoY in Q3, while the rest of the GDXJ top 34’s ex-KL grew 3.4%! Production and costs tend to be proportionally inversely related because of how mining works.

Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. The tonnage throughputs of the mills that process the gold-bearing ore are also fixed. So gold produced varies with ore grades each quarter. The more gold that is recovered, the more ounces to spread gold mining’s big fixed costs across. That lowers per-ounce costs.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’18, the overall cash costs of the GDXJ top 34 surged 8.4% higher YoY to $663 per ounce. That was still largely in line with the past four quarters’ $612, $618, $692, and $631 averaging $638.

But that sharp jump was mostly the result of the South African majors’ deepening troubles. Again their average cash costs last quarter were a whopping $925! Without them, the rest of the GDXJ top 34 averaged $629 per ounce which was only up 2.8% YoY and below the rolling-four-quarter mean. So the mid-tier gold miners of GDXJ are holding the line on cash costs, a sign their operations are fundamentally sound.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

The GDXJ top 34 reported average AISCs of $911 in Q3, up 3.8% YoY. But like cash costs, this was roughly in line with the $877, $855, $923, and $886 seen in the past four quarters. But again that was skewed quite a bit higher by those wrongly-included South African majors, which reported $1088 average AISCs in Q3. The rest of the top 34 averaged $877, which is actually better than the $885 four-quarter average.

So the South African majors are really tainting GDXJ’s collective operational performance, with lower production and higher costs dragging down this entire ETF. Those giant struggling gold producers are an albatross around the neck of the many great mid-tier gold miners in GDXJ! If you are a GDXJ investor, contact VanEck and urge them to boot the South African majors out of GDXJ to help it thrive going forward.

Gold-mining earnings are simply the difference between prevailing gold prices and all-in sustaining costs. And both sides of this equation moved the wrong way in Q3, squeezing the mid-tier gold miners’ profits. Q3’18’s average gold price of $1211 was 5.3% lower than Q3’17’s. And with overall GDXJ top 34 AISCs 3.8% higher at $911, that really cut into margins. These gold miners were collectively earning $300 per ounce.

That implied solid 25% profit margins absolutely, which aren’t bad. But they still plunged 25.4% YoY from Q3’17’s $402 per ounce, which amplified gold’s decline by 4.8x. But gold-mining profits leverage to gold is exactly why the gold stocks make such compelling investments. Gold stocks were weak in Q3 because gold was pounded to a deep 19.3-month low in mid-August on extreme all-time-record gold-futures short selling.

Left for dead and neglected, the gold miners’ stocks are the last cheap sector in these lofty bubble-valued stock markets. Their fundamental upside as gold mean reverts higher on speculators’ gold-futures buying and new investment demand as stock markets roll over is enormous. This is easy to understand with a simple example. In the last four quarters including Q3’18, the top 34 GDXJ gold miners’ AISCs averaged $894.

During gold’s last major upleg in essentially the first half of 2016, it powered about 30% higher driven by surging investment demand after stock markets suffered back-to-back corrections. That was even small by historical gold-bull-upleg standards. If we merely get another 30% gold advance from its recent mid-August low of $1174, we’re looking at $1525 gold. That would work wonders for gold-mining profits and stock prices.

At $1525 gold and $894 AISCs, the mid-tier gold miners would be earning $631 per ounce. That’s 110% higher than Q3’18’s $300! If gold-mining profits double, gold-stock prices will soar. Indeed during that last 30% gold bull in the first half of 2016, GDXJ rocketed 203% higher! So the gold-stock outlook is wildly bullish with gold itself due to power higher as the stock markets roll over on the Fed’s record tightening.

The rest of the top 34 GDXJ gold miners’ fundamentals were mixed last quarter. Cash flows generated from operations totaled $1.3b in Q3, down 21.2% YoY. That’s reasonable given average gold’s 5.3% YoY retreat and their leverage to it. Cash on hand remained high at $5.4b, down just 5.3% YoY. So these mid-tier gold miners have plenty of capital to build and buy new mines to continue growing their production.

Revenues only slipped 0.4% YoY to $4.1b, which means the softer gold prices were largely offset by higher production. But GAAP profits looked like a disaster, with the GDXJ top 34’s plummeting to a $379m loss in Q3’18 from being $212m in the black in Q3’17! That was far worse than the lower gold prices warranted, but thankfully it was mostly the result of big non-cash charges flushed through income statements.

Tahoe Resources reported a massive $170m impairment charge on its suspended Escobal silver mine that is being held hostage by the corrupt Guatemalan government. Yamana Gold wrote off $89m after selling a mine in Argentina. Explorer NOVAGOLD reported an $81m loss from discontinued operations on the sale of one of its projects. These three unusual items alone wiped out $340m of profits from GDXJ’s ranks.

Without them, the top 34 GDXJ gold miners’ earnings would’ve fallen to -$39m from +$212m. That isn’t great, but it doesn’t reveal any serious issues a rising gold price won’t quickly solve. Interestingly if KL was still included instead of AU, that would’ve added another $56m in Q3’18 profits. The mid-tiers’ overall earnings should dramatically leverage and outpace gold in coming quarters as it inexorably mean reverts higher.

While GDXJ should certainly no longer be advertised as a “Junior Gold Miners ETF”, it offers exposure to some of the best mid-tier gold miners on the planet. It’s really growing on me, I like this new GDXJ way better than GDX. That being said, GDXJ is still burdened by overdiversification and way too many gold miners that shouldn’t be in there. They are either too large, are saddled with inferior fundamentals, or both.

So the best way to play the gold miners’ coming massive mean-reversion bull is in individual stocks with superior fundamentals. Their gains will ultimately trounce the major ETFs like GDXJ and GDX. There’s no doubt carefully-handpicked portfolios of elite gold and silver miners will generate much-greater wealth creation. GDXJ’s component list is a great starting point, but pruning it way down offers far-bigger upside.

The bottom line is the mid-tier gold miners reported solid fundamentals despite a challenging third quarter for gold prices. Excluding the South African majors, they were able to grow their production nicely while holding the line on costs. That portends dramatic operating-cash-flow and earnings growth in the coming quarters as gold mean reverts higher on big investment buying. The mid-tier gold miners’ stocks will soar on that.

Gold stocks are not only unloved and dirt-cheap today, but they are a rare sector that rallies strongly with gold as general stock markets weaken. While virtually no one was interested in these leveraged plays on gold upside in recent months, that will change fast as these lofty stock markets roll over. And the mid-tier gold miners’ recent Q3 earnings season proved they remain ready to fundamentally amplify gold’s gains.

Adam Hamilton, CPA

December 3, 2018

Recent market and economic developments are positive for Gold and precious metals but conditions are not bullish yet.

Bullish conditions and bullish fundamentals would be highlighted by a shift in Fed policy. They aren’t shifting yet. They are slowing, which precedes a shift.

From a market standpoint, we need to see strength in Gold in real terms (against stocks and foreign currencies) and a steepening of the yield curve. These developments along with shifting Fed policy will tell us a new bull market is soon to begin.

In regards to Gold against equities, the chart below shows both progress but the need for more strength.

Gold remains below its long-term moving average against U.S. stocks (NYSE). The trend has not turned bullish yet.

Gold relative to the rest of the world (U.S. excluded) and Emerging Markets has turned the corner but now must prove it can hold above the long-term moving average.

Gold relative to foreign currencies is at an interesting juncture as the chart below shows. Over the past month it has been battling with a confluence of resistance right at its 200 and 400 day moving averages.

From a market standpoint, the stock market is key as it will front-run Fed policy. It’s a reflection of the economy and health of corporations. A stronger stock market means tighter Fed policy.

That could go out the window if and when the S&P 500 loses its recent lows at the 400-day moving average. But these lows could hold for several months.

The yield curve continues to flatten, which is not bullish for Gold. Steepening is.

Although the Fed said something about rate hikes coming to an end and the market now expects only two more hikes, the conditions are not there for Gold.

On the fundamental side, history argues that conditions turn most bullish after the last hike and when the market begins to discount a new rate cutting cycle. It appears we are still months away from the last hike.

On the technical side, there is improvement in the leading indicators but nothing definite yet.

Gold has not broken out of its downtrend relative to U.S. stocks nor has it broken out against foreign currencies. These things should happen before a bull market begins.

In the meantime, don’t try to catch falling knives or chase weakness as there will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. Moreover, the start of the next bull looks to be more than a few months away.

Consider our premium service which can help you ride out the remaining downside and profit ahead of a major bottom in the sector. To prepare yourself for an epic buying opportunity in junior gold and silver stocks in 2019, consider learning more about our premium service.

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