The latest gold COTs are out and they are an absolute horror story, with Commercial short and Large Spec long positions having ramped up to multi-year extremes, which we can take to mean that the dollar is not going to crash its support in the 93 area and will instead rally. 

While PM stocks have broken higher, gold has stubbornly refused to and has been dropping back in recent days to complete the Right Shoulder of what is believed to be a Head-and-Shoulders top, as we can see on its 6-month chart below. Once it breaches the neckline of the pattern it should plunge. This will not be a surprising outcome, as it is very rare for a parabolic blowoff move such as we saw earlier to be followed by continued advance.

The 6-year chart also shows why there are grounds for caution here. Gold has stalled out at the upper boundary of the channel shown, with its slow stochastic indicating that it is topping out…

Now we come to the latest COTs, where we see that Commercial Short and Large Spec long positions rose sharply again to new highs last week, just as gold marked out its Right Shoulder peak last Tuesday. Large Specs are “foaming at the mouth” bullish, but look set to end up like the Plains buffalo, with the Commercials, the Big Money players, set to kill them and skin them by the thousand.

Click on chart to popup larger clearer version.

The latest gold Hedgers chart, which is a form of COT chart that goes back further, shows that Hedger’s positions are at multi-year negative values, which again does not augur well for gold.

Chart courtesy of www.sentimentrader.com

The marked outperformance of PM stocks relative to both gold and silver has been due to them being grossly undervalued relative to bullion, but now this strong performance is believed to be leading many investors into the jaws of a trap. On its 6-month chart we can see how GDX broke out of its Dome pattern and advanced to new highs, which have not been confirmed by momentum (MACD). Although this chart still looks superficially OK, what we have observed above for gold and its COTs suggests that a bearish Rising Wedge might be forming in GDX, a suspicion that will be confirmed by a sharp breakdown from the converging channel soon.

As ever, the dollar is key, and it has been recent dollar weakness that has encouraged the PM sector recovery, as investors in the sector salivate over the prospects for a dollar breakdown and collapse, However, both the latest dollar and gold COT charts suggest that this is not going to happen – instead, the dollar looks set to rally soon. On its 2-year chart we can see that this year it has dropped back towards the key support level shown at the lower boundary of a potential top area. But the convergence of the downtrend channel and the oversold condition on its MACD and Slow Stochastic suggest that it is likely to turn up again soon, a process which may have begun last week. The big trading range may yet turn out to be a top, but first it looks likely that we will see another rally towards its upper boundary, which, needless to say, would not be good news for the PM sector.

The latest dollar Hedgers chart, while not exactly raving bullish, is looking a whole lot better than it did a year ago, and certainly indicates that there is scope for a significant dollar rally here…

Chart courtesy of www.sentimentrader.com

The Fed is now in a very unenviable position, having painted itself into a corner, and is reaping what it has sown. Its first priority is to do the bidding of its crony pals on Wall St and keep the stockmarket levitated by refusing to raise interest rates, but if it continues to follow this course the dollar is likely to crash the support shown on our chart and plunge, an outcome which will upset some very powerful people in Washington. Latest COTs are showing that Big Money is betting on the dollar rallying, which means that a rate rise is probably more likely than many are thinking.

Conclusion: gold looks set to have the rug ripped out from under it soon and drop hard, as the dollar rallies away from the danger zone.

related:

Miners Reach First Resistance Target but Continue to Outperform Gold

Gold-mining stocks surged higher this past week after breaking free from their high consolidation.  This newest upleg catapulted gold stocks to a doubling in less than 3 months, a remarkable world-leading performance.  But despite its quick doubling, this red-hot sector still has another easy doubling left to come from here.  Gold-mining stocks still remain greatly undervalued relative to prevailing gold prices.

Gold stocks’ whipsawing journey so far this year has been nothing short of incredible.  Back on January 19th, less than 3 months ago, the flagship HUI gold-stock index plunged to 100.7.  Those levels were utterly astounding, as that was the HUI’s lowest close since July 2002.  Back then gold was trading near $305, and had yet to exceed $329 in its young secular bull.  Revisiting those levels felt like a gold-stock apocalypse.

But as I argued in an essay that very week, that 13.5-year secular gold-stock low was fundamentally-absurd.  The very day gold stocks collapsed to their nadir, gold closed at $1087 which was 3.6x higher.  How on earth could anyone think it was rational for gold stocks to trade as if they could only sell their product for 3/11ths of its actual selling price?  The upside potential out of that extreme anomaly was vast.

Right then as traders had totally abandoned this left-for-dead sector, I wrote “Gold-stock prices are so low that they need to quadruple merely to reflect gold today!”  I put my money where my mouth was too, recommending 6 new gold-stock and silver-stock trades in our weekly Zeal Speculator newsletter on that very dark day the HUI bottomed.  That bet is paying off, with average unrealized gains of +118% as of this Tuesday.

The day before, the HUI had surged 6.2% to hit 206.1.  This 200+ close was a major psychological and technical milestone.  Seeing the HUI languish in the 100s since October 2014 destroyed investors’ confidence in this high-potential contrarian sector.  While the 200s is still low, at least it no longer looks and feels like the gold miners have one foot in the grave.  A 200+ HUI on balance will greatly improve sentiment.

200+ also took the HUI into doubling territory since those extreme mid-January lows.  As of this Tuesday, the HUI had skyrocketed 105.7% higher in less than 3 months!  That’s a clean doubling, one half of the coming quadrupling I was banging the table on in late January.  So gold stocks have not only doubled in short order, but they have another easy doubling coming from here.  They remain way too cheap.

That might sound like a tough argument to make in the wake of such enormous and fast gains.  But as always in the financial markets, perspective is everything.  Though gold stocks have indeed rocketed higher, their prices still remain very low compared to longer-term precedent.  All their blistering new bull has accomplished so far is erasing last year’s terrible losses that were never fundamentally righteous.

These charts help illuminate that essential broader context.  This first one focuses on the technical side, while the second shifts to fundamentals.  Gold stocks’ technicals as illustrated by the HUI are really pretty simple.  Here the HUI, its key 50-day and 200-day moving averages, and Bollinger Bands based off 2.5 standard deviations from its 50dma are rendered.  Gold stocks have merely unwound 2015’s plunge.

Before this week, the HUI hadn’t seen 200 since peeking above it briefly in January and February 2015.  Back then the gold stocks were in a solidifying uptrend, and those levels were around the top resistance of its trading range.  The bottom was the pre-breakdown support line shown here, which held strong for fully 7 months.  The gold stocks suffered an anomalous breakdown below that support early last June.

That was odd because gold, the dominant driver of gold-mining profitability and hence ultimately gold-stock price levels, was stable.  Gold actually rallied 1.0% into mid-June 2015, yet the HUI still dropped by 4.2%.  During that entire month, the HUI plummeted 10.2% to gold’s modest 1.5% loss!  Normally gold stocks’ leverage to gold runs 2x to 3x, even on the downside.  Last June witnessed a very extreme 7.0x.

This unexplained and unjustified technical breakdown of gold stocks fed on itself, spawning cascading selling as stop losses were triggered.  Not helping matters was the fact that summers are the weakest time of the yearseasonally for gold, thus a time when gold stocks usually languish in the doldrums.  So the battered gold stocks kept sliding lower into July, when they were beset by gold-induced panic selling.

Late one lazy Sunday evening, a giant gold-futures trader attempted to run gold stops with an extreme blatantly-manipulative shorting order.  It dumped nearly 24k gold-futures contracts controlling $2.7b worth of gold in just one minute.  That was so extreme that 20-second trading halts were triggered twice within that single minute!  Gold was crushed $48 lower to $1086 in that minute, shattering support as intended.

This extreme gold-futures shorting attack was perfectly executed to unleash panic among other gold-futures speculators holding leveraged long positions.  They had to exit instantly as prices slammed into their stops or risk catastrophic losses.  This artificially-manipulated failure of major multi-year gold support really freaked out gold-stock traders.  The following day, the HUI plummeted 12.0% to gold’s 3.2% loss!

This panic selling ultimately climaxed a couple weeks later in early August at 104.9 on the HUI.  That was a 13.0-year secular low, gold stocks were trading at fundamentally-absurd levels as I wrote at the time.  Those gold-stock prices were so ludicrously low that it was hard to imagine any traders susceptible to being scared into selling low still left in them.  And indeed HUI 105 soon formed critical secular-low support.

Despite gold drifting sideways to lower over the subsequent months on totally unfounded Fed-rate-hike fears, the gold stocks refused to fall much under those 105 panic lows.  Until mid-January, when a bizarre plunge on no catalyst dragged the HUI to that new 13.5-year secular low.  But that was short-lived, as the HUI spent just a single day under that 105 support.  That selloff really reeked of a final capitulation.

It was breathtakingly illogical, the product of extreme and unjustifiable fear.  As of the day it bottomed in mid-January, the HUI had fallen 9.4% month-to-date despite gold rallying 2.5%!  So gold-mining stocks were plunging as their profits were rising.  Such a divergence couldn’t last for long, especially coming at extreme decade-plus secular lows.  And indeed ever since, the gold stocks have been off to the races.

Less than 2 weeks later, the HUI had rebounded 23.7% to decisively enter a new bull market on the first trading day of February.  Gold was surging on massive investment buying, the biggest capital inflows it had seen in 7 years.  And the gold stocks naturally followed it higher, amplifying gold’s gains on their profits’ high leverage to the yellow metal.  As gold stocks powered higher, their technicals greatly improved.

In late February the HUI flashed the fabled Golden Cross buy signal, one of the strongest indicators of a young new bull market in all of technical analysis.  When a price’s 50dma crosses back over its 200dma after a major secular low, it almost always signals a new multi-year bull market just getting underway.  That was followed by the HUI’s 200dma turning north in early March for the first time since mid-2014.

By early March the HUI had skyrocketed 72.1% higher in just 6 weeks, leaving it very overbought on a short-term basis.  So a correction wouldn’t have been out of order at all.  But instead the gold stocks spent March largely consolidating high on balance, a major show of technical and sentimental strength.  The traders flocking to this red-hot sector were so convinced its run wasn’t over that they refused to sell.

And that’s where the crucial technical perspective necessary to understand why the gold stocks are going to double again starts coming in.  During March’s high consolidation, the HUI was actually just under its original pre-breakdown support that ran from late 2014 to mid-2015.  All the gold stocks had done by that point was simply unwind their ridiculous losses from last summer’s anomalous breakdown.

Gold stocks’ newest upleg started erupting in April just last week.  As gold began climbing out of its own high consolidation in defiance of the powerful bear-market rally in the stock markets, capital started to chase the gold miners’ stocks once again.  This rapid upside breakout drove the HUI to 207.1 this past Tuesday.  But as you can see above, that certainly isn’t a high and risky level in the grand scheme.

This leading gold-stock benchmark merely hit a 14.7-month high after more than doubling in less than 3 months in 2016.  If gold stocks were charging to a 15-year high there’d be serious reason to be very wary, but a 15-month high?  Despite all their sound and fury so far this year, all the gold stocks have done is claw their way back up to breakeven since early 2015.  That’s definitely far from being a major secular peak.

While I’m thrilled with this blistering new gold-stock bull so far this year, HUI 200 is truly nothing.  Gold stocks remain greatly undervalued relative to the metal that drives their profits and hence ultimately stock prices.  The HUI first closed above 200 in September 2003, when gold was just cresting $375 for the first time in its young secular bull.  In 2004 when the HUI averaged 212, gold’s average price was just $409.

This week when the HUI regained 207, gold was trading at $1255.  The idea that gold-stock price levels today are fundamentally righteous with gold over three times higher is as ridiculous now as it was back in mid-January at those secular lows.  Despite just doubling in a matter of months, gold stocks still need to double again to even approach some semblance of fundamental normalcy relative to the price of gold.

While gold mining is a tough industry, its earnings fundamentals are quite basic.  These companies mine their metal to sell at prevailing prices.  Those less costs yield profits.  These costs for gold mines are largely fixed in the mine-planning stages when specific ore bodies are targeted and recovery methods defined.  So increases in gold prices usually flow directly through to the bottom line, in an outsized way.

In Q4’15, the elite gold miners of the leading GDX Market Vectors Gold Miners ETF reported average all-in sustaining costs of $836 per ounce.  That’s how much it cost them to produce gold including all the expenses necessary to replenish and sustain current production levels.  That quarter saw gold suffer its worst average price since Q4’09, just $1105.   That still yields industry profits on the order of $269 per ounce.

At $1250, gold is up 13.1% from those dismal average Q4’15 levels.  But since gold-mining costs are largely fixed and don’t change with higher gold prices, their impact on profits is far greater.  At $1250 gold and $836 costs, the industry profits surge to $414 per ounce.  That’s a hefty 53.9% boost on a mere 13.1% gold rally!  Gold-mining fundamentals radically improve as gold powers higher in bull markets.

A great proxy for gold stocks’ ironclad fundamental relationship with gold is the HUI/Gold Ratio.  Looking at trends in the HUI’s daily close divided by gold’s daily close over time reveals whether gold stocks are overvalued or undervalued relative to the dominant driver of their profits.  And this fundamental analysis is what essentially proves gold stocks are due to more than double again despite already doubling in 2016.

This has long been my favorite chart, highlighting the epic contrarian opportunities for life-changing wealth multiplication in radically-undervalued gold stocks.  And I’m glad I could include it since today’s essay happens to be my 700th.  Despite gold stocks’ blistering early-year bull market, they still remain not far off all-time lows relative to the price of the metal that drives their profits.  They are still greatly undervalued.

Late last September the HGR slumped to an all-time low of 0.093x, which was revisited in mid-January at the HUI’s 13.5-year secular low.  Gold stocks had never been cheaper compared to gold!  And since all the markets are forever cyclical, gold stocks simply can’t underperform gold forever.  The HGR shows that gold stocks underperforming gold is exactly what happened on balance for 8 long years now since late 2007.

Before 2008’s once-in-a-lifetime stock panic sucked gold stocks into its mind-boggling maelstrom of fear, the HGR spent a long 5-year secular span averaging 0.511x.  The HUI generally oscillated around trading near half the price of gold.  But this post-panic world has been very different thanks to central banks’ extreme manipulations leading to gross market distortions.  This is especially true since early 2013.

That’s when the Fed’s wildly-unprecedented open-ended third quantitative-easing campaign ramped up to full steam.  Every time the stock markets threatened to retreat materially, Fed officials were quick to jawbone about being ready to expand QE3 if necessary.  That led stock traders to believe the Fed would not tolerate lower stock markets.  They used this perceived Fed Put as an excuse to keep on buying stocks.

So the stock markets seemingly magically levitated between 2013 to 2015, devoid of the normal selloffs necessary to rebalance sentiment and keep bull markets healthy.  This incredible performance sucked away capital from all other assets, including gold.  So it wilted during that recent several-year span where Fed-goosed stock markets were universally adored leading to all other asset classes being shunned.

All the recent gold and gold-stock woes stem from that surreal 2013-to-2015 Fed-stock-market-levitation period.  In 2012 before the Fed artificially extended a long-in-the-tooth cyclical bull market in stocks, gold and the HUI averaged $1669 and 465.   So 2009 to 2012 was the last normal period for the gold stocks, sandwiched between 2008’s once-in-a-century stock panic and the Fed’s unprecedented stock levitation.

During that last secular yardstick for some semblance of normalcy, the HGR averaged 0.346x.  There is no doubt gold stocks will mean revert back up to that normal pre-QE3 range of pricing relative to gold.  And that’s where the next doubling will come in.  As of this Tuesday, the HGR has only climbed back up to 0.165x.  Despite that being up 78.0% since mid-January as gold stocks far outperformed gold, it is still super-low.

To merely mean revert to its post-panic normal average levels seen between 2009 to 2012, the HGR will have to blast another 109.7% higher.  And unless gold somehow materially falls, that means we’re in for an at-least 110% rally in the HUI from Tuesday’s latest peak!  This inevitable HGR mean reversion is why I predicted the HUI quadrupling off its mid-January lows at the time, and so far we’ve only seen a doubling.

And amazingly, this is actually a very-conservative outlook.  Mean reversions out of sentiment-driven extremes almost never conveniently stop at their averages.  In order to maintain the mean, extremes in one direction are usually followed by proportional overshoots in the opposite direction.  So the HGR has a great chance of blasting far higher than 0.346x, with the potential to shoot as far above as it had been below.

That would briefly yield an HGR topping of 0.599x, levels not seen since gold stocks were last in favor with investors in spring 2006.  That kind of normal overshoot as the extremely fearful sentiment seen in late 2015 reverses into universal euphoria would catapult the HUI 270% higher from here.  And that’s at prevailing gold-price levels.  Naturally at higher gold prices, the projected HUI gains balloon accordingly.

And considering gold’s massive new investment buying and defiance of stock markets’ powerful bear rally since mid-February, there’s no doubt gold is in a young new bull market.  It’s likely to run for years given investors’ extreme underinvestment in portfolio-diversifying gold.  A new bear market in general stocks will fuel outsized investment demand for a couple years, as gold tends to move counter to stock markets.

Gold stocks’ mean reversion back up to and through normal price levels relative to prevailing gold prices will extend over that gold-bull span.  So I expect to see this gold-stock bull continue powering higher on balance over the next couple years or so.  While the next doubling won’t happen as rapidly as the low-hanging fruits of the first one, a doubling over a year or two is still an awesome gain trouncing all other sectors.

If you want to multiply your wealth in this long-overdue gold-stock mean reversion higher, be sure to take advantage of the inevitable selloffs in this volatile sector to deploy capital.  Buy that leading GDX gold-stock ETF, or better yet the best of the individual gold-mining stocks that will enjoy big upside well exceeding their sector peers’.  Nothing can compare to an expertly-handpicked portfolio of the best gold miners!

We’ve been building them at Zeal, with 13 amazing gold-stock and silver-stock trades now open in our acclaimed monthly newsletter and another 20 in our weekly.  As of this Tuesday, they already had huge unrealized gains running up to +208%!  These companies have fantastic fundamentals and are likely to continue to be outperformers at the right end of the bell curve as gold stocks keep on powering higher.

We’ve spent 16+ years intensely studying and actively trading this high-potential contrarian sector, so our expertise is unparalleled.  Over the decades we’ve helped our subscribers multiply their wealth with many hundreds of gold-stock and silver-stock trades.  You can put us to work for you for a pittance.  Our newsletters draw on our vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  They will help you learn to think, trade, and thrive like a contrarian, for only $10 an issue.  Subscribe today!

The bottom line is despite gold stocks already doubling in 2016, they are almost certain to double again from their recent highs.  Gold stocks remain greatly undervalued relative to gold, which overwhelmingly drives their profits and hence ultimately stock prices.  All this new bull market has accomplished so far is reversing 2015’s anomalous losses gold stocks suffered.  They are merely back to breakeven from last year.

The gold stocks still have a long ways to rally just to mean revert to average levels relative to gold, let alone overshoot to the upside as usual following last year’s record-low extremes.  These coming huge gold-stock gains will be fueled by gold’s own mean reversion higher in its young bull market.  Gold’s investment demand will continue growing as the Fed-levitated stock markets roll over, driving gold stocks higher.

Adam Hamilton, CPA

April 15, 2016

So how can you profit from this information?  We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research.  Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam?   I would be more than happy to address them through my private consulting business.  Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames?  Fire away at zelotes@zealllc.com.  Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally.  I will read all messages though and really appreciate your feedback!

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Today’s video analysis of 11 larger charts below. 

Precious Metal ETFs Video Analysis

US Bonds, Dollar, & Stock Market Video Analysis

Gold & Silver Bullion Video Analysis

Trader Time Swing Trades Video Analysis

Super Force Juniors Video Analysis

Also How Markets Outwit You …

Morris Hubbartt
trading@superforcesignals.com
trading@superforce60.com
Super Force Precious Metals Video Analysis
posted Apr 15, 2016

The SuperForce Proprietary SURGE index SIGNALS:

25 Surge Index Buy or 25 Surge Index Sell: Solid Power.
50 Surge Index Buy or 50 Surge Index Sell: Stronger Power.
75 Surge Index Buy or 75 Surge Index Sell: Maximum Power.
100 Surge Index Buy or 100 Surge Index Sell: “Over The Top” Power.

Stay alert for our surge signals, sent by email to subscribers, for both the daily charts on Super Force Signals at www.superforcesignals.com and for the 60 minute charts at www.superforce60.com

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Apr 15, 2016
Morris Hubbartt

Spring has sprung for precious metals mining stocks.The HUI gold stocks index surged 6.2% on Monday to close at a 14-month high. The HUI chart shows a strong base was built from last summer through this January, and from that base a new bull market has begun. (For the April 13th chart look HERE – M/T Ed)

Industry major Barrick Gold (ABX) has seen its share price more than double year to date, leading precious metals mining equities as a group to become by far the top performing sector of 2016. As the bull market matures, we can expect leadership to switch from the majors to the mid-tier producers, then on down to the junior explorers.

Eventually, the stocks will get ahead of their underlying fundamentals, as is always the case in momentum-driven markets. Investors will then find greater value and stability in the physical metals. Physical precious metals will at some point take center stage and outperform the miners.

For now, the miners are taking the lead and blazing a path higher for the metals markets.Gold mining stocks often serve as a leading indicator for gold prices.

Of course, on any given day, the share prices of miners can move based on business or market peculiarities that are wholly unrelated to spot gold. But when gold equities trend upward in a significant way, as they have so far this year, we can infer that some big-money investors are betting on a big recovery in gold prices. It’s the gold price, after all, that is the biggest factor in most miners’ prospects for realizing profits.

But it would be a huge mistake for investors to treat gold/silver mining, streaming, and exploration companies as if they were proxies for the metals themselves. Physical precious metals are an entirely separate asset class. A gold or silver coin can’t go bankrupt. A mining company can go bust for any number of reasons – poor management, an environmental disaster, a credit crisis, etc. Money Metals columnist David Smith has detailed all the risks for our readers.

Historically, investors in mining companies have suffered through extreme booms and busts with little on net to show for the punishment they’ve endured.In fact, gold stocks have vastly underperformed gold spot prices over the past couple decades. Gold prices trade more than three times higher today than they did 20 years ago. Yet the HUI, despite its recent run up, actually trades slightly lower today than it did back in April 1996.

Let’s consider a recent 10-year period. From 2006 through the end of 2015 (10 full calendar years), gold gained 104%.Gold prices finished 2015 well below their 2011 highs.But if you bought in 2006, you still made money. If you bought a basket of gold stocks, in 2006, you lost money – most of it, in fact. From 2006 through 2015, the HUI shed a whopping 60% of its value. Ouch!

Those who bought gold stocks as a proxy for gold learned a tough lesson. During favorable up cycles for gold mining equities, they can potentially deliver outsized gains compared to gold itself. But during unfavorable periods, the downside for the stocks is much more severe than it is for the bullion.

Only the metal itself has a long-term track record of maintaining purchasing power.

Only precious metals in physical form are money.

Only gold, silver, and other hard assets serve as hedges against the risks inherent in the financial system.

That’s not to say that mining stocks don’t have a place in a diversified investment portfolio. They can certainly deliver big returns when market conditions are favorable.Some of the majors, such as Barrick, Goldcorp (GG), and Newmont (NEM), even pay small dividends.

But do you buy into mining stocks now, after a lot of these names have already doubled off their lows, given the sector’s track record of producing more disappointment than profits? It’s a question you as an investor will have to answer for yourself, taking into consideration your own objectives and risk tolerance.

If you’re looking for an undervalued investment that has similar upside potential as mining stocks but less downside risk, plus all the attributes of a tangible attributes of a hard asset, then consider physical silver.

The silver market appears to be gaining momentum, but spot prices remain well below their highs from last year.The gold:silver price ratio remains elevated at 79:1. As recently as 2011, gold sold for 32 times the price of silver, and historically it has often sold for 16 times or even as low as 10 times the silver price.

What will cause the spread between gold and silver to narrow? Most likely a big move upward in silver prices.The silver market opened this morning just above $16.00/oz, surpassing its high mark for the year.After being compressed for many months within a trading range, the silver market now sits like a coiled spring on the verge of breaking out.

Opportunities to buy major breakouts into new bull markets don’t come along often. If you regret missing the big rally this year in the miners, now’s your chance to catch the better part of what could be an equally impressive follow-up bull run in silver.