Every once in a while, the stars and planets align. To those who notice it, it's an amazing thing. Well, the stars and planets are aligning once again for gold in a way that I do not think will happen again, at least not in my lifetime.
The stars, as I see them, are the following:
1) Buying on Weakness - February 28, marked the largest buying on weakness numbers in GLD that I have ever seen at over $88M in net money inflows. Buying on weakness is a sign that institutional money is grabbing up shares from panicked sellers. It is usually large at bottoms. To say $88M is large is an understatement.
2) The Blees Rating - On the COT (Commitment of Traders) report, the Blees rating has reached a 99 out of maximum 100 bullishness rating. Take a look at the charts at the link above, and you'll see that every single time the Blees rating reached these levels, a bottom closely followed.
3) Extreme negative sentiment - according to Sentimentrader, sentiment has reached lows not even seen during gold's 2008 bottom.
3) Capitulation Volume - These two charts are perhaps the most revealing. The first one shows the GLD from 2005 to the present. There are four points worthy of attention here.
- Area A depicted blow shows gold's two and a half year stagnation from mid 2006 until the end of 2008. The bull can work off a run for a long time until the next leg up.
- Area B shows that not even a year and a half has passed since gold began to stagnate last in September 2011.
- Most importantly, notice the volume discrepancies underneath areas A and B on the Google chart below. From the 2006 highs until just before gold's bottom in 2008, trading volume was a trickle. Then came a selling climax (area C) and volume spiked, followed by two and a half years of huge gains accompanied by consistently strong volume.
- Most importantly, look at area D. For some reason, in 2011, volume plunged according to Google. Soon after that, the gold market began to stagnate. Volume only recently began picking up again, however, accompanied with the selling climax we are seeing now. Finally capitulation volume has been reached.
You can see the same incredible volume plunge at around the same time in the mining sector below. As GDX became more and more attacked by sellers from 2011 until a bottom on May 16 of last year, volume simply did not budge. Then, suddenly along with the recent sell-off, volume exploded.
As for mining stocks, the spring is as loaded as it has ever been in terms of the Gold:HUI ratio, which hit an all-time record of 4.6 Monday (March 4) and has simply gone parabolic. HUI is the gold stock index that holds much of the same companies that GDX does. What this means is that mining stocks have never been so low relative to the price of gold. Essentially, the HUI is trading at the same level as it was back when gold was at $590 an ounce. This sounds ridiculous, but it's true.
Buying at the bottom takes a lot of guts
If you've ever looked at a long-term chart, seen a major bottom and asked yourself how you could have missed it at such cheap prices and how life would be different if only you were smart enough to buy that bottom, the answer is right in front of you. Major bottoms are terrifying. They are blaring with negative sentiment, the sinking feeling that the downtrend will never cease, that buying such a hated sector or stock is just asking to lose money, that everyone else is saying sell, and the only ones saying buy are "gold bugs."
Let's transport back to 1999 for a minute, when gold was below $290 an ounce. The tone against gold was quite similar to what we're hearing now. Here's what The New York Times was saying back then:
The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.
Once gold served as protection for investors against governments that debased their currencies. Now there is plenty of debasing going on -- the Brazilian real is down 27 percent this year -- but the lesson people have drawn is to believe in the dollar. There is growing support for the idea that all of Latin America should adopt the dollar as a currency….
If the demonetization of gold continues, the price is likely to keep falling as central-bank sales more than offset any increase in demand from jewelers or industrial users. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in Mr. Greenspan and sees little need for gold.
To buy a bottom requires you to tune out all the noise, to take a good hard look at the fundamentals of what's going on here, to look at the buying on weakness numbers, the sentiment, the Blees rating, the incredible amount of currency debasement the world over, to understand that these are all at rarely seen extremes all at the same time, right now, and then ask yourself: Who is it that's buying at this moment? Well, somebody is, or else the price of gold would go to zero. Those somebodies are the people who are in fact tuning out all the noise and going with the fundamentals. They are the ones buying the bottom.
My picks for the bottom
The safest and most prosaic pick for this major bottom is of course GLD, though putting all your eggs in one ETF basket in my view is a little unbalanced. ETFs need to be researched individually by reading the prospectus and how each functions, whether shares can be exchanged for bullion or not, whether shares are even backed by bullion at all, custodial fees, open vs. closed-end funds etc. Spreading out amongst several precious metals ETFs is a better move .These include, besides GLD, IAU, PHYS, SLV, PSLV, SIVR, PPLT and PALL. Some are closed-end funds, others open, each has its pluses and minuses regarding price movements, but they will all do generally well out of this bottom. Stay away from leveraged ETFs like AGQ or UGL. Those are just not worth the trouble, especially at highly emotional bottoms like this one.
As for miners, I expect them to at least double gold's pace out of this bottom. I group them into two categories. One is buy, the other watch. My two buys are Yamana (AUY) and First Majestic Silver (NYSE:AG). Yamana and First Majestic are opposite stories, so buying both of them will cover two strategies. Yamana is like the valedictorian of gold miners. Its growth has been phenomenal, especially since 2009. Revenue is up 97% since then. Net earnings this year were slightly down from last year for two reasons: first is the cost of mining. Yamana's cost of revenue jumped up 16% this year, and its income taxes jumped up 38% (page 41) due to previous accounting measures from last year. The cost of mining will continue to rise as money printing will fuel price inflation, so all in all, Yamana is a very strong company. Unlike most miners, Yamana's stock has actually achieved steady growth on a nice trendline instead of the wild ups and downs of other miners. Buyers have been impressed with the company's management.
As for First Majestic, the stock tanked at the end of 2008 and has never recovered. But the company sure has. From earnings of just over $6M at the end of '09, the company has shown earnings of $89M in 2012. But despite that growth, AG has gone nowhere since its great fall. This discrepancy cannot last much longer, unless buyers think First Majestic will fall apart as a company. I don't see that happening. With both Yamana and First Majestic, you'll be buying the most popular and the most hated, both of which are exhibiting impressive growth.
My first miner to watch is Golden Minerals (AUMN). This is a company bleeding cash, but showing some signs of life this year. 2011 saw under $2M in revenue, but 2012 showed growth - not nearly enough - to $26.1M. This junior has some staying power with $285M in hard assets and mining equipment, so I wouldn't count it out. Juniors can grow quickly once they find profitable and stable projects, so stay posted.
My other stock to watch is Uranium Hunter. (URHN.PK) Stocks like these pop up every so often when somebody wants to go on a treasure hunt in Africa and investors should be very careful of these. Many times they end up being money pits, but every so often one hits the scene that's a real opportunity. My feeling is that Uranium Hunter could be one of these, but we have to watch it closely over the next few months and see. What deserves attention is that the company has secured a $20M line from a Swiss venture capital group and joint ventured with a five-year old company called St. Watson Mining to work together on a mining project in Sierra Leone, a country which gets 4.5% of its GDP, or over $100M, from mining exports. Time will tell if and when this project bears fruit. The company projects revenues of $5-$10M in FY 2013. If it can achieve that even by mid 2014 I'd say it's the real thing. Let's wait and see.