"When you're feeling terrible you've got to buy…"
Rick Rule offered that comment in a March 3 interview. The title is "Gold is the fear trade, silver is the greed trade, and platinum is the math trade." The full quote is, "When you're feeling brilliant, you've got to sell. When you're feeling terrified, you've got to buy. Otherwise you're road kill, at best." This view applies to equities as well as metals and miners. This column focuses on the latter but to those in markets built on a slurry of POMO injections I reiterate, caveat emptor. Robert Fitzwilson of the Portola Group says the Fed's infusions of liquidity have created a "global financial sinkhole" and that "only precious metals and energy-related investments will be safe in the coming months. Michael Pento, Jim Rogers and others share this view. Those in the indices may be feeling brilliant now but caveat emptor.
Injunctions to buy pessimism are often made because it is so difficult to do. As for the major indices, the Boom-Bust barometer is like that of fall 2007 while consumer comfort on March 05 is not even half what it was in 2000. Current exuberance rests on shaky economic struts. Is the S&P cheap? Doug Short shows that the CAPE (Cyclically Adjusted P/E) for the current bull market is 33.5, extremely overvalued and by the Graham - Shiller metric due for a correction of about 900 points. He urges caution on equities, implies that we are in a phase of irrational exuberance. This implicitly makes the case of gold and silver as hedges set to appreciate strongly against equity indices. Fed and Central Bank fiat policies are jokers in the deck of markets divorced from grim economic realities.
The collapse of the Mining Sector in 2012 may be seen as a leading indicator, a canary in the mine for the trend of global economies. I've noted that Yardeni Research shows global growth trending down for two years. The ebb in mining and commodities is a warning signal that should inform asset allocation and degree of participation in markets generally. While equities race and the media exult, miners focus on streamlining costs and returning value to shareholders.
The sell-off in precious metals and miners results from a period of operational consolidation akin to price consolidation in spot bullion.
Just as the XAU price relative to gold is at its lowest level since formation of the index in 1983, the net speculative length of gold contracts relative to open interest is at its lowest since late 2008, the bottom of its collapse shortly before the absolute bottom of the collapse in the general indices. Perhaps this is another leading indicator of a major market correction. The XAU - gold ratio shows the mining shares are 100% below their strong buying level.
Moreover, COMEX managed gold has broken down precisely as it did in 2008. A chart shows the similarity and the base-building for a surge similar to 2009-2011.
While past performance does not guarantee future results especially in these days of increased manipulation of metrics, discourse, values and basic goods coupled with increasing gold buying and overt and inferred moves toward a reserve basket-of-currencies including or linked to gold, the basis for a strong rise is clear. Additionally, much gold buying is masked: India and China alone in 2012 bought more than global gold production. Perhaps major fiat currency banks are selling or 'leasing' their stocks. They may if they too desire a new monetary order in which the peoples of the West (and Japan) are impoverished relative to the East and to those who manage the system. Accountable governance is a Western principle increasingly out of favor with those who manage the grand game.
Approximity Group in Germany plots five gold price spikes since 2001 and extrapolates to a sixth and seventh: gold $4300 sixth by the end of this year. The DOW - gold ratio for a century points to June 2013 gold at $2650/oz and January 2015 at $4865. Super-cycles in DOW relative to gold last 15-40 years. The current declining DJIA-AU ratio converges at 1:1 in 2014-15.The fundamentals support it and the macro-cycles and trend lines established over a century make the case vivid. Barring a V-bounce in the DOW (this market will not soar off its liquidity-fueled base and rise 50-100% in the next two years) the current Bear cycle for the DOW-Au ratio will continue though it is masked by gold's consolidation (brief relative to established cycles) and the deep sag in the mining sector. The mean in the ratio is 8.6 and the DOW is in the process of falling from a high of 44.56 to the current 7.88 and sinking. Convergence at the trend line would give a gold price of about $12,000 in two years which several observers have suggested as the level at which dollar weakness and insolvency will cohere with gold.
Rick Rule notes a peculiarity in most people's purchasing behavior. When shopping for basics, most of us intensively seek bargains. Yet in financial instruments people are lured to charging bulls as we no doubt will see now that the DOW finally, after 66 months has made a new nominal (not real) high. Rule comments, "goods are on sale and I'm loving it. Fortunes will be made on the coming rise in gold." Rule also noted that the 1992 and 1999 collapses in mining shares "were capitulations like this [current] one."
Suit your additions, trimming and allocation to your means and tolerance. If you can, add miners, dividend payers with enormous resources, cash flow and proven reserves like Barrick (NYSE:ABX) and Goldcorp (NYSE:GG) both powerfully up (3% and 4%) Wednesday on strong volume as was mid-tier Kinross Gold Corp. (NYSE:KGC). Add a grossly suppressed mid-tier like IAMGOLD (NYSE:IAG) which, as Alika Singh noted in these pages, is artificially depressed beneath the rest of the sector by panic over recent events in Mali. That flare in the endless "war on terror" suppressed precious metals prices via disturbances in the resource rich areas of West Africa. As for juniors, McEwen Mining (NYSE:MUX) Wednesday surged away from its 52-week low, rising 10%.
Silver's diversity of uses should enable it to outperform gold long term, perhaps even when, not if gold takes its place in a new monetary order. First Majestic (NYSE:AG) has held 25% above its 52-week low and still is 60% below its high. Fortuna Silver (NYSE:FSM) has fine properties in the American West and Mexico and SilverCrest Mines (NYSEMKT:SVLC) is a solid junior. Premier Silver streamer Silver Wheaton (NYSE:SLW) also remains 25% below its year's low and 50% below its high-end estimates which do not even include analysis and comment like the cyclical charts described and linked above. It was interesting to see the Junior Gold Miners (NYSEARCA:GDXJ) rise 5% March 05-06 coming off yet another low to outperform the heralded DOW. Tom Fitzpatrick of Citi offers charts that measure gold by Yuan that show gold just put in a third bottom like those of January and May 2012. In each case, there was a $270 bounce off the bottom. The metrics noted above suggest a more potent rise.
Consider shifting from paper precious metals ETFs like Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) which facilitate manipulation of prices and hurt not only your hard asset holdings and mining shares but contribute to dangerous distortions of value throughout the markets and economy. Asia Gold Trust (NYSEARCA:AGOL), Swiss Gold Trust (NYSEARCA:SGOL) and Sprott Physical Gold (NYSEARCA:PHYS) and Silver (NYSEARCA:PSLV) are good choices. For those who might wish to buy a limited amount of silver bullion coins, Sprott Money offers rolls of as few as twenty. Colorado Gold is a quality outfit for those who wish to order in larger units.
The indices are running on liquidity, the first trickles of pent-up corporate cash and the desire of the suppressed retail investor to push onto the express. Put some morsels on your plate: one needs to add wealth in this brutal and deteriorating economic situation and for now the markets provide it. Smart money like Mr. Gartman who exited his equities last May, August and again in February has lost seven months of major gains. The sinkhole will not open in a flash but the facts of life will at length assert themselves over the artificial stimulations of this end game intended to crash and consolidate the system. Consumer Staples and Discretionary, Health Care - Pharma and Utilities are leading and will hold up best when fading euphoria reveals the chasm below. Use limit orders to take advantage of high volatility in precious metals and miners. Keep your allocation in the 10-20% range on metals and miners depending on your situation and tolerance for change. As for equities and metrics: Pavilion Capital looks at Insider Selling levels and expects at 5.9% correction in the next six months. That would make a prophet of Mr. Gartman. Yet trend trader Jonas Elmerraji brings data from Sam Stovall of S&P Capital IQ showing that for seventy years when both January and February post gains, the average return for that year is 24%: 2011 was one of two variations from this bullish norm. Economic fundamentals and the Graham-Shiller metric suggest there might be a major one coming. The S&P has soared away from the commodity index and declining global growth. A 7% correction might be the least of hard landings.
What dulls the nascent Bull in precious metals is the joker in the deck, the enormous amounts of currency and market manipulation in fiscal and socio-political initiatives and in geopolitics. The emerging world system points to a smaller pie a greater portion of which is possessed by fewer and stronger hands. On the business news Monday evening a guest lamented that "there are too many workers." There are many solutions that problem: wars, plague and soylent green. While waiting for governance aimed at growth, let your allocation and defensive positioning include cognizance of the lust for power of those steering the ship. The Bull is awaking in its pasture but the Joker's in the pilot house. Yet Rule remarks, "these are not times of terror for people who think." I don't totally agree with him but the suggestions above stand. It is our currency that is toxic, not precious metals. When leaves fall and turn golden in the late light, major inflections will occur.
Disclosure: I am long FSM, AG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.