Jordan Roy-Byrne: Biggest Risk For Gold Investors Is To Not Be Invested

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GEUR, GLD, GLDI, GLL, GTU, GYEN, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Palisade Radio

Summary

Negative interest rates key for gold.

This has been the worst bear market for 90 years.

How long will the bull market run?

The biggest risk is not to be invested!

Jordan publishes the Palisade Radio Precious Metals Update videos for the Palisade Radio youtube channel. He says that at the start of a bull market the miners perform way ahead of the metals and this is what we are seeing now. This has been the worst bear market in 90 years, so the following bull market should prove to be even bigger.

People are waiting for a correction in the mining stocks that has really not happened. All the sellers are out of the market, the same is happening in the metals, the breakout in silver is also a very bullish sign. Even if there was a correction that would just create a great buying opportunity.

Gold is still holding above the moving average on the S&P, as long as that holds a correction in the stock market should not effect the gold stocks too much. Jordan does not see a major downturn in the general stock market however.

The big key for gold is negative real rates, inflation has started to rise and bond yields have continued to go down further encouraging diversification into precious metals.

Historically the bull market after a bear market lasts longer than the bear market. This bear market lasted around 5 years so we could be in for up to 7-8 year bull market and at minimum 5 years. The people holding the stocks today will not be selling.

Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is returning guest, Jordan Roy-Byrne. He is the publisher of The Daily Gold, which can be found at www.thedailygold.com. Jordan, welcome back to the program.

Publisher and Editor of TheDailyGold.com, Jordan Roy-Byrne: Collin, thanks for having me.

CK: Yeah, and just for any of our listeners that do not know, you put up a weekly or sometimes every other week update with technical charts and fundamental approach to what the market is doing particularly the gold stocks in the junior sector that goes out through the Palisade Radio YouTube page. You put out a really great update yesterday. We are recording this on Thursday, April 21st, and you talked about the state of the market right now.

It seems pretty obvious we are in a new trend. The new bull market has started, yet a lot of people are calling for a major correction and money is waiting on the sidelines to jump in. Week after week passes and it is seeming to be a worse and worse decision to sit on the sideline. Jordan, what do you think is going on in the market right now?

JB: Well, Collin, I think what we are seeing in particular with the miners, because let us distinguish between the miners and the metals, because the miners have shown fantastic relative strength. Typically that is what you see at the beginning of a new bull market is the- most of the outperformance that you get from the miners versus the metals. That happens very quickly. It happens immediately after the bottom. It happens very early in a new bull market. When we are two or three years down the road the performance of the metals and the shares will be more in line. Of course that will force guys like you and me and other investors to find the stocks that are going to outperform. But now everything is outperforming. It does not matter as long as it has gold or silver in its name and that is just because at the bottom, and this is similar to the share bottom in late 2000.

If you look at the value of the miners against the metals, specifically gold stocks against gold, that was the lowest in basically 90 years. A lot of people are showing these HUI gold charts, XAU Gold and we are the cheapest in five years or ten years or fifteen years. But you know that I have the data that I have and I look back decades. Look, Collin, this was the worst bear market in 90 years. The price of the gold stocks relative to gold itself and relative to the stock market were the lowest that it had ever been in at least 90 years. I mean we are talking back to the 1920s. Again, the bear market was the- four and a half years in the stocks, the worst ever in terms of the price.

Collin, what happens after you have a really bad bear market is once you get the turn that new bull market, it tends to just go up for about a year without any real major correction along the way. You can have it at the beginning if the mark was kind of building a base and then that base lasts for a while and then it breaks out. But some examples of this are in other sectors. Look at tech stocks after 2002. Remember they were down, what 85%? I mean the NASDAQ something like that. And then after that bottom in late 2002, the tech stocks, they were just doubling and tripling. They were so extremely oversold and they just kept going up. I remember even in 2003 the entire market then was going up and everybody was waiting for this big correction and it never really happened.

Another example of that is the stock market in 2009. Look, that was the worst bear market in stocks probably since you would have to go back to the '37, '38 bear, the '37 to '42 bear, every one of it, Collin, or maybe even back to the '29 to '32 bear. After that bear, Collin, I remember even in early March, it was going up and there were people who were saying, "Oh, the economy still stinks. There are still lots of problems." But it just kept going up and it kept going up and we are seeing that in the gold stocks now. The reason for that, Collin, is there are just no sellers. The sellers are completely gone and there are only a few buyers, only the people who bought in before the bottom or around the bottom. Those people, once they see the turn, they have huge profits and they are just going to hold on to their positions. That explains why these markets- you have a huge rebound and some people, of course, the real naysayers are saying, "No, we are still on a bear market," and there are other people who are bullish, but they are saying it has gone up too much. I am waiting for a correction. But if you wait for a correction, you are taking a big risk there.

The other thing, Collin, is the corrections that we get they tend to be very short and quick. If you look at GDX, for example, we have had three or four 10% corrections. We have not even had a 20% correction yet. That may happen at some point soon. But everybody who has been waiting for a big correction has not- it has not materialized. The market has gone down like I said three or four times 10% and it looked like it was going to go down 15% or more, and then the next couple of days, boom, it was back up to where it was at the previous high.

I know that was a very long answer. But I think that explains what we are seeing now particularly in the stocks. Now the metals, of course, we see silver breaking out. That is healthy and the outperformance in the shares. I do not know how anyone could bearish on the sector when the shares are outperforming like this. The shares lead the metals and silver breaking out. That is also a very healthy sign. If we were going to see a big move down you would see silver showing weakness. You would see the stocks rolling over and showing weakness. The stocks perhaps might be making a little bit of a short term top here. I would not rule that out.

But getting back to gold, which has struggled a little bit, it reminds me of what happened after the bottom when the shares bottomed in late 2000 and gold bottomed in 2001. It really took a while for gold to really confirm its bottom. There are people who are saying gold needs to take out the 2015 high at $1308 to confirm its bottom. The stocks could be up another 50% before that happens. If you go back and you look at what happened in 2000, 2001, and 2002, gold really did not confirm its bull market until the middle of 2002 or even late 2002. Collin, the miners had already gone- the HUI had already gone from $35 to $150. It had already gone up fourfold by that point in time. The moral of the story is to keep your eye on the stocks. They are going to lead. They were completely devastated. If we get a little correction, take advantage of that.

CK: Jordan, logic would dictate that if the underlying metal, for example, gold, is going up the gold stocks would go up. But we always hear about the fact that the mining stocks are leading is a great indicator. How does gold actually have any relation to the gold stocks moving up? The gold stocks are going right now, but why is that to say that gold is not going to correct all of a sudden? Why are you so confident?

JB: Well, it is a very good question. The action we see in silver and the stocks it is telling you that the bottom is in for the sector. Even if you look at the stocks and you look at the 80-week moving average and you just look at a five or seven-year chart of GDX and GDXJ it is clear that we have seen a major turn. Collin, even the days when gold has been weak the miners have held up well. If there really was this risk that gold was going to go below $1180 that is kind of the support we need to focus on if it was going to correct a little bit more. If that was really going to happen gold is going to go below that level. You would see the miners selling off.

Remember these markets are about buyers and sellers. What we are seeing in the stocks- I mean markets are not mechanical. There are buyers and sellers and sometimes in these things- I know there are a lot of people who have their cycles. They have their computers and they try and predict how everything's going to go, but markets are not mechanical like that. You can build great systems, but you cannot always call a top or a bottom. It is extremely difficult. But my point is it is just the strength in the stocks. It is telling you that all the sellers are out of the market and the buyers are now in control.

The same thing is going on in the metals. It is just to a lesser degree you could say because they are not quite as oversold. We have even seen this as a commitment of traders where a lot of people are looking at this and they are saying it is bearish and the commitment of traders and the high speculative positions in gold, that is one reason why I have been lukewarm on gold recently and why I have said it is probably going to be range bound, but I do think it is going to break out. It is because the speculators in the market now, they are not selling. The speculators, during the bear market, every time gold will go down a little bit they would get scared and they would sell everything. Gold will go down a lot more. We are not seeing that now. Yeah, we are seeing speculators in both gold and silver, but they are patient in their holding because they know it is going to go up and probably because some of them already have profits and when you have a profit you tend to hold. Maybe that was not a direct answer to your question, but that is how I see it.

CK: Well, Jordan, we are certainly in a pretty set trend right now. You are convinced; I am quite convinced that this bull market is real. But let us talk about what could potentially derail the bull market? Something on the minds on a lot of gold bugs and investors is the US equities. We saw in 2008 that when things crashed in the US stock market- you, of course, had huge pullback in the gold stocks. It might have been different at that time because the gold stocks were also at highs instead of all-time lows as they are now. Are you concerned at all if we do get a major pullback in US equities that it could once again drag the gold stocks down?

JB: Not really. I mean just because of what you pointed out - the long term trend. The stock market is- even though it looks healthy to me in the short term, I know a lot of people disagree with that, but the breadth looks pretty good. Maybe we are not going to have a bear market here. Maybe it might take another year for the market to really start breaking down again.

If you go back to the '99 to 2001 period and you exclude tech stocks the market was kind of in a similar topping pattern where it really took a while for it to break down. Again, I am excluding tech stocks from that. If you look at the stock market and you take energy out of the stock market it would have been in a much healthier position over the last year or two. But, anyway, looking at the ratios of gold against the stock market they had a key breakout in January and then end of February. Those have been correcting, but I like to use the 80-week moving average which really sets the trend. Looking at gold against the S&P it is still holding above that moving average. As long as that holds I am not going to get too worried about the stock market either going up too much or breaking down. But I mean it is possible if the stock market corrects, it is possible that gold stocks would correct with it. But I do not think you would see anything too serious. No big moves to worry about beyond the short term.

The real key for gold is negative real rates which we have talked about many times. That is why we are in a new bull market because real rates- remember from 2011 to 2015 no matter if you look at the real Fed funds rate or the real yield on the 5-year Treasury bond, real interest rates they were negative and then they went back to around zero. That was negative for precious metals. But since 2015 we have seen inflation start to pickup and bond yields have continued to go down. The Fed funds rate has gone up a little bit because they raised rates once, but, regardless, real interest rates over the last year or so, they are going down and they have gone in negative territory again. Unless that completely reverses course and the Fed is suddenly going to get aggressive, then I do not see this new bull market being derailed. Collin, there is just too much debt out there for real interest rates to be rising or positive. That is why gold is in the secular bull market and that is what is going to drive it here in the quarters and years to come.

CK: It is always fun to speculate at the beginning of a bull market just how long it can last. It is also important, of course, to get an idea of when is a good exit point. We were talking the other day, I am not sure if you have had a chance to confirm the research, but I know that looking at the past bull and bear markets of gold mining stocks, the gold equities, that, generally speaking, I think all but one case in the last sixty or seventy years the bear market that precedes a bull market is always shorter. Meaning if we have just gone through a five-year bear market in gold stocks, we can expect for the bull market that just started three months ago to last at least five years, more likely somewhere between six, seven, or maybe even eight years. Jordan, can you talk about this a bit?

JB: Yeah, Collin, you brought that point to my attention and that is really a fantastic point that you made. I am really going to look into that. I am also going to kind of compare that with the stock market because as you are asking that question I was thinking of 1929 to 1932. That was probably the worst bear market ever in stocks and then they had a really strong five-year bull market. But, Collin, if you look at the 1937 to 1942 period in stocks, some people look at that as two small bear markets or one big bear market. But what happened after that, Collin, was the stock market from 1942 to like 1956, the corrections were very limited. They were very small. That was really one of the best buying opportunities ever in stocks was 1942.

I do not have the chart in front of me but just look at what happened from 1942 to 1956. From '46 to '49 the market went down about 28% in sideways and then after that it had a really strong move I think into 1956, but, really, limited draw downs. What we are talking about here is the '37 to '42 bear. If you are looking at a five-year performance of the stock market- this is something I am going to look at myself. If you look at a chart look at the five-year rolling performance. In 1942 that might be the worst over the last 100 years. I am just guessing. I mean I could be wrong, but if you look at that, if that is the case, then there is no coincidence why you had a 14-year run after that. I mean two really strong moves with only a 28% mini bull market there in the late '40s in between that.

What I am getting at is I just do not think that applies only to gold stocks. That may apply to other sectors. I know I am getting a little off topic here, but I remembering reading somewhere that the coal industry actually went down six years around the Great Depression and then after that it had a fantastic boom for I think like 16 or 18 years. That is something I am going to have to dig up again. But coming back to the present where we are with the gold stocks, this is a very significant bottom and I see gold stocks performing extremely well not only over the next three, four, five years, but I mean returns over the next seven, eight, ten years are probably going to be pretty good.

Now this cycle and when is this bull market going to end exactly? Looking at some things in my book and some cycles I think I have kind of talked about 2020 to 2021 for gold. Does that mean I am going to hold the things that I have for another five, six years? Not necessarily. But I guess what I am getting at here is we are in the very early stages of what is going to be an excellent bull market over at least the next couple years and at minimum five years. If we do get a downturn at some point whether it comes from the fifth or sixth year, I think gold stocks would perform well after that.

Another point to mention, Collin, is we had the 2007 to 2008 bear market in this sector and then you had 2011 to 2015. You had two really bad bear markets basically in like eight or nine year period. That is setting the stage not just for a really strong four, five years, but probably a strong seven to ten years. But, look, when things get really overbought three, four, five years into the future, you do have to be careful because you cannot hold gold stocks forever. We have even seen that over the last ten years where these stocks even get killed from cycle to cycle.

CK: Jordan, you made a profound statement in your piece on Wednesday that you released and you said the biggest risk for gold investor is to not be invested right now. We have talked about that at the beginning of this interview. But I am going to leave you with that statement and any other points that you want to make before we end the conversation today. I think it is very important for people to consider where we are in the market, where we might be, and how they need to set themselves up for the next several years.

JB: Well, that depends on whether you are buying the stocks or the physical metals. I think with the physical metals, especially silver, they are probably a better buy here just as far as lower risk. With the metals I think it is wise to just accumulate every month. That is a wise thing to do. You are going to build up a huge position over time and you are going to repute rewards.

Now with respect to the stocks, a couple of things I do want to mention is they kind of look like they might be putting in a short term top here, but I could be wrong. Looking at GDX and GDXJ, if they do not have like a 20% or a 15% correction here in the next couple weeks, Collin, then they may continue and shoot up and test the 2014 highs which for GDX. GDX is trading at $23 right now. The upside target I do have is around $28. If GDX zooms up to $28 in the next couple weeks or in the next month without having a big setback, then you could get a big correction at that point where you could see the $28 it could come back down to $20 or $21.

I do not want to say there is not some risk. If the miners do not correct that much here and zoom a lot higher in the next month or so, the next couple of weeks, that would probably lead to a correction at the beginning of the summer, and that would give you a really good buying opportunity for those who are still on the sidelines. But just watch carefully because if we do get a 15 or 20% correction in the next couple weeks I think that would set up a really good buying opportunity.

From where the miners are here and now, I do not see a whole lot of downside risk outside of a quick 15 to 20% decline. But I do not think that is going to happen. I think it is more likely that maybe we get a little correction here and then we move a lot higher after that. If that is the case and we are looking fairly overbought into June or middle or late May, then that could be the point where miners are at risk of correcting 20 to 25%, and then that would be the time for people around the sidelines to really get in.

Other than those reasons, if you are waiting for some 40 or 50% correction here right now that is just not going to be the case. The people who own the stocks right now, Collin, are people like you and me and your followers and my subscribers. For the most part we are not going to be selling anything. I mean, Collin, if your stocks go down 15, 20, 25% here, are you going to be selling?

CK: No, absolutely not. I mean after such declines it does not seem like that big of a drop.

JB: Absolutely! And I am not going to be selling either. That is the point. If people think we are going to have this massive, huge correction here and now, I just see no indication that that is going to happen. The worst case scenario would be a test of the 80-week moving average and GDX which is just below $18. GDX is at $23.25 today. I know that was kind of a roundabout answer, but that is kind of how I feel. We are fairly overbought here, Collin, so if we get even more overbought, then you probably want to relax and wait for some weakness in the summer. But if we get 10% weakness here in the next couple weeks, then you want to jump on that.

CK: All right, well, Jordan, bullish words from a wise analyst. Thank you for coming back on the program. Of course, thank you for putting out those weekly updates. All of our listeners seem to enjoy those and get a great deal of information out of that. Jordan's work can be found at www.thedailygold.com. He does have some free content he puts out which is very helpful, and then, of course, the premium content where he suggests specific stocks and he has just been doing a great job with his returns on his model portfolio. Jordan, thank you so much for coming back on the program.

JB: Collin, it is my pleasure. Thanks for having me.

Jordan Roy-Byrne, CMT is a Chartered Market Technician and member of the Market Technicians Association. He is the publisher and editor of TheDailyGold.com, a publication which emphasizes market timing and stock selection for the sophisticated investor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.