Bruce Pile

Massive Options Trade Signals Gold Miners (GDX) Is Set to Glitter

Don't look now, but silver just broke its bull flag pattern to the upside today. Gold and silver technicals seem to be signaling a big move soon either up or down - a lot of pent up energy ready to blow down or up.

The stock market rally detractors are assuming any bull move in silver automatically means a stoppage of the bull move in stocks. People are either fearful and buy PM or bold and buy stocks, right?. But let me point out that it is entirely possible for gold, silver, and the stock market to all move lovingly together in a raging bull market! Impossible you say? Well you need to look no further than our last big bear decline in '01-'03 to find an example of this. Look at what silver did from mid '01 to mid '04 and you see that it was in a mild climb channel during the bear market. But then, as we emerged into the stock bull market in early '03, silver moved into a much steeper climb into '04! Gold's action was similar.

That makes sense when you consider that, in the present case, you have the same 800 lb gorilla causing both the economic "recovery" and the dire threat of out of control inflation soon - namely the massive flood of fiat dollars.

ETF vs. Mutual Fund: Two Ways to Invest in Gold Miners

An added thought to the above on gold stocks, there was a very fundamental reason for them doing well in past bull runs. Homestead Mining's stock climbed, but also their earnings and dividend payout climbed at something like a 40% annual rate over the first few years of the Depression. If they were selling clothespins as their business, their stock would have done well! It was not just crazy fear-mongering speculation.

If you look at the charts and valuation by cash flow of gold stocks today, you see quite a collection of what you would have to call pure value plays. The price-to-cash flow numbers of many gold stocks are running well below the average for the S&P 500. But unlike most of the rest of the stock world, their product is not suffering severe demand destruction. Yet the gold stocks have received the same thrashing, even worse, than the rest of the market.

ETF vs. Mutual Fund: Two Ways to Invest in Gold Miners

Gold stocks are typically thought of as a one dimensional play on inflation. But there is more to it than that. For example, in the start of the Depression with deflation raging, gold stocks did a fabulous climb. And it started even before FDR fixed the price of gold keeping it from possible deflation.

Gold seems to respond more to chaos and uncertainty than to the current inflation rate. After all the debate on CDS, bank conditions, deflation, and inflation, there is only one form of money not subject to any personal liability anywhere and thus not subject to default - gold.