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Stocks in Rate-Hike Cycles

The stock-market outlook in 2016 is riddled with great uncertainty following the Fed ending its 7-year-old zero-interest-rate policy. With the first rate-hike cycle in nearly a decade just getting underway, traders are anxiously wondering how it will impact the stock markets. While raising rates out of ZIRP is radically unprecedented, stock-market reactions during past rate-hike cycles still offer some interesting insights.

The Federal Reserve’s monetary-policy decisions are no longer peripheral concerns for stock-market fortunes. Thanks to the Fed’s extreme easing of recent years, its actions have usurped everything else to become the stock markets’ overwhelmingly dominant driver. And unfortunately the wildly-outsized upside impact on stock prices by the uber-dovish Fed is highly likely to portend proportional downside.

This all started back in late 2008’s once-in-a-century stock panic, when the Bernanke Fed joined in the panicking. On December 16th, 2008, the Fed’s Federal Open Market Committee that makes its policy decisions slashed its benchmark federal-funds-rate target by a staggering 100 basis points (hundredths of a percent) to zero. This was the first time in the Fed’s entire history since 1913 that it implemented ZIRP!

But once it bullies rates to nothing, the Fed hits the zero lower bound where it can no longer cut rates to attempt to stimulate the economy. That leaves its final option of money printing, conjuring up new money out of thin air. Weeks before ZIRP was born, the Fed was already spinning up its first debt-monetization campaign known as quantitative easing. This pleasant euphemism obscures the fact this is pure inflation.

So since late 2008, the monetary environment in the United States has been epically unprecedented. The Fed has stormed so far into uncharted territory that it defies belief. In the last normal year of 2007, the federal-funds rate averaged 5.0%. That’s right in line with the quarter-century average ending that year of 5.5%. During the subsequent ZIRP years since, the FFR averaged nearly 98% lower at 0.13%!

In 2007 the Fed’s balance sheet averaged $830b. The Fed’s extreme QE money printing ever since has ballooned this to an average of $4450b in 2015, a mind-boggling 5.4x higher! If the Fed had grown its balance sheet at a reasonable rate around 7% annually, it would only be 1.7x higher today or $1425b. It’s exceedingly important to remember the past 7 years’ monetary policy has been the most extreme ever by far!

Such a crazy-easy Fed was tremendously bullish for the stock markets, especially starting in early 2013 when its third quantitative-easing campaign spun up to full steam. QE3 was very different from its predecessors in that it was open-ended, with no predetermined size or end date. Top Fed officials deftly used this to their advantage, aggressively jawboning the stock markets higher through an implied Fed Put.

Every time the stock markets started sliding into a normal healthy pullback, Fed officials would rush to the podiums to reassure they were ready to expand QE3’s bond monetizations if necessary. This effective central-bank backstop seduced stock traders to keep buying back in, ignoring all normal market indicators. The result was recent years’ extraordinary Fed-conjured stock-market levitation, a wildly-unprecedented anomaly.

Keep these vast Fed distortions in mind as you consider stock-market behavior during past Fed-rate-hike cycles. The incredible and record-setting-in-many-ways stock-market levitation leading into this latest rate-hike cycle was the direct result of the easiest Fed ever seen by an enormous margin. So there’s a very high probability the mean-reversion aftermath will be proportionally as severe and record-setting.

Nevertheless, the stock markets’ behavior in past Fed-rate-hike cycles is still worth studying. I recently completed a deep-research project looking at every FOMC decision changing its federal-funds-rate target since 1971. It turns out this happened a whopping 252 times over this span! Since the FOMC meets 8 times per year, that works out to FFR target changes happening at over 2/3rds of the 360ish meetings.

Provocatively the Fed doesn’t always hike rates in cycles, a series of multiple sequential hikes with no intervening cuts. There were 6 times in that nearly-half-century history where the Fed made one lone hike that was bracketed by cuts. There were an additional 6 times where the FFR target was raised twice in succession before it was reduced again. One or two isolated hikes certainly don’t make a rate-hike cycle.

The most generous definition possible for a Fed-rate-hike cycle is 3 or more consecutive FFR increases with no interrupting decreases. It turns out the Fed has executed fully 11 of these rate-hike cycles in the 45 years since 1971. The charts below reveal the benchmark S&P 500 stock index’s performance over the exact spans of these cycles, starting the days of their first hikes and ending the days of their last ones.

While all rate-hike cycles are highlighted in light red, these don’t always perfectly match the troughs and peaks in the federal-funds rate. The Fed actually doesn’t directly control the FFR, which is technically a free-market interest rate determined by federal-funds supply and demand. Commercial banks use this market to borrow and lend their required cash reserve deposits held at the Fed on an overnight basis.

The Fed instead sets an FFR target, which it then attempts to achieve through open-market operations where it directly buys and sells in the federal-funds market. While the Fed’s sophistication in bullying the FFR to its target has grown over the years, there are still deviations. Bending the free market to its will can literally take tens of billions to hundreds of billions of dollars of trading, it certainly isn’t a trivial task.

A half-dozen key data points are noted for each Fed-rate-hike cycle. They start at the top with the total increase in basis points. That’s followed by the number of individual hikes in each cycle, as well as their average basis-point increases per hike and per month. After that is each rate-hike cycle’s duration measured in months, finally followed by the S&P 500’s performance during each cycle’s exact span.



Recent months’ raging debate about this newest rate-hike cycle’s likely impact on the stock markets has been something of a Rorschach test, revealing traders’ inherent biases. Stock-market bulls argue that Fed rate hikes are bullish for stocks, because the Fed wouldn’t dare raise rates unless the underlying US economy is really improving. I’ve heard this case being made hundreds of times on CNBC recently.

Meanwhile the stock-market bears believe Fed rate hikes are bearish for stocks because they mark the end of the easiest monetary policies on record which levitated the stock markets. Take away the gigantic hot-air injectors of ZIRP and QE, and the artificial balloon they inflated shrivels up and collapses. It is rather amusing to see stock markets’ historical action during past Fed-rate-hike cycles support neither thesis!

The S&P 500 (SPX) climbed in the majority 6 of the 11 Fed-rate-hike cycles of the modern era, with an average gain of 11.1% during these wins. That’s pretty darned impressive, since the average duration of those particular rate-hike cycles was just 10.6 months. If that kind of performance is coming again, the bulls will rejoice. But during the other 5 cycles, the SPX lost 7.1% over an average duration of 13.5 months.

If the SPX’s performance during all 11 Fed-rate-hike cycles is averaged together, it is almost a wash with a mere 2.8% gain. This ambiguous result of a small upside bias doesn’t show clear direction either way. It’s fascinating comparing this to gold, which American futures speculators have been universally assuming will be crushed in this newest Fed-rate-hike cycle. Yet gold vastly outperformed the SPX in past ones.

Gold’s average gain during these same 11 Fed-rate-hike cycles of the modern era was 26.9%, nearly an order of magnitude greater than the stock markets’! Gold also rallied in 6 of these 11, but by a far-greater average of 61.0%. So while stock markets’ performance in Fed-rate-hike cycles has been ambiguous and directionless, gold’s has proved just the opposite. Stock-market bulls are betting on the wrong horse.

I was surprised stock markets’ historical performance during Fed-rate-hike cycles wasn’t worse. Rising interest rates hit stocks on multiple fronts. As higher rates increase debt-servicing costs throughout the economy, there is less money available to buy products and services from corporations. So rising rates lead to slowing sales, which are leveraged to a larger downside impact on overall corporate profitability.

Weaker earnings raise valuations, making stocks less attractive. On top of that, higher rates drive up the prevailing yields in the bond markets. This leads investors to migrate away from riskier dividend-paying stocks into bonds. Rate-hike cycles also prove the Fed has a tightening bias, which turns psychology on the stock markets bearish. So practically, Fed-rate-hike cycles simply shouldn’t be bullish for stock markets.

But the hard historical data didn’t bear this out, with the SPX rallying in the majority of the Fed-rate-hike cycles, seeing bigger average gains in those than losses in the others, and achieving that small overall average gain. Given the fundamental impact of higher rates on stock prices, this seemed odd. So we have to dig deeper into individual Fed-rate-hike cycles, which paints a more coherent picture of what to expect.

The stock markets meander in great third-of-a-century cycles I call Long Valuation Waves. Each wave’s first half is a mighty secular bull lasting about 17 years. These see investors flock to stocks and bid up their prices far faster than underlying corporate earnings are growing, ratcheting up their valuations. Eventually valuations grow too excessive and greed peaks, which ushers in each wave’s second half.

That’s a symmetrical 17-year secular bear, in which stock prices simply grind sideways on balance for long enough to let earnings catch up with the preceding bull peak’s lofty stock prices. Secular bears consist of an alternating series of cyclical bears and bulls, which first cut stock prices in half and then double them back up to breakeven again. These great valuation cycles explain the SPX’s rate-hike-cycle behavior.

A 16.7-year secular bull peaked back in February 1966, paving the way for a 16.5-year secular bear running to August 1982. This sideways-grinding trend of stock prices consolidating for long enough to enable profits to catch up and lower excessive valuations was the key driving force behind the markets during the first 5 Fed-rate-hike cycles of the modern era. And they saw average SPX losses of 5.5%.

If the stock markets were relatively high in their secular-bear consolidation trend when the Fed started to hike rates, they lost ground as mid-secular-bear cyclical bulls rolled over into cyclical bears. And since the Fed has always been worried about the stock-market reaction to its rate hikes due to the impact of the wealth effect on consumer spending and thus the overall economy, it never starts hiking near major stock lows.

After that in the 17.6 years between August 1982 and March 2000, the stock markets powered higher in their greatest secular bull on record. That period encompassed the next 5 Fed-rate-hike cycles, which saw average gains of 9.2%. The SPX rallied in 4 of those 5 secular-bull rate-hike cycles, compared to falling in 4 of the 5 secular-bear rate-hike cycles. This historical record is very provocative and illuminating.

The stock markets’ position within the Long Valuation Waves when new Fed-rate-hike cycles are born looks like the dominant driver of whether they rise or fall during those cycles. Fed rate hikes are likely to be ignored by stock markets powering higher in secular bulls, overcome by traders’ popular greed. But during secular bears, Fed rate hikes are overwhelmingly likely to help drive selling pushing stocks lower.

So if this newest Fed-rate-hike cycle is happening in a secular bull, stock markets are likely to shrug it off and keep on rallying on balance. But if the stock markets are really in a secular bear, rising rates will almost certainly force them lower. And unfortunately the fundamental and technical evidence is heavily in favor of the stock markets still being mired deep in the secular bear that started all the way back in early 2000.

When that last secular bull peaked, the stock markets were trading at extreme valuations up around 43x earnings. That is far into bubble territory above 28x, and the century-and-a-quarter average trailing-twelve-month price-to-earnings ratio of the S&P 500 is merely 14x. That’s fair value for stocks. After that extreme, stocks started grinding sideways giving profits time to grow into those lofty secular-bull-peak stock prices.

And indeed that’s exactly what happened between early 2000 and late 2012. The stock markets ground sideways on balance, first getting sliced in half in cyclical bears before doubling back up to breakeven again in cyclical bulls. Prevailing price-to-earnings ratios gradually normalized on balance, with underlying corporate profits rising faster than stock prices. It was a textbook secular bear until early 2013.

That’s when the Fed ramped up its wildly-unprecedented open-ended QE3 to full steam, and started brazenly jawboning the stock markets higher. So the SPX soon broke above its decade-plus secular-bear resistance near 1500 and ultimately levitated over 2100 by May 2015. This led stock investors to universally assume a new secular bull had been born, but odds are it was merely a gross Fed-conjured distortion.

When adjusted for basic CPI inflation, the S&P 500’s secular-bull peak of 1527 in March 2000 works out to just over 2100 in constant May-2015 dollars! So in righteous real inflation-adjusted terms, the stock markets have still never surmounted their last secular bull’s peak despite the extraordinary levitation the Fed fomented in recent years. The stock markets are still mired in that 17-year secular-bear sideways grind.

And with prevailing stock-market valuations just challenging 26x in recent months which isn’t far from 28x bubble territory, there’s no way this secular bear is over. Secular bears don’t end until the general-stock-market P/E ratio is way down near 7x, half fair value. Even in the dark heart of 2008’s stock panic and the subsequent early-2009 ultimate nadir, the SPX’s P/E ratio never fell much below 12x earnings.

And if the US stock markets indeed remain stuck in their long secular bear which the Fed temporarily tried to derail through the most aggressive easy-money policies in its entire century-long history, then this new Fed-rate-hike cycle is very bearish for stocks. There are high odds the stock markets will sell off on balance as the Fed hikes rates, likely seriously given today’s Fed-conjured near-bubble valuations.

And the coming stock-market selloff that Fed rate hikes will accelerate will be exacerbated by the gross distortions from ZIRP and QE in recent years. ZIRP’s impact on the stock markets was enormous, so the unwinding of ZIRP should largely reverse the SPX levitation. The primary mechanism through which ZIRP boosted stock prices so dramatically was through enormous levels of corporate stock buybacks.

With the Fed bullying short rates near zero through ZIRP, and long rates near record lows thanks to QE, the costs for corporations to borrow vast sums of money withered to all-time lows. So the majority of the elite US companies decided to undertake financial engineering to simultaneously boost their stock prices and earnings per share. They literally borrowed way over a trillion dollars to buy back their own stocks!

Over 3/4ths of the elite SPX companies engaged in stock buybacks, which bid up stock prices while also reducing the outstanding share count which increases earnings per share. This newest Fed-rate-hike cycle is going to start reversing these record-low corporate borrowing rates artificially created by ZIRP and QE. Even a modest uptick in prevailing rates will drastically alter the economics of corporate stock buybacks.

So the negative impact of the Fed hiking rates on buybacks financed with borrowed money alone are incredibly bearish for stock prices. And stock markets enjoyed a strong secondary boost in recent years from the Fed’s extreme policies forcing bond yields near record lows. This left investors seeking yields with no choice but to abandon Fed-pummeled bonds to migrate capital into far-riskier dividend-paying stocks.

With this new Fed-rate-hike cycle ending ZIRP and starting to allow bond yields to normalize again, all those legions of investors looking for yields to provide them incomes are going to start moving back into bonds. That will put even more selling pressure on stock markets as the Fed raises rates. So the selling stock markets will face as the Fed hikes rates out of record-low extremes are vastly greater than in normal cycles.

With that extraordinary stock-market levitation of recent years fueled by ZIRP going to unwind as interest rates slowly normalize, investors need to be exceedingly careful. They need to exit the overvalued stock markets and park that capital in cash or gold. Holding cash while stock markets fall grants a proportional gain in stock-share purchasing power after that selloff ends. Cash protects and preserves capital in bear markets.

But as one of the only assets that moves contrary to stock prices, gold grows capital during stock bears. Gold rallies on balance as stock markets sell off thanks to growing investment demand from investors seeking prudent portfolio diversification. Gold has actually thrived in past Fed-rate-hike cycles, enjoying exceptional average gains an order of magnitude higher than stock markets! This can be played two ways.

Investors can simply buy physical gold bullion or the flagship GLD SPDR Gold Shares gold ETF to mirror the coming gold upleg. But gold’s gains can be greatly leveraged in the left-for-dead gold stocks, which are still languishing near extreme 13-year secular lows. Their stock prices are at fundamentally-absurd levels relative to their existing profits, which will quickly soar as gold inevitably mean reverts far higher.

Gold stocks are likely to be the best-performing sector of 2016 by far, which is why we’ve aggressively bought and recommended many elite gold and silver stocks at Zeal in recent months. No other sector in all the markets is as undervalued and loathed, leaving vast room for gold stocks to soar as investors start to return. Buying in ahead of the herd before rate hikes’ impacts become apparent will yield the greatest gains.

We’ve long published acclaimed weekly and monthly subscription newsletters offering an essential contrarian perspective on the markets. They draw on our decades of exceptional experience, knowledge, wisdom, and ongoing research to explain what’s happening in the markets, why, and how to trade them with specific stocks. We buy low in deeply-out-of-favor sectors when few others will so we can later sell high when few others can as they return to favor. Subscribe today and multiply your wealth!

The bottom line is Fed-rate-hike cycles’ impact on the stock markets has been ambiguous, with the SPX seeing slightly-positive average gains. Stock markets’ performance during rate-hike cycles depends on where the markets happened to be in their long bull-bear cycles when the Fed starts hiking rates. Rate-hike cycles happening in bull markets see stocks tend to rise, and in bear markets see stocks tend to fall.

And not only do the stock markets remain mired deep in a secular bear today, but this newest Fed-rate-hike cycle is wildly unprecedented coming out of such record monetary-policy extremes. There is a very high chance that the Fed’s entire artificial stock-market levitation of recent years will be fully unwound as interest rates normalize. So the stock downside risks in this peculiar environment are far greater than normal.

Adam Hamilton, CPA

December 24, 2015

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Platinum Bling
Platinum Bling
Apr 5, 2010
I regularly read Adam Hamilton and enjoy his writing. In fact, I've posted several of his articles here as well. He just seems to "get it" and his style doesn't bury the reader in minutia or lose them in tons of technical terms.


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Mar 25, 2010
Fueling Gold’s 2016 Upleg

Gold certainly had a rough year in 2015, grinding inexorably lower on Fed-rate-hike fears and investor abandonment. But gold is poised to rebound dramatically in this new year, mean reverting out of its recent deep secular lows. The drivers of gold’s weakness have soared to such extremes that they have to reverse hard. The resulting heavy buying from dominant groups of traders will fuel gold’s mighty 2016 upleg.

Investment demand, or lack thereof, is what overwhelmingly drives the gold price. Investment certainly isn’t the largest component of gold demand, a crown held by jewelry at roughly 4/7ths of the total. But that is somewhat misleading, as gold’s investment merits are the primary reason Asians flock to gold jewelry. But since global jewelry demand is fairly consistent, it’s not what drives the gold price on the margin.

Investment demand is much smaller. According to the World Gold Council, it only accounted for 17.7% of global gold demand in 2013, 19.4% in 2014, and 22.0% in 2015 as of the end of the third quarter. So call investment demand something like 1/5th of total world gold demand. While that isn’t huge, it is a super-volatile demand category. That’s where gold’s biggest demand swings emerge, driving its price.

The reason gold prices plummeted 27.9% in 2013, slipped another 2.0% in 2014, and then fell 9.6% in 2015 by this essay’s data cutoff on the 29th was because investment demand first collapsed and then remained weak. Without strong global investment demand, gold is going to struggle. It is the big swing category of demand, the outlying volatile variable imposed on the steadiness of other demand and supply.

It’s hard to believe after the brutal gold wasteland of recent years, but this unique asset hasn’t always been despised. Between April 2001 and August 2011, gold skyrocketed 638.2% higher in a mighty secular bull earning fortunes for brave contrarians. The flagship S&P 500 stock index actually slipped 1.9% lower over that same span. Even after gold’s summer-2011 peak, its price averaged $1669 in all of 2012.

The collapse of gold’s critical investment demand began in early 2013. And it wasn’t a normal event, but an extreme market anomaly courtesy of the US Federal Reserve. Back in September 2012, gold traded at $1766 the day the Fed launched its third quantitative-easing campaign. QE3 was wildly different than its predecessors in that it was open-ended, its bond monetizations had no predetermined size or end date.

Just a few months later in December 2012 as gold traded at $1712, the Fed more than doubled the size of its brand-new QE3 campaign with massive new US Treasury monetizations. Starting in January 2013 the Fed would conjure up $85b per month out of thin air to buy bonds. The purpose of QE3 was to manipulate long-term interest rates lower, which the Fed openly admitted. QE3 radically distorted the markets.

QE3’s undefined open-ended nature made it a powerful psychological-operations weapon to use on traders to actively manipulate their sentiment. Whenever the stock markets started to sell off, elite Fed officials would run to their podiums to declare their central bank was ready to expand QE3 if necessary. Traders interpreted this just as the Fed intended, believing the Fed was effectively backstopping stock markets!

So traders started pouring increasing amounts of capital into the stock markets, levitating them. With a Fed Put in place, a notion that Fed officials aggressively fostered, traders increasingly ignored all the conventional stock-market indicators. They bought and bought and bought, sentiment, technicals, and fundamentals be damned. This relentless stock buying gradually became a self-fulfilling prophecy.

As the stock markets seemingly magically levitated thanks to the Fed’s deft use of QE3’s undefined nature, they started sucking capital away from other asset classes. Investors love to chase performance, and stock markets were powering relentlessly higher leaving everything else behind. So they started to sell other assets to move that capital into the red-hot stock markets. Gold was collateral damage from this migration.

This mass exodus of investment capital from gold was most evident in the flagship GLD SPDR Gold Shares gold ETF. After hitting an all-time-record gold-bullion-holdings high of 1353.3 metric tons just 3 trading days before the Fed greatly expanded QE3 in December 2012, stock investors started to dump GLD shares faster than gold in early 2013. This soon snowballed into a wildly-unprecedented record selloff.

Since GLD’s mission is to track the gold price, it has to act as a direct conduit for stock-market capital to slosh into and out of physical gold bullion. When GLD shares suffer differential selling beyond what is going on in gold, their price threatens to decouple from gold’s to the downside. GLD’s managers have to avert this failure by shunting that excess share supply directly into gold itself. This requires selling gold bullion.

GLD’s managers sell enough of its gold holdings to raise sufficient cash to buy back all the excess GLD shares being offered. In 2013 as the Fed’s extraordinary QE3-stock-market levitation blasted the S&P 500 29.6% higher, stock investors dumped GLD shares so fast that its holdings plummeted 40.9% or 552.6t that year! GLD selling alone accounted for over 5/6ths of 2013’s total drop in overall global gold demand.

As GLD was forced to hemorrhage vast record torrents of gold bullion into the markets, another group of traders piled on to ride gold’s downside. The American gold-futures speculators, whose trading has the greatest impact on gold’s price by far, started short selling gold futures at extreme levels. This added to the paper supply of gold, forcing down the benchmark gold-futures price off of which the physical metal is priced.

The more American stock investors jettisoned GLD shares, the faster gold fell. The faster gold fell, the more American futures speculators ramped their short selling. All the resulting gold carnage forced the other futures speculators long gold futures to greatly pare their bets, adding still more selling to the mix. The result was the most devastating vicious circle of selling gold has ever seen, spawning recent years’ wasteland.

As gold fell due to extreme selling driven by the Fed-levitated stock markets sucking investment capital out of it, traders tried to rationalize those losses as fundamentally-righteous. So the futures speculators started to believe first the tapering of the size of QE3’s monthly bond monetizations, then the end of QE3’s new bond buying, then later the Fed’s first rate hike would wreak more havoc on devastated gold.

These rationalizations were always weak though, simply masking self-feeding selling driven by out-of-control bearish sentiment. Remember gold traded at $1766 and $1712 when QE3 was originally born and expanded in late 2012. So gold plunged sharply during QE3. If that largest inflationary event in world history was ludicrously very bearish for gold, then why would the end of QE3 prove bearish as well?

The coming slowing and end of QE3’s epic monetary inflation was the boogeyman used by traders to justify aggressively selling gold in 2013 and much of 2014. QE3 was first tapered in December 2013, and its new bond buying fully ended in October 2014 even though none of those vast monetized bonds have been sold yet to this day. Once QE3’s new bond buying ended, traders shifted their boogeyman to rate hikes.

Fed-rate-hike fears were used to justify futures speculators’ and stock investors’ ongoing gold selling in 2015. Their rationale was simple. Since gold yields nothing, it will be far less attractive in a rising-rate world where yields climb on competing investments. But again this justification was totally emotional, a reflection of extreme popular bearishness that had nothing to do with gold’s actual global fundamentals.

The fatal flaw with this Fed-rate-hikes-are-gold’s-nemesis thesis is that history proves just the opposite. I’ve extensively studied gold’s performance within the exact spans of every Fed-rate-hike cycle since 1971. It turns out there have been 11 of them, through all of which gold averaged a stellar gain of 26.9% while the Fed was hiking rates. In the majority 6 where gold rallied, its average gain was a staggering 61.0%!

In the other 5 Fed-rate-hike cycles where gold lost ground, its average loss was an asymmetrically-small 13.9%. Gold’s best performance within Fed-rate-hike cycles occurred when it entered them near secular lows and they were gradual. With gold just off major secular lows today, and the coming Fed-rate-hike cycle promised to have the slowest hiking pace ever witnessed, it’s incredibly bullish for gold’s fortunes.

If higher rates really kill gold, history would be riddled with examples. The Fed is currently estimating that the federal-funds rate it targets will hit 1.25% to 1.5% in 2016. While that’s a lot higher than recent years’ 0.0% to 0.25% range, it is still trivial by historical standards. Between January 1970 and January 1980, gold skyrocketed 2332% higher when the FFR averaged a super-high 7.1% and gold still yielded zero.

During that later 638% secular gold bull between April 2001 and August 2011, the FFR still averaged 2.1% over that span despite the advent of the Fed’s zero-interest-rate policy within it. Gold has no problem at all rallying mightily during Fed-rate-hike cycles and in much-higher-rate environments as long as global investment demand is strong. All those rampant gold-to-plunge-due-to-Fed-policy fears are baseless.

Thus as 2016 dawns, the whole premise for selling gold near major secular lows is totally wrong. Gold only hit these lows because investment demand remained low as extreme bearish psychology choked out all logic and reason. But the Fed actually hiking rates for the first time in 9.5 years, ending 7 years of ZIRP, will serve as the acid test to shatter these false notions. Gold hasn’t plunged post-hike as widely forecast!

And that means gold-futures speculators and stock investors alike are going to have to seriously rethink their whole gold thesis. As they realize that rate hikes won’t slaughter gold, investment demand is going to start returning. And coming from such epically-extreme anomalous lows, it is going to take a massive amount of gold buying to restore normalcy in the gold market. That normalization is inevitable in 2016.

Major gold uplegs have three distinct stages of buying, with groups of traders handing off the baton like a relay race. New gold uplegs are initially ignited and fueled by speculators buying gold futures to cover their risky hyper-leveraged shorts. That sparking surge of buying lasts several months or so, propelling gold’s price high enough to get speculators interested in redeploying capital in long futures positions again.

Unlike short covering which is mandatory and forced as gold rises to prevent speculators from getting wiped out, long buying is totally voluntary and far less frantic. So it can take a half-year or more for the speculators to reestablish their upside bets on gold. That extends gold’s new upleg long enough and high enough to convince investors with their vastly larger pools of capital to start returning, which takes years.

Today gold is in an unprecedented position where the coming speculator gold-futures short covering, speculator gold-futures long buying, and stock investor GLD-gold-ETF buying is all aligned to be utterly huge! As the extreme anomalies of recent years spawned by the Fed’s stock-market levitation unwind, the vast gold buying necessary to mean revert that market to norms is going to fuel a mighty new gold upleg.

Let’s start with the futures speculators, the early buyers necessary to get gold moving higher again for long enough to motivate investors to return. This chart shows American futures speculators’ total short-side and long-side bets on gold weekly over the past several years. These guys are so far out over their skis on the bearish side of this trade it is mind-boggling, and their only way out is extreme gold-futures buying.


American speculators’ aggregate gold-futures positions are released every Friday afternoon current to the preceding Tuesday’s close in the CFTC’s Commitments of Traders reports. The latest read when this essay was published was December 22nd’s. That was the week surrounding the Fed’s rate hike which was supposed to obliterate gold. Yet since gold didn’t plunge as expected, speculators quickly covered.

They bought 15.5k gold-futures contracts that CoT week, cutting their total shorts from near-record levels to 167.5k contracts. But that is still extremely high by all historical standards, not far from the all-time record of 202.3k in early August. Even during the recent Fed-distorted years, speculators’ gold-futures short-side bets generally meandered in the trading range between 75k to 150k contracts shown above.

Merely to return near recent years’ 75k-contract support for the fifth time since late 2013, speculators are going to have to buy 92.5k gold-futures contracts to offset and cover their shorts. And to mean revert to total speculator shorts’ normal-year average levels of 65.4k between 2009 and 2012 before the Fed’s stock levitation started, these traders have to buy a staggering 102.1k contracts. That’s an incredible amount of gold!

Each gold-futures contract controls 100 troy ounces of the metal, so that equates to total gold buying in speculators’ short covering alone of 317.6 tonnes! For an idea of how enormous this is, quarterly global gold investment demand in 2015 up to Q3 averaged 228.0t. So we are talking about overall world investment demand soaring 139% on speculator short covering alone within a condensed several-month span!

Short covering unfolds so rapidly because traders are legally obligated to effectively pay back the gold they effectively borrowed to sell short. And the leverage in gold futures is so extreme that they can’t afford to wait to cover once gold starts rallying. A single gold-futures contract controls $107,000 worth of gold at $1070, yet only requires a maintenance margin of $3750. That makes for extreme leverage of 28.5x!

A mere 3.5% rally in the gold price at that kind of leverage would wipe out 100% of the capital risked by fully-margined gold-futures speculators. So gold-futures short covering rapidly feeds on itself, with all the covering buying blasting gold’s price rapidly higher which forces additional speculators to cover their own shorts. The more short covering, the faster gold rallies. The faster gold rallies, the more shorts are covered.

By the time gold-futures short covering has run its course and fizzled out, speculators buying long-side gold futures start returning. And their bets are exceedingly low right now, which means they also have huge buying to do to mean revert to normal. As of that latest CoT report on the 22nd, American futures speculators only held 189.7k long-side gold contracts. That’s their lowest level since way back in April 2014.

In those last normal years between 2009 to 2012, speculators averaged weekly long-side gold-futures positions of 288.5k contracts. Merely to mean revert to those normal levels without even overshooting would require 98.8k contracts of buying equivalent to another 307.2t of gold! In total, American futures speculators alone need to buy the enormous equivalent of 624.8t of gold simply to normalize current extremes!

To put this into perspective, in all of 2013 and 2014 global gold investment demand ran 784.8t and 819.1t per the World Gold Council. In 2015 current to Q3, that number is running 684.0t. Annualize the latter and average these years, and you get yearly gold investment demand of 838.6t. American futures speculators alone are almost certainly going to buy 3/4ths as much gold in 2016 on top of all that normal demand!

And all that mean-reversion gold-futures buying will propel gold high enough for long enough to start to convince investors to return. And their gold positions are as extreme today as speculators’ gold-futures ones, a guarantee of massive normalization buying coming. While physical bar-and-coin investment is larger than ETFs, GLD’s highly-transparent daily data is representative of radical underinvestment as a whole.


This chart reveals the total value of GLD’s gold-bullion holdings divided by the market capitalization of that benchmark S&P 500 stock index. If offers a glimpse into the proportion of stock investors’ portfolios that are deployed in gold. And thanks to the epic gold bearishness in recent years based on those false notions on the extreme Fed policies’ implications for gold, American stock investors are radically underinvested.

For many centuries, wise investors have recommended every portfolio have at least a 5% allocation in gold. It is the ultimate insurance policy, a unique asset that moves counter to stock markets. When something bad happens with the other 95% of one’s investments, that mere 5% gold allocation will often multiply enough to offset most of the other losses. That old 5% target is probably gold’s full-investment level.

But as of the end of November the last time we calculated the S&P 500’s market capitalization, the ratio of the value of GLD’s holdings to the S&P 500’s collective market cap was just 0.115%. American stock investors had just over a measly one-tenth of one percent of their capital invested in gold! That is incredibly low by all historical standards, a Fed-driven anomaly that is as ripe to mean revert as gold-futures bets.

During those last normal years between 2009 to 2012, this GLD/SPX ratio averaged 0.475%. Seeing stock investors with that nearly 0.5% portfolio allocation to gold is a reasonable conservative baseline. Just to return to 0.475% would require gold’s portfolio allocation to soar 4.1x from the recent super-depressed levels. Vast amounts of stock-market capital would have to deluge back into gold to make this happen.

GLD’s holdings averaged 1208.5t between 2009 to 2012 before the Fed’s stock-market levitation sucked so much capital out of other investments including gold. This week, GLD’s holdings were way down around 643.6t. So to return to pre-QE3 GLD-investment levels, stock investors would have to buy up enough GLD shares to force this ETF’s managers to purchase another 564.9t of gold bullion in coming years!

And that’s third-stage gold-upleg investment buying on top of first-stage speculator gold-futures short covering and second-stage long buying! While it will probably take years instead of months to normalize levels of gold portfolio allocations for stock investors, that’s still a tremendous amount of marginal new gold investment demand. 564.9t of GLD buying over 2 years is 282.5t per year, and over 3 years is 188.3t.

The average quarterly gold investment demand in 2015 up until Q3 was 228.0t, so we’re talking about an additional 0.8x to 1.2x a quarter’s gold demand per year on top of all other gold demand. And don’t forget that GLD is just a window into one aspect of gold investing, ETFs. Global physical bar-and-coin demand is way larger than ETF demand, and the radical underinvestment there is similar to what GLD has revealed.

So with the gold positions of speculators and investors alike so radically skewed by the Fed’s extreme market distortions of recent years, vast mean-reversion buying is inevitable in 2016 to start to normalize gold investment back to reasonable levels. Coming off of such an anomalously-low base where virtually everyone loathes gold, all this speculator and investor gold buying is going to fuel a mighty gold upleg.

Gold’s performance will trounce the stock markets’ in 2016, and it can be played via that GLD gold ETF or physical gold bullion. But the coming gains in the left-for-dead gold stocks will dwarf those in the metal they mine. With their stock prices recently trading near fundamentally-absurd levels relative to their current profitability, down near extreme 13-year secular lows, gold stocks should be 2016’s top-performing sector.

With the precious-metals sector poised for such an extraordinary reversal, it’s very important to cultivate a studied contrarian perspective. That’s our specialty at Zeal, where we’ve spent 16 years now deeply studying the markets so we can walk the contrarian walk. We fight the crowd and herd groupthink to buy low when few others will so we can later sell high when few others can, multiplying our subscribers’ wealth.

We’ve long published acclaimed weekly and monthly newsletters for speculators and investors. They draw on our decades of exceptional experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. With gold on the verge of a massive reversal as the Fed enters a new rate-hike cycle, it’s a fantastic time to subscribe and enjoy 20% off!

The bottom line is gold is poised for a mighty upleg in 2016 after being abandoned during the Fed’s surreal stock-market levitation. That sucked incredible amounts of capital out of other assets including gold, which speculators and investors alike jettisoned with a vengeance. The resulting bearishness left gold-futures speculators’ bets at epically anomalous levels, and stock investors radically underinvested in gold.

They tried to rationalize their extreme gold selling with Fed-rate-hike fears. But now that the rate hike has happened and gold refused to collapse as advertised, traders will have to start normalizing all their hyper-bearish gold positions. This will require vast buying by both speculators and investors, greatly boosting gold investment demand which will fuel a mighty new gold upleg in 2016. Are you ready to ride it?

Adam Hamilton, CPA

December 31, 2015

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!

Copyright 2000 - 2015 Zeal LLC (www.ZealLLC.com)


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Mar 25, 2010
Fed’s Market Distortions Unwind

The world’s financial markets changed dramatically entering this young new year, led by sharp stock selloffs and a mounting gold rally. These are major reversals from recent years’ action. The immediate catalysts were China’s plummeting stocks and ongoing yuan devaluation. But the far larger underlying driver is the Fed’s first tightening cycle in a decade, which is just starting to unwind years of gross distortions.

Just a few weeks ago on December 16th, the Fed’s Federal Open Market Committee chose to hike the benchmark federal-funds rate for the first time since June 2006. This was widely hailed as bullish for stocks, since it implied the US economy had improved enough to weather a new tightening cycle. The flagship S&P 500 stock index (SPX) surged 1.5% that day, as traders rejoiced at the Fed’s gradualist approach.

But as I argued a couple days later, that stock euphoria was terribly misplaced. The Fed had originally implemented its zero-interest-rate policy during 2008’s stock panic, and promised ZIRP would only be a temporary emergency measure. But the Fed reneged and kept ZIRP in place for an astounding 7 years. This along with the Fed’s quantitative-easing debt monetizations unleashed a vast deluge of liquidity into markets.

Much of this flowed into stocks, through the mechanism of corporate stock buybacks. Companies took advantage of the Fed forcing rates to artificial lows by borrowing incredible amounts of money. Instead of investing it in actually growing their businesses, they used it to buy back their own stocks. Enormous debt-fueled stock demand from corporations at a mind-boggling scale directly levitated the stock markets.

The Fed’s own data late last year reported that US non-financial companies spent a staggering $2.24t on stock buybacks since 2009. This was 1.8x higher than the $1.24t of stocks purchased by the entire mutual-fund and exchange-traded-fund industry over the same span! Meanwhile pension funds sold $1.05t of stocks, while households and hedge funds collectively liquidated another $0.56t. Think about that.

Since 2009, stocks saw net selling from normal investors of $0.37t. So the only reason the SPX blasted 215.0% higher between March 2009 and May 2015 was the trillions of dollars of stock buybacks. And of that $2.24t, the Fed reports that a shocking $1.9t was debt-financed. That’s over 5/6ths of all the stock buybacks since the panic! ZIRP unleashed the biggest debt-fueled stock-buyback binge ever witnessed.

Corporations love buying back their own stocks not only because that extra demand boosts their share prices, but because of its impact on apparent profitability. Buybacks leave fewer outstanding shares over which total income is spread, raising the critical earnings-per-share metric that feeds into price-to-earnings ratios. Buybacks financially engineered the illusion of business growth despite stagnant sales.

While stock buybacks always happen, the record-low borrowing rates forced by ZIRP and QE ballooned them to radically-outsized levels. This is why the end of ZIRP a few weeks ago was such a momentous event for stock markets. Higher rates quickly erode the economics of borrowing vast amounts of money to buy back stocks. And frenzied corporate stock buybacks have been this stock bull’s wildly-dominant driver.

Smart stock traders realized the first rate hike spelled doom for this Fed-conjured long-in-the-tooth bull market. So the SPX plunged 3.3% in the couple trading days after December’s rate hike. But with year-end looming, most investors didn’t want to sell because they had massive capital gains courtesy of the Fed’s stock-market levitation. If they sold in 2015, they’d have to pay big taxes on those by April 2016.

By waiting just 2 weeks until the new year to harvest their gains, they pushed back the due date on their taxes by an entire year. The dire implications of a new Fed tightening cycle on these extraordinary Fed-levitated stock markets is why so much selling has emerged in early 2016. China’s plunging stocks and yuan devaluation are certainly sparking fear, but they remain a peripheral concern to a tightening Fed.

The potential stock-market losses to be endured from rate hikes slicing deeply into corporations’ debt-financed stock buybacks are breathtaking. Recent years’ gross market distortions thanks to the Fed are going to reverse hard and are very likely to fully unwind before the dust settles. Zooming out to a secular time frame is necessary to understand the terrible implications of all this for investors’ hard-earned wealth.

This first chart looks at the benchmark S&P 500 superimposed over the monthly average trailing-twelve-month price-to-earnings ratio of all 500 of its elite component stocks. The light-blue line shows all these P/Es simply averaged, while the dark-blue line weights them by market capitalizations. Stocks’ extreme valuations in recent years prove that the Fed’s stock-market levitation was never fundamentally righteous.


Normal stock markets not actively manipulated by interventionist central banks move in great third-of-a-century cycles I call Long Valuation Waves. Their first halves are mighty secular bulls seeing stocks bid up far faster than underlying corporate earnings justify, which catapults valuations to extremes. That’s followed by second-half secular bears where stock prices drift sideways for long enough for profits to catch up.

The last secular bull ended in early 2000 at extreme valuations far into bubble territory which starts at 28x earnings. So stocks entered a new secular bear, which are an alternating series of shorter cyclical bears and bulls. The former cut stock prices in half, while the latter double them again to simply bring them back to breakeven. The net effect is sideways-grinding stock prices that earnings can grow into.

This totally normal and healthy secular-bear behavior persisted for fully 13 years, with the SPX slowly meandering in a mammoth trading range between 750 support and 1500 resistance. Cyclical bears would drag the stock markets to support, then cyclical bulls would power them back up to resistance again. All the while valuations were gradually falling on balance as profits rose faster than stock prices.

When the Fed launched its radically-unprecedented ZIRP and QE campaigns in late 2008, they didn’t upset these great bull-bear cycles. After a cyclical bear climaxing in an ultra-rare once-in-a-century stock panic, a new cyclical bull was overdue in early 2009 as I called right at those lows. And despite a sharp rebound in the SPX, stock-market valuations continued grinding lower between 2010 and 2012.

But in late 2012 just 8 weeks before the crucial presidential election, the Fed chose to launch QE3. It’s certain that decision was political, as the Fed was under heavy attack by Republicans for its ZIRP and QE leading into that. A new QE would boost the stock markets, and since 1900 their performance in the Septembers and Octobers leading into November presidential elections has predicted the winner 26 of 29 times!

If stock markets rally in those final 2 months, the incumbent party wins 94% of the time. And in 2012 that happened to be the Keynesian easy-Fed-loving Democrats. And QE3 proved far more potent for distorting the markets than its predecessors since it was the Fed’s first open-ended bond monetization. Unlike QE1 and QE2, QE3 had no predetermined size or end date. This turned out to be hugely important.

After QE3’s money printing to buy bonds ramped up to full steam in early 2013, Fed officials constantly used that campaign’s undefined nature to actively manipulate stock-trader psychology. Every time the stock markets started selling off, elite Fed officials would rush to the microphones to declare that they were ready to expand QE3 anytime if necessary. Traders interpreted this exactly as the Fed intended.

They started to believe there was a Fed Put in place on the stock markets, that this interventionist central bank would quickly step in to arrest any material stock-market selloff. So soon after the debut of full-size QE3, the S&P 500 broke out above its secular-bear resistance at 1500. And then it kept powering higher in 2013 and 2014 without any normal corrections. The Fed succeeded in suppressing normal sentiment swings.

But just because the Fed convinced traders never to sell, and corporations trashed their balance sheets to boost earnings per share, it doesn’t mean those stock prices were fundamentally justified. And the SPX valuation data proves that. Thanks to QE3’s amplification of ZIRP’s stock-market impact, starting in early 2013 general valuations climbed from an already-expensive 20x earnings to a frightening 26x by late 2015.

The century-and-a-quarter average trailing-twelve-month price-to-earnings ratio of the US stock markets is 14x earnings. Double that at 28x is officially bubble territory, and the stock markets weren’t far from that as the Fed hiked last month to slay ZIRP. There is literally zero chance general-stock valuations can remain this high without the roaring stock-market tailwinds provided by the easiest Fed policy ever witnessed.

The white line above shows where the S&P 500 would be trading at historical fair value of 14x earnings. And as of the final trading day of 2015, that number was down at a shocking 1096. With the SPX exiting last year at 2044, the stock markets would have to fall 46% merely to hit fair-value price levels based on current corporate earnings! That’s right in line with typical mid-secular-bear cyclical bears that cut stocks in half.

And despite the Fed’s herculean attempts to artificially truncate a secular bear, we remain in one. Between 2000 and 2012 the SPX meandered sideways in that giant trading range, which is textbook secular-bear behavior. The Fed-fueled breakout since early 2013 was totally fake, with even its May 2015 apex that saw the SPX hit 2131 a sideways grind. This is evident when the SPX is adjusted for CPI inflation.

In constant early-2015 dollars, the SPX’s nominal 1527 peak in March 2000 works out to 2100 which is right where the SPX crested last year! So the secular bear is very much alive and well despite the best efforts of the Fed to thwart it. As evidenced again in China this week, central bankers have such puffed-up egos that they think they can succeed in bending markets to their will despite all of history proving otherwise.

And being 16 years into a 17-year secular bear, the stock-market downside as the Fed’s gross distortions unwind is far worse than fair value. Secular bears exist solely to force market P/E ratios from extreme overvalued levels as secular bulls end to half fair value or 7x earnings. This valuation downtrend was in progress before the Fed brazenly attempted to short circuit it, as the fat-blue dotted line above reveals.

Stock prices are likely to fall until current corporate earnings support valuations of 7x to 10x. And those yield terrifying SPX targets of 553 at 7x and 790 at 10x. So we are staring down the barrel of total SPX selloffs since the end of 2015 of 62% to 73%! That sounds crazy, but all the Fed accomplished was a temporary delay of an already-in-force secular bear. Without ZIRP, it’ll come roaring back with a vengeance.

And amazingly, the SPX’s market-capitalization weighted-average trailing-twelve-month P/E ratio of all its component stocks at 26.1x as 2015 ended is actually understated! Real valuations are even worse for two reasons. Without the epic debt-fueled corporate stock buybacks courtesy of ZIRP, earnings per share would be much lower driving P/Es much higher. We are still at near-bubble 26x after $2.24t of buybacks!

And our SPX valuation data in this chart caps all individual stocks’ P/E ratios at 100x. I implemented this practice back in early 2000 to keep tiny companies with crazy-high P/Es from unduly skewing the overall weighted average. But today key mega-cap market darlings have insane P/Es. The SPX’s 2 best-performing stocks last year were Netflix and Amazon, which exited 2015 at TTM P/Es of 304.3x and 968.6x!

So if this dataset’s P/E ratios weren’t capped at 100x on the individual-stock level, we’d be looking at a much more ominous broad-market valuation read. So don’t let Wall Street deceive you, valuations are exceedingly dangerous today thanks to the Fed’s stock-market levitation. Wall Street’s motivation has always been to keep people fully invested so it can “earn” its hefty percent-of-assets management fees.

Smart contrarian investors who do their homework realize the grave danger the stock markets are in with the Fed tightening again which will unwind its gross market distortions of recent years. A new cyclical bear which will at least cut stocks in half likely began last May, as I warned last summer. It will accelerate as the Fed hikes rates this year, which it plans to do 4 more times. That’s why 2016 is seeing heavy selling.

While the Fed-delayed stock bear comes roaring back to maul stocks into a drastic mean reversion, all hope is not lost for investors. The Fed’s gross market distortions didn’t levitate everything, they sucked all available capital into stocks. That decimated other asset classes led by gold. This forced gold down to deep secular lows every bit as artificial and unsustainable as the Fed-conjured stock-market highs.


As the stock markets levitated in the Fed’s wild orgy of ZIRP-fueled stock buybacks and QE3-jawboning-driven euphoria, investors rushed to stocks like moths to a flame. Professional money managers have to chase performance to keep their customers, so they sold everything else including gold to migrate all their capital into red-hot stocks. So in early 2013 they dumped GLD gold-ETF shares at an epic record pace.

This forced GLD’s managers to spew vast amounts of gold bullion into the markets, collapsing the gold price in the first half of 2013. This extreme event caused by the Fed seducing everyone into stocks just wrecked gold-market psychology. And with stock markets continuing to levitate since, gold’s traditional role as an essential portfolio diversifier that moves counter to stock markets was forgotten by nearly all.

So gold continued to grind lower in recent years as the Fed-conjured stock-market levitation blinded the world to the fact markets are forever cyclical, rising and falling. Gold started to recover along the way, but was soon crushed back down by extreme record gold-futures short selling by American speculators that left it at major secular lows. But these lows were totally artificial due to the very nature of short selling.

Short selling requires traders to sell something they don’t actually own to sell in the first place, so they first have to effectively borrow it before selling. And those effective debts must soon be repaid. So all gold-futures short selling is guaranteed proportional near-future buying. The higher speculators’ gold-futures shorting level, the more bullish gold looks. And these positions hit extreme record highs in late 2015.

As the Fed tightens and starts its long road to normalization, capital is going to return to gold. It will start with speculators covering gold-futures shorts, followed by speculators adding new gold-futures longs. This will give gold enough upside momentum over a half-year or so to convince investors with their vastly-larger pools of capital to return. And this week, we are already seeing this new gold buying accelerate.

On December 31st when gold languished at $1060 and everyone still wrongly believed it was doomed to spiral lower indefinitely, I laid out the case for a powerful 2016 gold upleg in an essay. And the modest gold buying this week is only the beginning. It will take many months for futures speculators’ overall gold-futures positions to return to normal years’ levels, and years more for investors’ gold exposure to normalize.

With stock markets selling off without the Fed’s fierce tailwinds to levitate them, gold’s centuries-old role of diversifying portfolios will become very attractive again. This will lead to surging investment demand as professional money managers flock to gold to own something actually rallying as stocks fall. And contrary to all the extreme bearish hype late last year, Fed rate hikes are actually exceedingly bullish for gold!

In mid-December I published my latest comprehensive study on gold’s behavior in past Fed-rate-hike cycles. Before this one, there have been 11 since 1971. Gold’s average gain through the exact spans of all of them was 26.9%, an order of magnitude higher than the stock markets’! Gold’s average gain in the majority 6 cycles where it rallied was 61.0%, and it only saw average losses of 13.9% in the other 5 cycles.

During the last Fed-rate-hike cycle running from June 2004 to June 2006, gold powered 49.6% higher. That was despite the Fed more than quintupling the federal-funds rate to 5.25% through 17 consecutive rate hikes totaling 425 basis points. Gold thrives the most in Fed-rate-hike cycles when it enters them near secular lows and they are gradual. And both these conditions happen to be true in spades today.

So for the love of all that is good and holy, if you want to protect and multiply your wealth in 2016 you have to exit stocks and buy gold. Both markets are going to mean revert away from recent years’ gross Fed-conjured extremes as this central bank tightens. Stocks are going to fall as corporate buybacks wane and investors exit, while gold will surge as radically-underinvested investors start to prudently return.

Investors need to pare general-stock positions, especially market-darling ones with high P/E ratios. The more expensive any stock is, the greater its downside in a cyclical bear market. Puts on the flagship SPY SPDR S&P 500 ETF can be used to hedge investments or bet on more stock-market weakness. And aggressively buy gold, either physical bullion itself or shares in the leading GLD SPDR Gold Shares ETF.

I’ve been pounding the table on this coming mean reversion after the Fed shift since summer, and the time to make these critical portfolio changes was late last year. The longer you drag your feet, the greater your stock losses will grow and the more gold gains you will forgo. And if you really want to multiply your wealth, augment your gold holdings with shares in the left-for-dead stocks of the gold miners.

The Fed-driven gold sentiment was so rotten that these stocks recently traded near fundamentally-absurd 13-year secular lows. Even though this industry is mining gold at average cash and all-in-sustaining costs near $618 and $866 per ounce, and selling it for over $1050, their stocks were priced as if gold was trading around $305. I’ve never seen a more ridiculously-undervalued sector in all my decades of trading.

As gold mean reverts higher as the Fed-levitated stock markets roll over into their long-overdue bear, the beaten-down gold stocks will greatly amplify its gains. Merely to mean revert to normal levels relative to today’s gold price, let alone where gold is heading much higher, the leading gold stocks will have to see their stock prices at least quadruple in the next couple years. This sector will dominate 2016’s wealth creation.

If you want to thrive in this dangerous new post-ZIRP era, Wall Street isn’t going to help you. You need to cultivate excellent sources of contrarian market research and analysis, which is the realm that we’ve long specialized in at Zeal. We are rare contrarians who actually walk the walk, buying low when few others will to later sell high when few others can. We aggressively bought hated gold stocks in recent months.

They are soaring this week while the rest of the markets burn, but it’s not too late to deploy. We’ve long published acclaimed weekly and monthly contrarian newsletters for speculators and investors. They draw on our decades of exceptional experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. It’s never been more important to subscribe now with a new rate-hike cycle upon us! We’re also running a 20%-off sale.

The bottom line is the massive market distortions fomented by the Fed in recent years are finally starting to unwind. Without the howling tailwinds of epic Fed easing, the Fed-levitated stock markets are rolling over and mean reverting into a long-overdue cyclical bear that will at least cut stock prices in half. The levitation wasn’t supported by earnings fundamentals, and stock valuations are near bubble territory.

And as stock markets fall, investors will remember the great wisdom of diversifying their portfolios with gold. This unique asset class tends to move counter to stock markets, rallying during stock bears which makes it far more attractive than cash. Massive new gold investment buying will be necessary to mean revert speculators’ gold-futures positions and investors’ gold stakes to normal-year levels, which is wildly bullish.

Adam Hamilton, CPA

January 8, 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!

Copyright 2000 - 2016 Zeal LLC (www.ZealLLC.com)


Site Mgr
Sr Site Supporter
Mar 28, 2010
Planet Earth
I wonder if the FED really knows what it's doing, or is it merely an academic exercise?

This make sense:
So for the love of all that is good and holy, if you want to protect and multiply your wealth in 2016 you have to exit stocks and buy gold. Both markets are going to mean revert away from recent years’ gross Fed-conjured extremes as this central bank tightens. Stocks are going to fall as corporate buybacks wane and investors exit, while gold will surge as radically-underinvested investors start to prudently return.
This does not...
Investors need to pare general-stock positions, especially market-darling ones with high P/E ratios. The more expensive any stock is, the greater its downside in a cyclical bear market. Puts on the flagship SPY SPDR S&P 500 ETF can be used to hedge investments or bet on more stock-market weakness. And aggressively buy gold, either physical bullion itself or shares in the leading GLD SPDR Gold Shares ETF.


Founding Member
Board Elder
Site Mgr
Sr Site Supporter
Mar 25, 2010
I hear ya GH, but a lot of people with large sums do not or will not put significant sums into physical metals,

When we were in full bull mode, the ETF's were a huge driver in the movement to the up,

But if it were me advising good clients that I actually cared about, I would not reco paper unless with risk dough,

The same can be said of buying metal miners, their stocks.


Platinum Bling
Platinum Bling
Apr 5, 2010
I think they tend to lean to the ETFs and so called paper metals because of two reasons.

One, it's the (choose your term) realm, format, or playing field, they are most comfortable with.

And two, because of the liquidity. They can move in and out of them faster than they can buy and sell the physical metals.


Founding Member
Board Elder
Site Mgr
Sr Site Supporter
Mar 25, 2010
Major Stock Bear Awakening

The US stock markets have suffered their worst early-year losses in history in young 2016, an ominous proof that a major trend change is underway. The Fed’s new tightening cycle is already slaying recent years’ extraordinary easy-Fed-fueled stock-market levitation. Unfortunately the only possible reckoning after such a record artificial stock boost is a long-overdue major bear market that is finally awakening.

Just a month ago, the stock markets looked radically different. The Federal Reserve’s Federal Open Market Committee that sets monetary policy mustered the courage to hike rates, ending exactly 7 years of a record zero-interest-rate policy. Stock traders rejoiced, interpreting the first rate hike in 9.5 years as a sign the Fed had great confidence that the US economy was improving. So they bid stocks higher that day.

The benchmark S&P 500 stock index (SPX) surged 1.5% to 2073 the afternoon of the Fed’s first-ever ZIRP-ending rate hike. That was merely 2.7% under the SPX’s all-time record high seen just 7 months earlier in late May. Euphoric Wall Street strategists spent the next couple weeks calling for that powerful bull market in stocks to continue in 2016, with plenty of predictions for the SPX climbing another 10%+ this year.

But something snapped as this new year dawned, unleashing waves of selling. Enough stock traders worried that an anomalous stock bull fueled by the Fed’s ZIRP and quantitative-easing money printing might not fare so well without ZIRP and QE. Since that first rate hike since June 2006 was so close to the new year, they waited to 2016 to realize their big gains which delayed their taxation for an entire year.

So instead of rallying in recent weeks in line with early years’ strong upside bias on new capital inflows from pension funds and year-end bonuses, the stock markets have plunged. The SPX has lost a truly breathtaking 7.5% in 2016’s mere 8 trading days as of the middle of this week! The massive selling that is necessary to drive such a drop has been relentless yet orderly, with insufficient fear to mark a durable bottom.

As I warned last June just weeks after the SPX’s record high as euphoria reigned supreme, the Fed shift is a major stock-market risk. The US stock markets had perfectly mirrored the Fed’s increasingly-bloated balance sheet since the dawn of the wildly-unprecedented QE and ZIRP era in late 2008 in response to that year’s stock panic. Whenever the Fed was actively monetizing bonds with QE, stock markets rallied.

But when both QE1 and QE2 ended, the stock markets corrected hard. Popular greed had grown so epic that the end of the final QE3 bond-buying campaign in October 2014 was shrugged off. Yet the SPX’s QE-fueled momentum soon stalled out anyway, with this flagship index peaking less than 7 months later. While the new bond monetizations ended with QE3, the Fed hadn’t started selling its gargantuan holdings.

As recent weeks are proving, the final nail in the Fed stock levitation’s coffin was the end of ZIRP less than 14 months later in December 2015. But the Fed-boosted stock bull was already in topping mode. During that long span between the Fed ending QE’s new buying and executing its initial rate hike, the SPX only edged 3.1% higher. The end of ZIRP is even more ominous for stock markets than the end of QE.

The 7 years of ZIRP and QE had openly manipulated short and long interest rates to record lows. Corporations took advantage of the deluges of cheap money to borrow with a vengeance. But instead of using these vast amounts to actually grow their businesses and hire people, the great majority of it went into pure financial engineering. It was used to buy back stocks, boosting share prices and apparent profitability.

According to the Fed, US non-financial corporations spent a staggering $2.24t buying back their stocks since 2009. And the Fed reports they borrowed $1.9t to do this, so over 5/6ths of all the stock buybacks of the ZIRP era were debt-financed! Without record-low interest rates, the economics of such stock buybacks crumble. And they have been recent years’ overwhelmingly-dominant source of stock demand.

The 2015 stock-market action reflected the dire implications of the end of QE and ZIRP, which euphoric traders foolishly chose to ignore. As this first chart shows, the US stock markets stalled out before rolling over to form a giant rounded topping pattern in the past year or so. That gradually eroded all the bullish psychology enough to start breaking it in early 2016. But the flagship VIX fear gauge shows no bottom in sight.


Stock traders are notorious for their myopic shortsightedness. Their opinions on market outlook are just dominated by the latest action from recent days and weeks. But much-longer-term context is necessary to understand why a major stock bear is awakening. And to the great peril of everyone who refuses to study the bigger picture, the serious stock selling seen so far in 2016 is only the very tip of the iceberg.

Despite the vast distortions caused by QE and ZIRP, the stock markets behaved normally between 2009 and 2012. They had just plummeted in a once-in-a-century stock panic in late 2008, so a major cyclical bull market was due as I predicted in early 2009. By September 2012 just days before the Fed launched QE3, the SPX had powered 112.5% higher in 3.5 years. Its bull-market trajectory to that point was totally normal.

The stock markets would rally for a year or so, and then correct. These 10%+ declines in stock prices are normal and healthy in bull markets, as they rebalance sentiment before greed grows too excessive. It’s provocative to note though that both major corrections in the SPX in that era ignited right after the Fed’s massive QE1 and QE2 bond-monetization campaigns ended. So the Fed was already distorting stocks.

But in September 2012, the Fed birthed its wildly-unprecedented QE3 campaign. It was very different from QE1 and QE2 in that it was open-ended, with no predetermined size or end date. QE3 was soon more than doubled in December 2012 to an $85b-per-month pace of conjuring new money out of thin air to buy bonds. Fed officials deftly used QE3’s undefined nature to actively manipulate stock traders’ psychology.

Every time the stock markets threatened to sell off since early 2013, top Fed officials would rush to their microphones to declare they were ready and willing to expand QE3 if necessary. This was interpreted by stock traders exactly as the Fed intended. They started to believe an effective Fed Put was in place, that the Fed would quickly ramp its record easing if necessary to arrest any material stock-market selloff.

So the stock markets started levitating, decoupling from their normal bull trajectory. Not wanting to fight the Fed, traders began ignoring all conventional sentimental, technical, and fundamental indicators to aggressively buy every minor dip. This Fed-spawned psychology along with the extreme debt-financed corporate stock buybacks courtesy of ZIRP drove the most extraordinary stock-market levitation ever witnessed!

Nearly all the stock-market action since early 2013 is a Fed-conjured illusion that never represented the underlying real-world fundamentals as we’ll discuss shortly. That indicators-be-damned buying without any normal selling to rebalance sentiment resulted in one of the longest correction-less spans in stock-market history, an incredible 3.6 years. That only ended with the SPX’s brutal 10.2% 4-day plunge in late August.

That extreme selling was a big warning shot across traders’ bows that the markets were topping and rolling over into bear mode, as I warned again just days after that plummet. While China’s surprise devaluation of its yuan was credited as that plunge’s cause, that revisionist history isn’t true. That yuan devaluation came on August 11th, which was fully 7 trading days before that intense stock-market selling began.

The real catalyst for August’s sharp correction was the release of minutes from the latest FOMC meeting the afternoon before that big selling hit. They were more hawkish than expected, with most of the FOMC members agreeing that conditions had almost been achieved for hiking rates at their next meeting in mid-September. So it really wasn’t China that blasted US stocks in late August, but Fed-rate-hike fears!

Of course that very global stock selloff the hawkish Fed spawned stayed its hand in September. But at the FOMC’s next meeting in late October, the Yellen Fed hellbent on finally hiking warned that it would likely happen at the next mid-December meeting. And so it came to pass. Though the end of ZIRP that had enabled the debt-financed stock buybacks that levitated stock markets was wildly bearish, stocks held on.

The Fed’s first rate hike in nearly a decade happened just a couple trading days before Christmas week which many traders take off entirely. But during the two trading days between the hike and that holiday week, the SPX plunged 3.3%. The writing was on the wall for anyone who cared to read it, as I warned again that very day. But with year-end so near, traders nervously sat on their hands to avoid realizing gains.

Then as 2016 dawned and all those capital-gains-tax bills would be pushed an entire year into the future, all hell broke loose. Again China was blamed, with its ongoing yuan devaluation and limit-down stock-market closes under brand-new circuit breakers apparently driving heavy American stock selling. But underneath it all was the super-bearish ramifications of the Fed’s first tightening cycle in a decade underway.

Then just this Wednesday, the blame-China excuse for the horrendous early-year US losses imploded. On a day with the best economic news out of China in some time, a big upside surprise in exports, the US stock markets opened higher. But they soon started to sell off on no news whatsoever, collapsing to a huge 2.5% loss which made for the worst trading day of 2016. And this year, that’s sure saying a lot!

Make no mistake, China is a peripheral issue to the dire implications of the new Fed tightening cycle on stock markets levitated for years by epic record Fed easing. And the selling isn’t over even on a near-term basis. Check out the definitive VIX fear gauge above, which measures the implied volatility on 1-month S&P 500 index options. The higher the VIX, the greater general fear which is necessary for a bottoming.

Even during the Fed’s levitation, durable bottoms after major selloffs never occurred unless the VIX shot above 40. During the SPX’s 16.0% correction in mid-2010 following the end of QE1, the VIX rocketed as high as 45.8 on close. During the next 19.4% correction a year or so later after the end of QE2, the VIX soared as high as 47.5 on close. And in late August 2015’s sharp correction, the VIX hit 40.1 on close.

The near-term selling in the stock markets is very unlikely to end in the magnitude of plunge we’ve seen so far in 2016 without a VIX read up above 40. As of Wednesday, the VIX’s highest close of the year was merely 26.4 last Friday. Even Wednesday’s sharp 2.5% SPX plunge saw the VIX merely hit 25.0. There is simply not yet enough fear to see a durable bottom, as the selling has been big and relentless but orderly.

And even when that 40+ VIX inevitably arrives and a major short-covering rally is unleashed, the stock markets aren’t out of the woods by a longshot. They remain overdue for the major bear market that was artificially delayed by the Fed’s record easy money spewing from QE and ZIRP. While extreme central-bank manipulations can temporarily distort market cycles, history has proven they can’t be eliminated.

Before we get into the fundamental proof of why a major stock bear is awakening, consider the sheer damage it will wreak in the chart above. Bear markets start at a 20% SPX loss off of the preceding bull’s peak, which would drag this benchmark index to 1705. That would erase all the stock-market gains since mid-2013, the majority of the Fed’s stock-market levitation! Even 20% would devastate stock-trader sentiment.

But it’s going to get far worse than that, as bear markets tend to cut stock prices in half! And that average comes after garden-variety bulls that haven’t been artificially extended by central banks. A 50% overall drop is likely very conservative for this new bear underway. Yet even that would drag the SPX all the way back to 1065 within a couple years or so, blasting this index back to late-2009 levels just after the stock panic!

The bigger this long-overdue bear market grows, the more it’s going to scare stock investors into selling and running for the exits. And the more they sell, the bigger this bear will grow. Bear markets, just like bulls, are self-feeding beasts. So selling is only going to intensify as 20%, 30%, 40%, and even 50% total declines in the S&P 500 are seen. Naive investors trapped unaware in this are going to lose fortunes.

While the end of 7 years of QE and ZIRP is exceedingly dangerous for Fed-levitated stock markets, this risk is compounded greatly by the resulting extreme stock-market valuations. This next chart looks at the average trailing-twelve-month price-to-earnings ratio of all 500 SPX component stocks. Weighted both simply and by companies’ market capitalizations, this terrifying valuation data guarantees an outsized bear.


The stock markets move in great third-of-a-century cycles I call Long Valuation Waves. Their first halves see mighty secular bulls where stock prices are bid up far faster than underlying corporate earnings, so valuations soar. This necessitates second-half secular bears, which see stock markets grind sideways on balance for long enough for profits to catch up with lofty stock prices. We remain deep in a secular bear.

It started in early 2000 as the last secular bull peaked, and consisted of a series of shorter cyclical bears and bulls. The former indeed cut stock prices in half, while the latter doubled them back up to breakeven again. Thus for fully 13 years ending in late 2012, the SPX slowly meandered within a giant secular trading range between roughly 750 support to 1500 resistance. That typical pattern was very healthy for stocks.

As these blue SPX P/E lines reveal, stock-market valuations gradually mean reverted from bubble levels over 28x earnings as the last secular bull peaked down towards normal levels. The century-and-a-quarter fair-value level for US stock markets is 14x earnings, and we were well on our way back there before the Fed’s brazen open-ended QE3 campaign reached full steam in early 2013. Then stocks soared to a breakout.

The SPX blasted above its secular-bear 1500 resistance in January 2013 on the Fed’s we’ll-expand-QE-if-we-need-to jawboning and never looked back. But this sentiment-driven stock levitation truly had no fundamental foundation. Stock-market P/E ratios soared with stock markets, proving that earnings were not justifying recent years’ big gains. By last month, the SPX’s P/E of 26x was back near 28x bubble levels!

Such extreme valuations demand a stock bear to bring them back in line with norms, which is why one is guaranteed. And it’s even more remarkable to see near-bubble stock prices considering recent years’ epic ZIRP-fueled stock buybacks. Buying back stocks reduces outstanding share counts, which spreads overall profits across fewer shares. This boosts the earnings per share used to calculate P/E ratios.

So without the radical stock-buyback binge the Fed fomented, valuations would now be well into bubble territory at today’s stock prices! And they’re actually heading higher if stock prices don’t drop sharply to bring them back in line. Overall US corporate earnings are now projected to fall in the fourth quarter of 2015, up to 5%. Lower profits will force valuations even higher, further ensuring one heck of a bear.

Based on the latest trailing twelve months of earnings for all the elite S&P 500 component companies, and that’s current to the third quarter, the SPX would have to fall all the way back down under 1100 merely to hit historic fair value at 14x earnings! The white line above shows where the SPX would be trading at 14x fair value. Just getting there would require a 48.5% bear market, right in line with historic averages.

But today’s situation is much worse than that. We remain mired deep in the secular bear which started in early 2000, and tend to run for 17 years. While the SPX’s nominal peak near 2125 last May was a lot higher than March 2000’s near 1525, if you adjust the latter using CPI inflation it works out to about 2100 as well in early-2015 dollars. So ever since 2000, the stock markets really have ground sideways on balance.

Secular bears don’t end at fair value of 14x earnings, but persist until stocks are trading at half that level or 7x before they finally yield to the next secular bull. In order to push valuations down that far based on today’s corporate earnings, the SPX would have to see an astounding 74% bear market that would crush it under 550! Since bears take a couple years to unfold, stock prices won’t have to go that low as profits rise.

But this still illustrates how scary-extreme these stock markets are in fundamental valuation terms due to the wild distortions the Fed unleashed through QE and ZIRP. Given the extraordinary stock-market levitation fed by epic record Fed easing leading into this awakening bear, I’d be shocked if it stops at a mere 50% loss. Traders are going to pay an awful price as these markets mean revert lower and overshoot.

All the Fed’s record monetary inflation ballooning its balance sheet and record-low rates accomplished was artificially extending a long-in-the-tooth cyclical bull market within a secular bear. And with QE and ZIRP done and a new tightening cycle upon us, the gross stock-market excesses are only just starting to unwind. Investors and speculators alike trapped unaware in this resulting bear are going to get slaughtered.

But the prudent can still thrive during stock bears. The coming S&P 500 downside can be directly bet on with puts in the leading SPY SPDR S&P 500 ETF. Investors can also use SPY puts to hedge their long stock investments. But since the vast majority of stocks get sucked into bear markets, a far better option is selling investments and parking capital in cash. Cash is king in bears, going beyond preserving wealth.

Investors who wisely go fully in cash early in a bear can literally buy back twice as many shares in their investments after the bear runs its course and cuts stock prices in half. Then they can use this much-larger base to rapidly multiply their wealth in the next bull. And gold is even better, because unlike cash it rallies during stock bears as falling stock prices kindle gold investment demand for portfolio diversification.

Just like during the last two cyclical stock bears that cut the markets in half in the early 2000s and again in the late 2000s, Wall Street is going to deny this current selling is a new bear all the way down. Since it earns vast percent-of-assets management fees, Wall Street’s mission is to keep people fully invested no matter what. In order to understand what’s really going on, you have to cultivate contrarian intelligence sources.

That’s what we’ve long specialized in at Zeal. We really walk the contrarian walk, buying low when few others will so we can later sell high when few others can. We publish acclaimed weekly and monthly newsletters that draw on our decades of exceptional experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. If you want to not only survive but thrive in this bear, you need to subscribe today and get informed!

The bottom line is a major stock bear is awakening. The new Fed tightening cycle marks the end of the most extraordinary record easing in history. Its combination of record-low interest rates and record-high money printing unleashed vast deluges of stock buying resulting in recent years’ artificial levitation. But it was totally unjustified fundamentally, with stocks soaring far faster than profits leading to near-bubble valuations.

With those extreme Fed tailwinds suddenly shifting to headwinds, the Fed-fueled stock-market levitation is rapidly starting to unwind in this young new year. And this selling is just getting started, as nothing short of a full bear market will force extreme valuations back down to fair value. The chickens are finally coming home to roost for the Fed’s radical stock-market distortions, and the reckoning ain’t gonna be pretty!

Adam Hamilton, CPA

January 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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Mar 25, 2010

Gold-Stock Upside Targets

The gold miners’ stocks are rocketing higher again, multiplying wealth for smart contrarian traders who bought them low in recent months. But after such a blistering surge, traders are naturally wondering how much farther gold stocks can run. Is it time to realize gains, or buy aggressively for greater gains to come? This critical question can be answered by looking at fundamentally-derived gold-stock price targets.

Many analysts shy away from offering price targets, with good reason. Divining precise future outcomes in volatile markets is all but impossible. Prevailing stock prices result from the chaotic interplay between sentimental, technical, and fundamental drivers. And an effectively-infinite array of variables can affect each one, making forecasting stock prices a fool’s errand. Nevertheless, this exercise is absolutely necessary.

Like many things in life, the markets are an inherently-unpredictable probabilities game. Even if fantastic research suggests some outcome has 80% odds of coming to pass, there’s still a 20% chance it won’t. But a lot of traders read forecasts as if they were advertised as a 100% chance, ridiculing the analyst if events don’t play out that exact way. Weather forecasters struggle with this psychological bias all the time.

Most market price targets emerge from technical analysis, looking at chart patterns to extrapolate trends into the future. Price action considered over time indeed reveals a great deal about traders’ sentiment and likelihood to keep on buying or selling the way they have been. But as any honest technician will quickly admit, technical analysis is often highly subjective. Price charts are interpreted like Rorschach tests.

So for gaming gold-stock price targets, I prefer a fundamentally-based approach. Fundamentals in the stock markets revolve around underlying corporate profits. And all stocks ultimately gravitate towards some reasonable multiple of their companies’ earnings. This is true in every sector including the gold stocks. And from a profits-fundamentals perspective, the gold-mining industry is exceedingly simple.

Gold miners painstakingly wrest gold from the bowels of the Earth, and then sell it for prevailing gold prices. Thus their profits are merely the difference between the gold price and their production costs per ounce. So once you know this industry’s cost structure, it’s easy to calculate how much gold stocks are likely to rally with any given gold-price increase. Gold’s price is their overwhelmingly-dominant earnings driver.

The world’s major elite gold miners are all included in the flagship GDX Market Vectors Gold Miners ETF. Like all public companies, these GDX component stocks report their financial results to investors once per quarter. These comprehensive reports are a treasure trove of fundamental data that includes production-cost information. Crunching this for all the GDX components yields representative industry-wide metrics.

For reasons I’ve never been able to fathom, the gold miners tend to report 4 to 7 weeks after quarter-end. So the Q4 data isn’t all in yet, but I hope to publish a comprehensive analysis on it in the coming weeks. The latest full quarterly data from the gold miners is still the third quarter of 2015’s. And during that quarter the elite major companies included in GDX reported average all-in sustaining costs of $866 per ounce.

All-in sustaining costs are a relatively-new construct the World Gold Council introduced in June 2013. Unlike traditional cash costs, AISC include all the costs necessary to maintain and replenish existing production levels. This includes mining costs, corporate-level administration, exploration, mine development and construction, remediation, and reclamation. AISC include everything necessary to sustain gold output.

Gold has been deeply out of favor for years thanks to the Fed’s surreal stock-market levitation sucking capital away from alternative investments. And that gold antipathy climaxed in mid-December the day after the Fed’s first rate hike in 9.5 years when gold plunged to $1051. That was a dark day for the gold stocks, which languished just above mid-November’s 13.3-year secular low per the HUI gold-stock index.

This entire sector was trading at stock prices last seen in July 2002 when gold was trading near $305 and had yet to exceed $329 in its young secular bull. Yet even at $1051 gold, this industry was earning $185 per ounce with its average all-in sustaining costs of $866! So those dire left-for-dead gold-stock price levels were truly fundamentally-absurd, as I argued aggressively in July, November, and January.

There was no doubt that gold stocks eventually had to return to some reasonable multiple of underlying corporate profits. And as gold inevitably rallied in a major new upleg as I predicted in late 2015, profits for mining this metal would explode higher. Again the fundamental math is very simple, and critical for all investors and speculators to understand. As of this essay’s Wednesday data cutoff, gold had surged to $1197.

Gold-mining costs are essentially fixed when mines are designed and built, so gold-price increases flow directly to the bottom line. At those same industry-wide all-in sustaining costs of $866 per ounce, $1197 gold yielded profits of $331 per ounce. Gold’s impressive 13.9% rally in 7 weeks since mid-December translated into a radically-larger 78.9% increase in gold-mining profitability! Gold is always gold stocks’ key.

The easiest way to abstract this dominant core fundamental relationship between gold prices and gold is through the HUI/Gold Ratio. The HGR divides the daily HUI close by the daily gold close and charts the results over time. When the HGR is rising, gold stocks are outperforming gold. This generally happens during gold rallies. And when the HGR is falling, gold is outperforming the gold stocks. That happened for years.


Ever since 2008’s once-in-a-century stock panic, gold-stock prices have been falling relative to gold on balance. Gold stocks have lost ground relative to the price of the metal which drives their profits for 7.5 years. Provocatively in the initial years after that stock panic, that was despite the HUI soaring 319.0% higher out of those deep late-2008 lows over the next 2.9 years. Gold stocks were falling out of favor.

But all markets are forever cyclical, no trend lasts forever. So as long as the gold-mining industry could remain profitable at prevailing gold prices, a major mean reversion higher in gold stocks was inevitable. Gold stocks had to return to their historical pattern of flowing-and-ebbing performance relative to gold instead of recent years’ one-way anomaly. And that reversal I’d forecast erupted with a vengeance in 2016.

Gold stocks are finally returning to favor again, and radically outperforming gold coming off such crazy-extreme lows. In just 4 trading days ending Monday, the HUI skyrocketed 24.7% higher on a 5.5% gold rally! This incredible 4.5x gold-stock leverage is well above the norm of 2x to 3x. It’s the result of gold stocks being unjustly and irrationally hammered down to such fundamentally-absurd price levels in late 2015.

After such an anomalous secular period of gold stocks underperforming gold, they are long overdue to outperform gold for years to unwind this gross Fed-conjured distortion. And since the HUI/Gold Ratio approximates that critical core fundamental relationship between gold prices and gold-mining profits, it can provide solid gold-stock price targets. The key is to define some normal level for the HGR to mean revert to.

For 5 full years prior to 2008’s epic stock panic, the HGR averaged 0.511x. The HUI generally traded at about half the prevailing gold price. This relationship persisted through all kinds of gold environments, both major uplegs and corrections. While I strongly suspect the HGR will eventually mean revert back up to this pre-panic secular average, almost no one else does. So a more-conservative HGR target is in order.

That stock panic pummeled the HGR to an incredible 7.5-year low, which was utterly unsustainable as I argued at the time. And indeed gold-stock prices would more than quadruple over the subsequent several years, earning fortunes for brave contrarians who bought them low. During the 4 years after that stock panic, from 2009 to 2012, the HGR settled in at a new 0.346x average. Those were the last “normal” years.

Early 2013 saw the Fed ramp its wildly-unprecedented open-ended third quantitative-easing campaign to full steam. Unlike QE1 and QE2, QE3 had no predetermined size or end date. Fed officials brazenly used this ambiguity to their advantage, quickly responding to every stock-market selloff by proclaiming the Fed was ready to expand QE3 if necessary. Traders interpreted this as a Fed Put, it levitated stock markets.

With stocks seemingly doing nothing but rally indefinitely courtesy of the Fed, investors quickly lost all interest in alternative investments led by gold in early 2013. It was dumped with reckless abandon, and the years since were totally fake and artificial in both stock markets and gold. So the only normal span in recent years ran between 2009 and 2012, sandwiched between that stock panic and QE3’s epic distortions.

With QE3’s new buying long done, and the Fed’s parallel zero-interest-rate policy finally slain in December, there’s no reason not to expect markets to return to pre-QE3 normal levels before 2013. So seeing the HGR mean revert back up to its initial 4-year post-panic average is an ultra-conservative and near-certain bet to make. That’s such a low HGR level relative to history it is actually pretty bearish to expect!

Yet at $1200 gold and that 0.346x post-panic-average HGR, we are looking at a fundamentally-derived HUI price target of 415. That’s another 179% above this Wednesday’s close, and would see the HUI more than quadruple again off its recent fundamentally-absurd lows as I predicted late last year when everyone still hated gold stocks. Gold mining’s huge 39% profit margins at $1200 certainly support such prices.

The incredible fundamental upside potential the gold-mining sector still offers is even more apparent if we zoom in to the bottom-right corner of the long-term HGR chart. This next chart looks at the HGR and HUI over just the past couple years or so. It also includes a hypothetical HUI in yellow, illustrating where the HUI would be trading at that post-panic-average 0.346x HGR that looks exceedingly easy to return to.


It’s impossible to overstate just how much things have changed in gold stocks in the past couple months, where they’ve gone from the most-despised sector on the planet to the best performers by far in 2016. Out of their final fundamentally-absurd capitulation low in mid-January, as of Monday the HUI rocketed 51.2% higher in less than 3 weeks on a 9.5% gold rally! This extreme buying surge proves trends have changed.

Both the HUI and HGR are now carving higher highs in recent months, and gold stocks are radically outperforming gold again as investment capital returns. It’s not a stretch at all to see these HGR gains extending back into this critical fundamental ratio’s early-2015 uptrend and then the 2014 one above that. The great majority of 2015’s HGR damage has already been erased in a matter of weeks, it’s incredible.

As this battered HGR inevitably continues mean reverting higher on balance, the HUI will narrow the gap between where it’s trading today and where it would be trading at that post-panic-average 0.346x HUI/Gold Ratio. The red actual-HUI line will converge with the yellow hypo-HUI line. That means a heck of a lot of gold-stock buying is left to come, that gold stocks’ new upleg is merely getting underway.

And for a variety of important reasons, that 415 HUI target based on this HGR analysis is exceedingly conservative. It makes two assumptions that are extremely unlikely to prove true, that gold won’t rally beyond $1200 and that the HGR’s mean reversion will magically stop at that post-panic average. The fundamentally-based gold-stock upside targets shoot far higher when more realistic outcomes are considered.

As I pen this essay Thursday, gold is trading at $1255. After years of gold languishing in hyper-bearish sentiment wastelands while the Fed levitated stock markets, today’s levels certainly feel high. But they really aren’t at all. In 2012 which was the last year before QE3’s extreme distortions, gold’s average price was way up at $1669. And 2012 wasn’t even a topping year, but a grinding consolidation one for gold.

If gold merely mean reverts back up to $1669, which is way under its $1894 August 2011 peak carved before the subsequent years of trillions of dollars of pure Fed inflation, the gold stocks are destined to soar far higher. At $1669 gold, the miners would earn $803 per ounce in profits at the current average AISC of $866! That’s 143% higher than today’s profitability, which would fuel massive stock-price gains.

At that post-panic-average HGR of 0.346x and 2012’s average $1669 gold, we’d be looking at a HUI upside target of 577. That’s another 288% higher from this Wednesday’s levels! But after any extreme central-bank-conjured market anomaly, mean reversions are vastly more likely to overshoot than just magically stop at the averages. And these overshoots tend to be proportional to the preceding extreme.

The HUI/Gold Ratio hit its all-time low of 0.093x in late September, and revisited that same extreme level in mid-January. That is 0.253x away from that post-panic-average HGR of 0.346x. A completely-normal proportional HGR overshoot would briefly drive the HGR that much above its mean, to 0.599x. That isn’t unprecedented, as the pre-panic years saw such HGR levels hit multiple times when gold stocks were in favor.

At that 2012 average $1669 gold and a proportional-mean-reversion-overshoot 0.599x HGR, we’d be looking at a HUI right at 1000! While such levels wouldn’t last for long since they’d require extreme popular greed proportional to the extreme herd fear of late 2015, they illustrate the gold stocks’ truly-epic upside potential after being artificially battered down for so many years during the Fed’s stock levitation.

Now right now today, believing that HUI 1000 is even possible isn’t relevant at all. Since the HUI’s all-time high was just 635 in September 2011, you may think 1000 is crazy talk. That’s fine. All that matters now is whether or not you believe gold stocks can mean revert to those post-panic-average levels relative to the price of the metal that drives their profits. Remember at just $1200 gold, that implies 415 on the HUI!

And with the HUI trading around 150 this week, if you believe there’s any chance we’ll see 400 again you ought to be aggressively buying gold stocks hand over fist. After spending the past 16+ years as a hardcore full-time contrarian student of the markets and speculator researching and trading gold stocks, few people in the world know more about this forgotten sector than me. I’m convinced HUI 400 is trivial to attain.

A conservative timeframe for the HUI regaining 400, nearly tripling gold-stock traders’ wealth from even today’s post-surge gold-stock levels, is during the next year or two. And with the general stock markets nosing over into their long-Fed-delayed cyclical stock bear, is there any other sector in all the markets with upside potential to rival the gold stocks? Literally everything else stands to get pummeled in this bear.

So if you’re watching gold stocks soar from the sidelines and wondering if it’s too late to get deployed, the fundamental answer is heck no! Gold stocks were beaten down to such fundamentally-absurd price levels late last year that they have a vast amount of rallying left to do merely to return to some semblance of normalcy. As always, this mean-reverting sector can be gamed with that GDX gold-stock ETF and its call options.

But also as always the best gains won’t come from this sector as a whole, but from the elite gold (and silver) miners and explorers within it with the best fundamentals. An expert-picked portfolio of these winners will trounce the broader sector gains mirrored by GDX. While it’s too late to spend tens of thousands of hours researching gold and silver stocks, it’s not too late to lean on that hard work already done by others.

As zealous contrarians, we’ve long specialized in gold-stock research and trading at Zeal. And unlike the great majority of analysts, we kept on studying and learning in the recent dark years instead of giving up and walking away. That makes our hard-won knowledge unparalleled and exceedingly valuable, as we won’t have to spend years getting back up to speed. You need priceless expertise like this in your corner.

We publish acclaimed weekly and monthly newsletters offering a studied contrarian perspective on the markets. They 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. We’ve done hundreds and hundreds of gold-stock and silver-stock trades over the decades, earning fortunes for our subscribers. In recent months we already have many new trades with unrealized gains ranging from 40% to 80%+! At just $10 an issue, you can’t afford not to subscribe. Join us today before we end our 20%-off sale!

The bottom line is gold stocks’ upside remains vast even from here. Ultra-conservative fundamentally-derived gold-stock upside targets show this sector is still due to nearly triple from here even after this month’s extreme gold-stock rally. After being battered down to such fundamentally-absurd price levels late last year, gold stocks have a long ways yet to rally merely to return to some semblance of normalcy.

And using far-more-realistic assumptions including gold continuing its own mean reversion higher and the gold-stock mean reversion overshooting, the gold-stock upside targets rocket far higher. The gold stocks are offering a rare opportunity to greatly multiply wealth even during a major cyclical stock bear. As always the earliest buyers will reap the greatest gains, with smart and brave contrarians massively rewarded.

Adam Hamilton, CPA

February 12, 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!

Copyright 2000 - 2016 Zeal LLC (www.ZealLLC.com)


Founding Member
Board Elder
Site Mgr
Sr Site Supporter
Mar 25, 2010

Massive Gold Investment Buying

Gold’s powerful surge in 2016 has been driven by utterly massive investment buying. This is a marked sea change from recent years, where investors relentlessly pulled capital out of gold. But with that dire sentiment reversing, they are rushing back in with a vengeance. Major investment capital inflows into gold are an exceedingly-bullish omen, as they are what transform a mere gold rally into a new bull market.

With gold enthusiasm growing, it’s easy to forget how radically different things looked just a few months ago. Back in mid-December the day after the Fed hiked rates for the first time in 9.5 years, gold dropped to a miserable 6.1-year secular low of $1051. The popular level of antipathy towards this asset class by investing professionals was mind-boggling. They universally believed it was doomed to keep spiraling lower.

But with gold so epically out of favor and loathed, it was a dream buy for the rare contrarians. On the final trading day of 2015 as gold still languished at $1060, I published an essay titled “Fueling Gold’s 2016 Upleg”. In it I explained what was going to “fuel a mighty new gold upleg in 2016”, drawing much ridicule. And that usual pattern of early-upleg gold buying has indeed played out exactly like I forecast.

New gold uplegs emerging out of major lows are always driven by three distinct stages of buying. First futures speculators cover short positions, then futures speculators add new long positions, and finally investors follow the futures speculators in. The third stage is the biggest and most critical, and it only happens if the futures speculators’ early buying boosts gold high enough for long enough to win over investors.

When gold plunges to a major new secular low, the futures speculators who’ve shorted it are the main initial buyers. Gold-futures trading requires very little cash up front relative to position sizes, granting extreme leverage which makes these bets incredibly risky. Futures speculators selling short effectively have to borrow gold before selling it. So they are legally obligated to soon buy gold back to cover and close their shorts.

After speculator gold-futures short covering ignites the initial rally out of major gold lows, sharp upside momentum attracts in more speculators on the long side. Unlike short covering which is compulsory, gold-futures long buying is totally voluntary. Speculators need to have a high level of conviction that gold will keep rallying instead of soon revisiting its recent lows to make these risky leveraged upside bets.

The leverage inherent in gold futures is astonishing. Back in 2015’s final week when gold averaged $1065, a single 100-troy-ounce gold-futures contract controlled $106,500 worth of gold. Yet the futures exchanges only required speculators to keep $3750 cash per contract in their accounts as maintenance margins. That works out to 28.4x leverage, so a mere 3.5% adverse move in gold could wipe out traders.

Today after gold’s mighty early-2016 rally, the situation isn’t much less extreme. The CME has raised its gold-futures maintenance margins to $4500 per contract, but at this week’s $1240 gold levels each one is worth $124,000. That works out to similar 27.6x maximum leverage today in gold futures, which is so far beyond the legal limit of 2.0x in the stock markets imposed by the Fed in 1974 that it boggles the mind.

Since trading anything at 20x+ leverage is so insanely unforgiving and dangerous, the actual numbers of speculators willing to shoulder such instant-bankruptcy risks are small. So any gold rally only fueled by gold-futures speculators covering shorts and then adding new longs will soon fizzle out. Though this elite group of traders can really bull the gold price around, the pools of capital they control are small and finite.

Thus futures speculators are incapable of doing the heavy lifting necessary to grow a gold rally into a major new upleg or bull market. Gold rallies in recent years have stalled out when futures speculators either chose to stop buying or ran out of capital firepower. In order to transform into something much bigger, investors have to follow futures speculators into gold. They must take the gold-buying baton from speculators!

Of course investors control vastly larger pools of capital than speculators, so they have the means to buy gold for years on end while speculators can only sustain a few months of heavy buying. But essential differences between investors and speculators go far beyond that. Unlike speculators, investors use little or no leverage and buy for long time horizons instead of just day-to-day momentum. So they are strong hands.

Gold’s surge this year is so darned powerful because investors have indeed usurped the gold-buying leadership from futures speculators for the first time in some years! Unfortunately this is not yet widely understood because the gold world is so vexingly opaque. Gold trades in an enormous global market that has evolved over millennia, with fantastic complexity in terms of trading venues and numbers of participants.

The best global gold demand data comes from the venerable World Gold Council. This elite marketing organization is funded by the world’s biggest and best gold miners, and has excellent global resources at its disposal to gather gold investment data. The problem is this big effort takes lots of time. The WGC can’t collect, analyze, and publish quarterly gold-investment numbers until about 6 weeks after quarters end.

So gold’s most-comprehensive fundamental data is only current to Q4’15, before gold’s mighty new-year upleg began. But provocatively despite gold’s average Q4 price of $1105 making for its worst quarter since Q4’09, global gold investment demand still surged 14.9% YoY to 194.6 metric tons according to the WGC! Even late last year as gold was hated, investment demand was already picking up though few knew it.

While the WGC’s outstanding quarterly Gold Demand Trends reports are inarguably the gold standard of tracking gold investment demand, their once-per-quarter resolution delayed a half-quarter is insufficient to keep traders informed. But there is a fantastic proxy for gold investment demand that is updated every trading day, and interestingly it was birthed by the WGC. It is the world’s largest and dominant gold ETF.

This of course is the American GLD gold ETF, now known as SPDR Gold Shares. GLD was not only the first true gold ETF launched way back in November 2004, but it remains the juggernaut. As of the end of 2015, GLD’s physical gold bullion held in trust for its shareholders more than quadrupled its next biggest competitor’s. As 2016 dawned, GLD’s holdings accounted for 2/5ths of all the world’s gold ETFs’ holdings!

A creation of the world’s gold miners to boost American gold investment demand, GLD has always been exceptionally transparent about its holdings. So every single trading day it publishes not only how much gold bullion it holds, but a comprehensive list of every single individual gold bar in its inventory. As of the middle of this week, that included 62,214 gold bars with stats spread across 1245 separate pages!

As a lifelong student of the markets and speculator who has spent decades studying and trading the precious-metals realm, I’ve long been convinced that this daily tally of GLD’s physical-gold-bullion holdings is one of the single-most-important indicators for gold investment demand. Every speculator and investor interested in gold really needs to carefully watch GLD’s daily-holdings data like a hawk.

The reason why is simple. GLD’s mission is to track the gold price, which isn’t trivial. GLD’s shares have their own unique supply-and-demand profile totally independent from gold’s. The American stock investors who are GLD’s owners can and do buy and sell GLD shares at rates different from what gold is experiencing at any given moment. That makes GLD-share prices constantly prone to decouple from gold.

But if GLD disconnects from gold, this ETF fails. And there is only one way to keep GLD-share prices mirroring gold prices. Any excess supply or demand of GLD shares relative to gold must be directly shunted right into physical gold itself. This process equalizes GLD-share supply and demand into the far-larger underlying gold market. GLD is literally a conduit for stock-market capital to flow into and out of gold!

If GLD shares are experiencing excess supply (selling) compared to gold, they threaten to decouple to the downside. GLD’s managers have only one way to avert this failure. They need to buy back enough GLD shares to sop up that excess supply. They raise the capital necessary to do this by selling some of GLD’s physical gold bullion. So when GLD’s holdings are falling, stock-market capital is exiting gold.

Conversely if GLD shares see excess demand (buying) compared to gold, they will soon disconnect to the upside. The only way to keep GLD’s price tracking gold’s is to equalize this differential buying directly into gold itself. So GLD’s managers issue new shares to offset that excess demand, and then use the proceeds to buy physical gold bullion. Rising GLD holdings mean stock-market capital is flowing into gold.

This concept is very basic, and I’ve been writing about it for many years. Yet few traders seem to really understand it. The rise and fall of GLD’s holdings reveals American stock-market investors and their vast pools of capital either migrating into gold or exiting out of it. GLD’s holdings remain the best proxy for gold investment demand available at a daily resolution, and they prove it’s been astounding in 2016!

This first chart looks at GLD’s holdings in metric tons (blue) superimposed over the gold price. Also noted are each calendar quarter’s percentage change in the gold price, and percentage and absolute changes in GLD’s gold-bullion holdings. When this blue line is falling, capital is flowing out of gold. When it is rising, capital is flowing out of the stock markets and into gold. Check out 2016’s incredible surge.


This young new year has already seen utterly massive gold investment demand! Quarter-to-date as of the middle of this week, GLD’s holdings alone have already surged 22.8% higher. That’s a staggering level of gold demand from American stock investors. The 146.2 tonnes of gold they’ve purchased via GLD shares in 2016 alone is already the equivalent of 3/4ths of total global investment demand in Q4’15!

This epic trend change couldn’t be more pronounced. After GLD’s holdings fell on balance for years as American stock investors abandoned gold, they’ve suddenly taken off like a rocket following the Fed’s first rate hike in a decade. As I warned just the week before that rate hike when everyone thought that higher rates would slaughter gold, Fed-rate-hike cycles have actually proven very bullish for gold historically!

The unprecedented investor flight from gold in recent years leading to the 7.3-year secular low in GLD’s holdings the day after that rate hike in mid-December was a gross Fed-conjured anomaly. Gold didn’t plunge on collapsing investment demand because it was fundamentally impaired, but because stock markets were being levitated by record extreme Fed easing. Investors abandoned normal prudent diversification.

In 2012 before the Fed’s third quantitative-easing campaign ramped to full steam, gold’s price averaged $1669 per ounce while GLD’s holdings averaged 1294.2t. The Fed’s wild distortions that crushed gold began in early 2013 as full-strength QE3 came online. This newest bond-monetization campaign was radically different from QE1 and QE2 in that it was totally open-ended with no predetermined size or end date.

That seemingly-subtle difference changed everything. Each time the lofty overvalued stock markets started selling off, top Fed officials would rush to the microphones to declare they were ready to expand QE3 if necessary. Stock traders interpreted this exactly as the Fed intended, that the central bank would defend the stock markets. These perceptions of a Fed Put sucked capital out of everything else to chase stocks.

As the leading alternative asset that tends to move counter to stock markets, gold was a major casualty of their fake Fed-conjured levitation starting in early 2013. If this brazen central bank would ensure that stocks do nothing but rally indefinitely, then why bother diversifying portfolios anymore? So investors sold vast amounts of gold to move that capital into red-hot stock markets, as GLD’s plunging holdings revealed.

The worst of that mass exodus hit like a runaway freight train in Q2’13. Gold plummeted 22.8% on epic GLD selling, its worst quarterly performance in an astounding 93 years! This once-in-a-century storm was driven by an epic 1/5th holdings draw from GLD. American stock investors’ differential selling of GLD shares was so great this ETF had to spew 251.8t of gold bullion into the markets that quarter alone!

This wreaked such catastrophic sentiment damage that gold couldn’t recover for years, as long as the Fed’s record easing continued to levitate the stock markets. But with this central bank’s launch of a new rate-hike cycle in mid-December, the epic Fed tailwinds boosting stocks vanished. And as the extreme market distortions courtesy of the Fed started to unwind this year, stocks fell and investors remembered gold.

Because it moves contrary to stock markets, gold is the ultimate portfolio diversifier. As one of the very few assets that rally when stock markets suffer cyclical bears, a substantial gold allocation is utterly essential in every portfolio. With stock markets selling off sharply in early 2016, unlike anything seen in all those Fed-levitation years, investors are flocking back to gold. And odds are this major reversal is only beginning.

Despite these incredible GLD capital inflows so far in Q1’16, its holdings were merely back to a 17.7-month high as of the middle of this week. In order to mean revert back to 2012 average levels seen before the extreme QE3 distortions, GLD’s holdings still have to climb by another 2/3rds or 505.7t! That’s another 3.5x as much differential buying of GLD shares as the initial vanguard already witnessed in 2016.

And gold investment buying of the magnitude seen so far this year is exceedingly bullish! Nothing like it has been witnessed since early 2009, when hedge funds flooded back into gold after 2008’s once-in-a-century stock panic. And that last comparable surge of gold-investment buying was very early on in the massive 166.5% gold bull market between November 2008 and August 2011. Gold’s next bull has been born.

Once investors start migrating back into gold again in a big way, their buying tends to run for years. The more capital they move into gold, the higher gold’s price rallies. And since investors love momentum and winners, the higher gold rallies the more capital investors will allocate to it. Nothing begets buying like buying. This powerful virtuous circle unleashed by major investor buying is just getting underway again.

As I warned late last year, investors were radically underinvested in gold after the Fed’s stock-market levitation. Interestingly, GLD’s daily holdings can also be used as a proxy for American stock investors’ level of gold diversification in their portfolios. This final chart divides the total value of GLD’s physical-bullion holdings by the collective market capitalization of all the companies in the benchmark S&P 500 stock index.


For many centuries if not thousands of years, the world’s smartest and most successful investors have advocated having at least 5% of every portfolio invested in gold. As the ultimate diversifier, owning gold is an outstanding form of portfolio insurance. When some unforeseen event hammers the rest of one’s portfolio, even if it is just an overdue cyclical stock bear, gold shines and offsets some of those broader losses.

By looking at the ratio between the total value of GLD’s holdings and the collective S&P 500 market cap, we can get a great idea of what percent of American stock investors’ portfolios are in gold. And back in mid-December, that was incredibly low. GLD was valued at just 0.111% of the elite S&P 500 stocks, so American stock investors’ allocation to gold was only just over 0.1%. That’s 1/45th of that classic 5% target!

While technically an 8.0-year low in the ratio of the value of GLD to the S&P 500 (SPX), it was effectively an all-time low. Remember GLD was the world’s first true gold ETF introduced in November 2004, so those initial several years of its existence were a ramping to normal levels by early adopters. The only years of GLD’s existence that were normal were sandwiched between 2008’s stock panic and 2013’s dawn of QE3.

And during that last secular normal-years span between 2009 to 2012, GLD’s value averaged 0.475% of the collective market cap of all SPX stocks. Those years encompassed a mighty gold bull as well as the subsequent sharp correction and long consolidation, so they should be representative. Since this 0.5% GLD allocation persisted for years, it is far more likely again soon than that historical ideal of a 5.0%+ gold allocation.

In order for American stock investors to mean revert their collective portfolio gold allocation from its mid-December secular low to normal levels, it had to multiply 4.3x. And from the latest read of a 0.171% allocation thanks to gold’s spectacular early 2016, their allocation still has to balloon by another 2.8x. So the recent massive gold investment buying by American stock investors has only started the mean reversion.

Once investors seize the gold-investment-buying lead from futures speculators, history shows that their buying tends to run for years. And coming from such record-low levels of gold investment in late 2015 thanks to years of artificial Fed-driven gold weakness, it’s almost certainly going to take years for world investors’ gold holdings to return to some semblance of normal levels. Naturally this is fantastic news for gold.

Since investors have so aggressively taken the gold-buying baton from speculators, the odds are stellar a new bull market in gold has been born! Investors can ride this in physical gold itself or GLD shares, which each offer their own advantages and drawbacks. Physical gold in your own immediate control is safer, but more expensive to acquire. GLD offers instant paper exposure to gold prices, but at a 0.4% annual fee.

And as always the gold miners’ stocks offer big upside leverage to gold. They were hammered down to fundamentally-absurd 13.5-year secular lows in mid-January, and have rocketed radically higher since. Yet even with their immense recent gains, the fundamentally-derived gold-stock upside targets remain vastly higher from today’s levels. Great wealth will be won in the coming years as gold stocks mean revert higher.

At Zeal we’ve long specialized in this high-potential contrarian realm. We’ve researched and traded this sector for many years now, resulting in hundreds and hundreds of gold-stock and silver-stock trades that have earned fortunes for our subscribers. And unlike the great majority of analysts, we kept on studying and learning in the recent dark years instead of giving up and walking away. That makes our hard-won knowledge exceedingly valuable today since we won’t have to spend years getting back up to speed.

You need this priceless expertise in your corner! We’ve long published acclaimed weekly and monthly newsletters offering a studied contrarian perspective on the markets. They draw on our decades of experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. In recent months, we’ve made many new trades already sitting on huge unrealized gains ranging from 50% to 90%+! At just $10 an issue, you can’t afford not to subscribe. Join us today before we end our 20%-off sale!

The bottom line is gold’s amazing rally in 2016 has been driven by utterly massive investment buying. Investors have seized the buying baton from futures speculators at a magnitude not seen since early 2009, early in the last mighty gold bull. And once investors start aggressively buying gold again, their capital inflows ignite a virtuous circle that tends to run for years. Their buying has created gold’s next bull market.

American stock investors are leading the way with enormous differential demand for GLD shares. The end of the Fed’s record easing is plunging the US stock markets into a long-overdue new cyclical bear. And as stock markets weaken, gold investment demand for prudent portfolio-diversification purposes soars. And coming out of record gold underinvestment, years of strong buying will be necessary to normalize.

Adam Hamilton, CPA

March 4, 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!

Copyright 2000 - 2016 Zeal LLC (www.ZealLLC.com)


Platinum Bling
Platinum Bling
Apr 5, 2010
Okay, this one isn't an Adam Hamilton writing, it's a Bob Moriarty editorial singing Adam's praises.


The Two Best Calls Ever on a Gold Bottom
Bob Moriarty
Apr 28, 2016

We do our very best to present all possible reasonable alternatives in the resource space. I don’t have to agree with someone to post a piece by them. No one gets it 100% and I’m wrong on a regular basis like most people.

This piece may be the most valuable piece we have ever written so you need to read it all the way to the finish.

2016 is proving to be the opportunity of a lifetime to invest in all commodities. While the manipulation and flat earth crowd doesn’t ever mention it, platinum went down more than gold and no one is screeching about how platinum is suppressed. All commodities went down including gold and silver. Most commodities went down more than silver and gold but that is never mentioned.

Actually, early this year gold was higher in relative terms against oil, platinum and commodities in general than ever in history. But that doesn’t fit the manipulation mantra so none of the PermaBulls will ever mention that any more than they will discuss perfectly normal corrections.

We had a major bottom. In everything. Gold and silver hit their lowest prices in December. Commodities hit rock bottom in January. The XAU and HUI bottomed about the 19th of January. Oil sunk to $26 on the 11th of February.

Two guys got it exactly right on gold and silver. One, Adam Hamilton, we post every Friday so our readers got a free ride on some valuable advice back in December. I like him a lot because he was one of only about five guys who correctly called a top in silver in 2011. In a piece posted on our site in March of 2011 he described an upcoming crash perfectly. I nailed the actual top almost to the day in late April of 2011.

Another guy I have followed for years, without ever being able to post links to because he has a subscription-only site, is James Flanagan of Gann Global. Fifteen years ago the GURU with the loudest mouth in silver was claiming that the world was going to run out of silver by December of 2001.

James Flanagan of Gann Global predicted that instead, silver would bottom in the last week of November of the year. He made that prediction almost six months in advance. I ignored it but by all my measures, silver was going to bottom. I made an excellent call of the low in early December of 2001. If you know anyone else who got it, feel free to let me know but being a bull from 1999 to 2001 was pretty lonely. Nobody else I know called the bottom in silver, certainly not the GURU.

On February 1st of this year I posted a piece I called We’ve Seen the Bottom in Gold and I gave a link to a Gann Global Financial promotional video. If you watched it and believed he was correct and bought options on the HUI or XAU, you could have made 1000% over the next 3 months as the HUI climbed 122% and the XAU rocketed higher by 114% in 91 days from the low.

That’s the kind of investment prediction that you can retire on. I have talked to James Flanagan at some length lately and asked him to provide my readers with what he sees coming next. And you are going to like this a lot. While the first leg of a bull market higher is the barnburner, it’s actually the 2nd leg higher that is the safest to invest in.

James sees a correction for gold, silver and the metals indexes. You could see the XAU and HUI down 25% in the next month to six weeks. If you do, you are going to have one of the safest and best opportunities in your lifetime.

Most investors want to invest with the herd. They are buyers at the top and they are sellers at the bottom. It’s the nature of mankind to want to belong and do what the herd does. There are thirty or forty me-too gold sites out there that survive by feeding you noise so all your fantasies can be filled. We would far rather our readers make money and this is about the most valuable advice I have seen in 15 years.

If you go to this link you will see a video that I think has the potential to be the most valuable in real terms of any piece I have ever posted. He nailed it in 2001, he nailed it in 2011, he nailed it in January and February and my belief is that he will nail it again. I do not have a dog in the fight. I haven’t asked and wouldn’t take a portion of his subscriptions as an affiliate. It’s his advice, if you like it you pay for it and we are thrilled that you make money


Platinum Bling
Platinum Bling
Apr 5, 2010
Gold-Stock-Benchmark Battle
Adam Hamilton
Jul 29, 2016

The gold-mining stocks have enjoyed enormous gains in their young bull market this year, trouncing all other sectors. Naturally this radical outperformance has led to surging popular interest in this usually-obscure contrarian sector. New investors are wondering how to best track its performance, about which gold-stock benchmark is the definitive one to use. Something of a battle is brewing over new versus old.

Benchmarks are very important for stock trading. Their performances over any given span really help investors and speculators quickly understand how a sector is faring relative to others. Just one easily-digestible number distills down the collective performances of many stocks. Benchmarks also provide standards by which the performances of both individual stocks and individual traders can be objectively judged.

Good benchmarks are actively managed and appropriately updated on an ongoing basis. Companies that are bought out or fall by the wayside are removed, while newer up-and-coming companies take their places. Well-constructed benchmarks include the best stocks a given sector has to offer, and accurately reflect the underlying performance of that sector's stocks as a whole. They greatly aid trading decisions.

As a relatively-small and little-known sector, gold stocks have never had one definitive benchmark that has long been universally respected. The first contender was the Philadelphia Stock Exchange Gold and Silver Index, which was traded as XAU. It was created way back in January 1979 heading into a massive secular-gold-bull climax, but didn't become widely-followed and quoted until December 1983.

While XAU reigned supreme for over a decade, it started falling out of favor in the mid-1990s. That was about a decade-and-a-half into the subsequent secular gold bear. With gold prices falling on balance for years on end, mining companies naturally increasingly hedged their production. With gold expected to keep on grinding lower, they wanted to lock in current selling prices for their future mine production.

You can't blame the miners for hedging deep in a gold bear when they expected lower gold prices, it's a rational decision to maximize cash flows. But by the mid-1990s, growing numbers of contrarian investors were expecting the secular gold cycles to turn. They were looking for a new secular gold bull to arise like a phoenix from the ashes of the long secular bear. So they hated miner hedging with a vengeance.

Locking in future selling prices makes sense in gold bears, but proves disastrous during gold bulls. Hedging literally sells away the future upside potential of gold-mining profits driven by rising gold prices! And that happens to be the only reason to own gold stocks. Investors rightfully shun them during gold bears since miners' stocks follow gold lower. They're only worth buying if their profits can leverage gold's gains.

And that's only possible if they are unhedged. So with XAU dominated by heavy hedgers that would enjoy little profits leverage from higher gold prices, a new upstart unhedged gold-stock index was launched in March 1996. It was originally called the American Stock Exchange Gold BUGS Index, which stands for Basket of Unhedged Gold Stocks. That clever wordplay always brings a smile to my face.

This new gold-stock index's symbol was HUI, which has always been horribly unintuitive. After the American Stock Exchange was acquired by the New York Stock Exchange in January 2008, the HUI's name was changed to the NYSE Arca Gold BUGS Index. It kept that yucky symbol, which had become widely known among gold-stock investors in the previous decade or so as it usurped and replaced XAU.

Provocatively calling the HUI unhedged isn't technically true, despite its name! To be considered for HUI inclusion, a gold miner only has to not hedge its gold production beyond a year-and-a-half. But relative to the high general hedging levels in the late 1990s, that was essentially unhedged. In the early years of the new gold-stock bull between late 2000 and mid-2002, the HUI's performance obliterated the XAU's.

In June 2002 I wrote an essay "Gold Stock Investing 101" where I looked at the bull-to-date gains in the HUI and XAU. The HUI had soared 278% by that point compared to mere 95% gains in the XAU! I called that vast delta a "hedge tax". Hedging gold production, locking in future selling prices today, is incredibly foolish and bad for shareholders when gold prices are rising on balance. I still despise hedging.

Publicly-traded gold miners' sole reason for existence is to provide investors with upside profits leverage to gold prices. Hedging robs shareholders of the growing future profits they are rightfully entitled to. So there is no reason to ever own a gold miner that is considerably hedged. With its upside to rising gold prices sold away, investors have no significant profits growth or appreciating share price to look forward to.

The HUI proved a great gold-stock benchmark for a long time. But unfortunately after the NYSE bought AMEX, its obscure sector indexes including the HUI fell into neglect. The necessary updates to the HUI component list and weightings to account for individual gold miners' production waning and waxing to different levels of importance relative to their peers went from seldom to almost never. This was a real shame.

Gold stocks were the best-performing stock-market sector of the 2000s by far. Between November 2000 and September 2011, the HUI skyrocketed an astonishing 1664.4% higher! Great fortunes were won by smart contrarian investors. Over that same secular 10.8-year span, the benchmark S&P 500 general-stock index actually lost 14.2%. Keeping the HUI updated and current should've been a high priority.

But in the midst of that mighty secular bull, investors' approach to gold stocks was starting to shift. Since the 1970s, the focus had been on picking the best individual gold stocks to own. But the 2000s saw the exchange-traded-fund industry explode in popularity. Rather than buying individual stocks, investors could instead buy diversified portfolios holding an entire sector's worth of stocks through a single ETF.

This really appealed to investors for obvious reasons. Instead of doing the hard research work that's necessary to uncover a sector's superior individual stocks with the best fundamentals, investors could have professional analysts working for ETF companies do that work for them. And with ETFs holding many companies, individual-stock risks were largely diversified away yielding pure sector trading performance.

Playing into this ETFs-rising trend, Van Eck Global launched its Market Vectors Gold Miners ETF back in May 2006. Trading under the symbol GDX, this early gold-stock ETF gradually grew in popularity to totally dominate the new gold-stock-ETF realm. Known today as the VanEck Vectors Gold Miners ETF, its net assets are running a staggering 33.9x higher than its next-closest normal-1x-gold-stock-ETF competitor's!

Today when gold stocks are discussed on mainstream financial media including CNBC, the HUI almost never gets mentioned. GDX has become the de-facto gold-stock benchmark of choice for investors that are newer to the gold-stock realm. While both the HUI and GDX were left for dead during the recent dark bear years, gold stocks' dazzling new bull thrusting them back into the limelight has created a battle of benchmarks.

Investors with long experience in the gold-stock realm generally prefer the HUI they've spent decades now getting familiar with. Old-school traders like me simply think of gold stocks in HUI terms since we've spent so long viewing this sector through that index's lens. But many newer investors never had any significant HUI exposure, so they prefer GDX since that's the gold-stock metric the mainstream now uses.

So how do these battling gold-stock benchmarks stack up? They are paradoxically both surprisingly similar and very different! Benchmarks live or die by the component stocks their managers choose to include. And since the gold-mining sector is pretty small, there really aren't that many major gold stocks to pick from. So there's naturally going to be an overwhelming overlap in positions across sector benchmarks.

This table compares the latest component stocks and weightings of GDX and the HUI. Each company's absolute and relative market capitalizations are included. The latter is based on the entire pool of GDX component stocks, since it is far larger than the HUI's list. GDX's weightings are diverging more from the HUI's since the last time I examined these competing gold-stock benchmarks back in April 2014.

GDX's gold-stock component list is massive, now running at a staggering 49 companies! This compares to only 14 for the HUI. So GDX is inarguably far more diversified than the HUI. GDX's weightings also more closely follow its component gold stocks' individual market caps, which is the most-logical way to construct a sector benchmark. Bigger companies should naturally have more impact on sector pricing.

But diversification is truly a double-edged sword. On the good side it definitely reduces the considerable individual-company risk the gold miners face. With gold mines immovable, gold miners face exceptional risks of local-government meddling through excessive regulations and taxation. And since these mines costs hundreds of millions to billions of dollars to construct, gold miners can't walk away when problems arise.

The more gold stocks a benchmark tracks, the lower the overall portfolio impact from any individual-stock selloff resulting from some adverse development. And since gold stocks are a small and volatile sector, the stock downside when something bad happens at a mine is considerable. So GDX's extensive gold-stock holdings make it safer than the HUI, diversifying away virtually all company-specific mining risks.

On the other hand, diversification also reduces upside. During a gold bull, the stocks of the elite gold miners with superior fundamentals are going to far-outperform their sector average. These outsized gains will be largely diluted away in an over-diversified portfolio. Diversification reduces risks, but it also reduces potential returns. The markets never give something for nothing, there are always tradeoffs.

A big advantage GDX has over the HUI is its component list is actively managed by expert analysts. So while HUI component changes are rare to nonexistent, GDX's are constantly being shuffled around. I see this on a quarterly basis as I analyze the top GDX component stocks' quarterly operating results. There's no doubt GDX is a more-accurate ongoing reflection of this dynamic sector than the static HUI.

But GDX has other disadvantages in addition to extreme over-diversification. By virtue of including so many stocks in such a small sector, GDX also has to include plenty of primary silver miners. While their stocks generally mirror gold-stock action, the substantial silver weighting among GDX's top components makes it more of a precious-metals-stock benchmark than the pure gold-stock one it is often advertised as.

For many contrarian investors gold stocks and silver stocks are synonymous and interchangeable, they own both. While gold price action overwhelmingly drives silver, occasionally silver disconnects from gold and its miners' stocks follow. Such divergences weaken GDX's gold-stock tracking, and I've heard from plenty of investors not happy their "gold-stock ETF" also includes most of the major silver miners as well.

The HUI on the other hand is a pure gold-stock benchmark, including no silver miners that dilute its core mission. Ideally gold-stock benchmarks should only include primary gold miners since that's what they are supposed to track. Silver stocks can go into other silver-stock ETFs. This separation helps investors more easily tailor their specific gold and silver exposure via their respective miners exactly how they want it.

The HUI has another major advantage over GDX in the form of no management fees. As a pure index, the HUI simply tracks underlying stocks without owning them. But GDX's managers actually buy shares in all its component companies proportional to their weightings, shunting stock-market capital directly into the underlying gold stocks. This process naturally takes considerable expertise, effort, and expense.

So GDX's managers justifiably charge a management fee currently running about 0.52% of assets every year. This gradually skews GDX's returns over time, shrinking them by a half-percent annually compared to a gold-stock index. Like a small course change by a ship in the middle of the ocean, this deviation isn't noticeable in real-time. But as GDX ages and the years pass, its reflection of gold stocks grows more distorted.

Because of this and the far-longer track record of the HUI, I've always preferred it when doing most gold-stock analysis. The longer-term the time horizon being considered in any study, the better the HUI is for a cleaner view of gold-stock price action. Rather interestingly though, despite their major differences GDX has always mirrored the venerable HUI very closely. This chart shows both over most of GDX's lifespan.

Despite their dissimilarity, the historical price action of GDX and the HUI is functionally identical and interchangeable. Without vertical axis labels, virtually no one could tell these charts apart! Due to the relatively-small world of gold stocks necessitating any benchmarks have similar concentrations in the biggest miners, GDX and the HUI perform very similarly. Their price action is nearly perfectly correlated.

Statisticians measure data correlations through a construct known as the coefficient of determination. It is also called R squared, because it is calculated by multiplying the correlation coefficient, symbolized as R, by itself. I bastardize this to r-square, as it flows better in writing. R-square effectively reveals how much movement in one dataset is directly mathematically related to movement in a different dataset.

Since the dawn of 2007 as GDX stabilized after its launch, it has enjoyed a staggering 99.3% r-square with the HUI! And that's over a secular span encompassing the first stock panic in a century, mighty bull markets, and brutal bears. In other words, during the most extreme times imaginable for gold stocks. And the r-squares rise even higher in individual bulls and bears, running 99.4%, 99.9%, and 99.8%.

So mathematically, GDX and the HUI both track gold stocks the exact same way! Neither benchmark has a meaningful advantage over the long term, they both do their jobs very well. Nevertheless, the HUI's performance does edge out GDX's due to the latter's extreme over-diversification and ongoing management fees. Their relative action in this year's mighty new gold-stock bull is an excellent example.

Since GDX was only born in May 2006, it was bludgeoned to an all-time low of $12.47 back in mid-January. That same day the venerable HUI was slammed to a 13.5-year secular low of 100.7. That very day I recommended a half-dozen new gold-stock and silver-stock trades to our subscribers that have soared hundreds of percent since! That week I wrote about the fundamental absurdity of those gold-stock prices.

In the brief 6.2-month span since then, GDX has rocketed 145.4% higher at best. Such big and fast gains are incredible, and illustrate why everyone should have gold-stock exposure in their portfolios. No other sector has even come close. Yet the HUI fared even better over this same new-gold-stock-bull timeframe, with extreme 170.4% gains at best! That's an additional 25.0%, which is huge over such a short span.

So while the upstart GDX benchmark tracks the venerable HUI benchmark perfectly for all intents and purposes, the HUI still has a performance edge. Not being over-diversified and not being saddled with a management fee makes a difference. Nevertheless, GDX's performance is close enough that investors shouldn't think twice about using it to deploy capital into gold stocks if they prefer ETFs to individual stocks.

But neither benchmark can hold a candle to a carefully-handpicked portfolio of the elite gold stocks with the best fundamentals. While GDX and the HUI both contain plenty of outstanding world-class best-of-breed gold miners, they are also burdened with many lesser companies. Some are even outright dogs with such poor fundamentals that their serious underperformances will really retard entire benchmarks.

When researching individual gold stocks to find the winners with superior fundamentals and therefore upside potential in gold bulls, the component lists of GDX and the HUI are great places to start. Each quarter I examine the latest operating results of the top miners of GDX, the GDXJ junior-gold-miners ETF, and the SIL silver-miners ETF. Among their holdings are always found the world's best precious-metals miners.

In order to be included in these leading ETFs, their component stocks have been heavily researched and vetted by teams of expert analysts. Even better, top-ETF inclusion guarantees mining stocks will enjoy sizable-to-big capital inflows. When stock investors buy these ETFs' shares at faster paces than the underlying gold stocks are being bought, the ETFs shunt this excess demand directly into those stocks.

This essentially-blind buying by investors who haven't researched individual gold stocks and don't even know which ones ETFs hold amplify their upside compared to peers not included in major ETFs. So it is a great boon for gold miners to be included in GDX. And since the HUI isn't directly tradable, GDX is the best way to trade the gold-stock sector as a whole. Buying GDX shares is quick, easy, and cheap.

At Zeal we've put in literally tens of thousands of hours of research on individual gold stocks, so we will always prefer smaller portfolios of this sector's very best miners and explorers. We build these portfolios in real-time as market trends allow and buying opportunities arise in our acclaimed weekly and monthly newsletters. Since 2001 we've recommended and realized 833 stock trades in real-time for our subscribers.

Our average annualized realized gains across all these trades, including all losers, are running way up at +17.6%! And this year's dazzling new gold-stock bull has already catapulted many newer trades still on our books to unrealized gains of hundreds of percent! So it pays big to put us to work for you. 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. For just $10 an issue, you can learn to think, trade, and thrive like a contrarian. Subscribe today and start multiplying your wealth!

The bottom line is GDX and the HUI are both excellent gold-stock benchmarks, so a battle for supremacy isn't necessary. While they each have significant advantages and disadvantages, their actual trading performance is functionally identical. The HUI has an edge in actual gains due to holding fewer components and having no management fees, but it isn't tradable like GDX. These benchmarks are complementary.

Far from being a competitive threat to individual gold stocks, GDX's rise to prominence has proven a big boon for them. Elite-ETF inclusion for the best of the gold stocks provides a major source of capital inflows for them as new investors and fund managers flood into GDX to gain some gold-stock exposure. The HUI and GDX will likely continue to coexist peacefully and track gold stocks for many years to come.


Jul 29, 2016
Adam Hamilton, CPA

REO 54

Midas Member
Midas Member
Jul 4, 2010
This will require vast buying by both speculators and investors, greatly boosting gold investment demand which will fuel a mighty new gold upleg in 2016. Are you ready to ride it?

Well, half way through the year we are and no real significant upleg in gold.........yet.

My gut says will see something after the elections, one way or another.


Platinum Bling
Platinum Bling
Apr 5, 2010
Gold's Next Major Upleg Just Unleashed By Dovish Fed


This week’s dovish FOMC likely just unleashed gold to start powering higher in its next major upleg, removing the primary impetus for gold-futures speculators to sell.

For years futures speculators’ perceptions of the likelihood of imminent Fed rate hikes has battered gold around. That’s proved very true in this year’s young gold bull too.

With the critical US presidential election rapidly approaching in early November, the Fed can’t risk sending any hawkish signals. Gold is starting to enjoy a multi-month window devoid of hawkishness.

Gold surged sharply this week after the Yellen Fed yet again chickened out on raising its benchmark interest rate. Gold-futures speculators' irrational fear of Fed rate hikes has been a major drag on gold. And rate-hike risks just plummeted in the coming months, since the Fed can't risk acting heading into this year's critical US presidential election. So gold's next major upleg was likely just unleashed by the Fed.

Oddly, Wall Street's expectations for a rate hike at this week's latest meeting of the US Federal Reserve's Federal Open Market Committee were surprisingly high. The interest-rate target directly controlled by the FOMC is the federal-funds rate. Commercial banks are required to hold reserves at the Fed. They lend these reserves to other banks overnight in the federal-funds market, at the FOMC's federal-funds rate.

This market is so important that federal-funds futures contracts trade on the CME. No one has more knowledge about federal funds than the hedgers and speculators trading in this market. Parsing their collective bets yields the implied odds of Fed rate hikes, which the CME conveniently calculates and summarizes in real-time with its FedWatch Tool. It revealed this week's rate-hike expectations were totally wrong.

On Tuesday's close before this latest Wednesday FOMC meeting, these futures-implied rate-hike odds were running just 18%. Thus any hike would have been a big surprise for the markets, almost certainly igniting a major stock-market selloff. Historically the FOMC hasn't hiked before these odds are running 70%+. That only happens after top FOMC officials have spent months warning of an impending rate hike.

Before the Fed's first rate hike in 9.5 years last December, these futures-implied rate-hike odds were way up near 80%! So it was strange to see many economists and analysts ignore federal-funds futures in expecting a probable rate hike this week. Given their strong gold buying after the Fed did nothing for the umpteenth time, futures speculators obviously also believed this week's rate-hike risks were higher.

Even more perplexing, these American gold-futures traders who dominate short-term gold price action have long believed Fed rate hikes are gold's nemesis. Gold-futures trading is exceedingly risky, so only elite and sophisticated traders participate in this market. At $1350 per ounce, each 100-ounce futures contract controls $135,000 worth of gold. Yet the maintenance margin required to trade it is merely $5400!

So the maximum leverage available in gold futures now is 25.0x, vastly higher than the decades-old legal limit in the stock markets of 2.0x. At 25x, a mere 4% adverse move in the gold price would wipe out 100% of the capital risked by a fully-margined trader! So you'd think that these guys would take the time to seriously study gold's historical price action and drivers before taking such outlandish risks betting on it.

Historically gold actually thrives during Fed-rate-hike cycles! As I pointed out in depth last December just days before that first Fed rate hike in 9.5 years, Fed-rate-hike cycles are actually very bullish for gold. There have been 11 since 1971, and gold's average gain across the exact spans of all was way up at +26.9%. Gold rallied in a majority 6 of these 11 Fed-rate-hike cycles, enjoying huge average gains of +61.0%!

And in the other 5 where gold retreated, its average loss was an asymmetrically-small 13.9% over their exact spans. The lower gold's price entering Fed-rate-hike cycles, and the more gradual their hiking pace, the better gold performs as the Fed forces interest rates higher. So this newest Fed-rate-hike cycle couldn't be any more bullish for gold. Gold entered it at major secular lows, and it is the most gradual ever.

Even if the goofy gold-futures speculators can't be bothered to spend a day digging into gold's historical price action during Fed-rate-hike cycles, they should consider the last one. Between June 2004 to June 2006, the FOMC more than quintupled its FFR to 5.25% through 17 consecutive rate hikes totaling 425 basis points. Surely that slaughtered gold, right? Nope. Over that exact span, gold still powered 49.6% higher!

So this popular belief in recent years that Fed rate hikes are going to crush gold is ridiculous, a totally-false myth. Yet gold-futures speculators still hang on every word from the FOMC and its top officials. Whenever the Fed does something hawkish or jawbones about it, gold-futures speculators flee in terror. Conversely when the Fed is perceived as more dovish, these traders rush to buy gold just like we saw this week.

Gold-futures speculators chaining themselves to the Fed is readily evident in this gold chart of the past couple years or so. American futures speculators' total long contracts, upside bets on gold, and short contracts per the CFTC's weekly Commitments of Traders reports are also included. This year's young new gold bull has been heavily influenced by how futures traders perceive the Fed's stance on rate hikes.

On a lazy summer Sunday night in July 2015, gold was crushed to artificial lows by an extraordinarily-manipulative giant short sale. Within a single minute around 9:30pm Sunday July 19th, a gargantuan 24k-contract gold-futures sell order was placed. That was so extreme that twice within that single minute 20-second trading halts were triggered! Gold was blasted $48 lower to $1086 in one minute, shattering support.

As I explained in depth at the time, this was obviously an extreme shorting attack. No long-side trader would dump so many contracts so quickly at such a low-volume time, as it would have a huge adverse impact on their exit price. Impressively despite the horrendous gold sentiment back then, this brazen attempt to manipulate gold lower failed. Soon after that gold entered a major new multi-month uptrend.

Between early August and mid-October 2015, gold powered 9.6% higher out of that shorting attack. It was carving a nice uptrend, until a hawkish surprise from the FOMC's October 28th meeting last year. In its usual post-meeting statement, the FOMC warned of an imminent rate hike "at its next meeting" which was coming in mid-December. Consider this precedent before gold-futures speculators' kneejerk selling reaction.

In the 10.2 years since its last rate-hike cycle ended in June 2006, the Fed has only hiked rates a single time last December. And in the very FOMC statement from the meeting immediately preceding that one with the rate hike, the FOMC directly warned one was impending. Since the Yellen Fed didn't warn again in this week's FOMC statement, there is no chance it is planning to hike at its next early-November meeting.

Back to that late-October-2015 FOMC statement's hawkish surprise, futures speculators dumped gold with reckless abandon. Their total long contracts shown above in green cratered, and their shorts in red skyrocketed. It was American futures speculators' irrational fear of rate hikes that drove gold's major 6.1-year secular low in mid-December. Gold actually bottomed the day after the Fed's first rate hike in nearly a decade.

But rate-hike-cycle fears are not misplaced at all for the general stock markets. Still back in December, I looked at the benchmark S&P 500 stock index's performance during those same 11 Fed-rate-hike cycles since 1971. Its average gain in them was merely +2.8%, an order of magnitude less than gold's. And considering these overvalued stock markets directly levitated by extreme Fed easing, rate hikes are a real threat.

During the first couple trading days after that mid-December rate hike, the S&P 500 plunged 3.3%. But with a new tax year approaching in a couple weeks, most sellers waited until 2016 to exit in response to a tightening Fed. That would push the big taxes due on their realized gains out another entire year. The moment January 2016 arrived, the Fed-rate-hike-driven stock-market selling resumed with a vengeance.

During the first 6 weeks of 2016 in the wake of the Fed's initial rate hike off that 7.0-year-old zero bound, the S&P 500 plunged 10.5%! That was its biggest selloff in 4.4 years. So as I predicted on the final day of 2015 when gold languished at $1060, investors soon started to flock back. Gold is a unique asset that moves counter to stock markets, so investment demand soars when stock-market fortunes are deteriorating.

It was this gold investment demand that fueled 2016's strong new bull market! Last week I discussed this in depth if you want to get up to speed on this essential foundation. Investment capital steadily returned to gold in the first half of 2016, before stalling out in the third quarter. While all this investment demand has overwhelmingly been this gold bull's primary driver, futures speculators still drive major swings.

Gold suffered a sharp selloff on heavy gold-futures selling in mid-May. There wasn't even an FOMC meeting that entire month, but 3 weeks after each meeting the Fed releases its minutes. While the FOMC's statement from its late-April meeting had been considered dovish with no explicit hints of any potential rate hike at its next meeting in mid-June, those April minutes were more hawkish than expected.

So gold-futures speculators again rushed to sell, their total longs plummeting, driving gold's sharp May pullback. This metal didn't start to recover until the first Friday in June, thanks to a colossal miss in the US-monthly-jobs data. Economists were looking for 164k jobs created in May, but the actual was just +38k! This was the worst jobs report in 5.8 years, so the data-dependent Yellen Fed couldn't risk hiking in June.

Thus futures speculators flocked back into gold again, catapulting it higher on plunging odds of the next Fed rate hike. Indeed at its mid-June meeting, the FOMC held fire. There was do dissent among the FOMC members, and their future projections for federal-funds rates in the coming years dropped by about 50 basis points. Gold's strong June rally came because futures speculators expected no rate hike.

Then on the last Friday in June, gold soared after the British people shocked the world by courageously voting for independence from their unelected, unaccountable, meddling EU overlords. Speculators and investors alike rushed to buy gold, so it shot higher. The futures speculators weren't buying because of Brexit uncertainty per se, but because they believed Brexit uncertainty would stay the Fed's hand on rate hikes!

See the pattern here? Gold surges higher when futures speculators aggressively add longs and cover shorts in response to lower perceived odds for near-future Fed rate hikes. I suspect this week's latest FOMC meeting will prove a similar major buying catalyst for gold, igniting its next major upleg. While the federal-funds-futures traders didn't expect a rate hike, they did expect the FOMC to talk a bit hawkish.

But that didn't happen! There was no explicit hint for an imminent rate hike at the FOMC's next meeting like its gold-crushing warning late last October. This week's FOMC statement was actually shocking in that the Fed didn't even offer up an excuse like usual for not hiking rates. It said even though the rate-hike case "has strengthened", it simply "decided, for the time being, to wait". Yellen just doesn't want to hike.

On top of all this, at every other meeting the FOMC releases a summary of the FFR projections by each of the FOMC members and regional Fed presidents. These so-called dots got much more dovish again, with the FFR levels for the next couple years plunging another 50 and 75 basis points or so! This Fed led by uber-dove Janet Yellen is getting more and more dovish all the time, unleashing serious gold buying.

There were 3 regional-Fed presidents on the 10-person FOMC who dissented, the first time this has happened since December 2014. But due to the rigged nature of the FOMC, that's no indication that a rate hike is coming anytime soon. The colorful regional-Fed presidents, God bless 'em, have no power at all on the FOMC. They only occupy 4 of its 10 seats on a rotating basis, so Yellen's cohort always outvotes them.

Yellen and 4 closely-allied Fed Board of Governors' members always control 5 votes, and the president of the New York Fed has the only permanent voting seat for any regional Fed as the 6th. Naturally he is always very dovish too, since rate hikes hurt the financial markets that are so critical to his Fed district's economy. Yellen's dovish faction dominates the FOMC with iron fists, regional presidents be damned.

And this is super-bullish for gold in the next few months, because now the Fed's hands are tied until after the early-November US elections. There is zero chance for a rate hike or even much hawkish talk until after all Americans cast their ballots on November 8th. The FOMC's next meeting is right before that on November 2nd, so it can't even warn in that statement about a hike at its following mid-December meeting.

So we have at least 3 months now before the Fed can even start getting hawkish again, a fantastic and long window for gold's next major upleg to surge higher on heavy investment and speculation buying. Contrary to Janet Yellen's feeble assertions otherwise, the Fed is highly political. The results of this upcoming presidential vote have huge implications for the Fed, and Yellen certainly wants Hillary to win.

Yellen is a hardcore lifelong Democrat appointed by Obama. One of her governors with a permanent FOMC vote is Lael Brainard. She served in Obama's Treasury department, and earlier this year actually made multiple donations to Hillary Clinton's presidential campaign up to the personal limit! Democrats who love easy money dominate the FOMC, and they know a rate hike or enough talk of one will tank stock markets.

Almost since the FOMC made the unprecedented move to force the FFR to zero in December 2008, the Fed has been under heavy if not withering attack from Republican lawmakers. They hate the fact the Fed has grossly distorted the economy, and decided to subsidize debtors and Wall Street by robbing blind hardworking American savers. Congressional Republicans want to drastically limit the Fed's power.

Remember soon after last December's initial rate hike, the stock markets plunged dramatically. Given how fake today's lofty Fed-goosed stock markets are, there's no doubt another rate hike or sufficient threat of one will do the same thing. And it turns out that US stock-market performance in the final two months leading into early-November elections is exceedingly important for their outcomes. The Fed knows this.

Since 1900 there have been 29 US presidential elections. When US stock markets rally in Septembers and Octobers leading into these early-November elections, the incumbent party has won the presidency 16 of 17 times! But when stock markets sell off in those final couple months before the elections, the incumbent party has lost 10 of 12 times. Stock-market fortunes have 90% odds of predicting election results!

Why is this the case? 40% to 45% of voting Americans will always vote Republican, while an opposing 40% to 45% will always vote Democrat. But in the middle are 10% to 20% of swing voters with no strong party affiliation. They often vote based on how they perceive their own economic prospects. Higher stock markets have always bred optimism, making them more likely to vote for keeping the status quo.

Any Fed hawkishness at all risks pushing stock markets lower heading into the November 8th US elections, including at the FOMC's next meeting on November 2nd. As I've been telling our newsletter subscribers for months now, there is absolutely no way the heavily-Democrat Yellen FOMC will risk doing anything at all that ups the chances of a hostile-to-Yellen Donald Trump winning the presidency!

So not only just unleashed by the Fed again, gold is entering a few-month-or-longer period where there is virtually no risk of anywhere-near-enough Fed hawkishness to spook futures speculators. Gold just got the green light for a major new upleg driven by investment and speculation buying. Every major gold selloff in the past year was driven by Fed hawkishness's impact on futures trading, and that risk has vanished.

Thus I strongly suspect this week's FOMC meeting will soon prove to be the catalyst igniting the next big upleg in gold's strong young bull. Investors can certainly play this with physical gold coins or by buying shares in that flagship GLD SPDR Gold Shares gold ETF (NYSEARCA:GLD). Provocatively nearly all the capital fueling gold's bull market this year has come from American stock investors aggressively buying GLD shares.

But at best GLD will merely pace gold's coming gains. Meanwhile the stocks of the best gold miners will really amplify gold's gains due to their great inherent profits leverage to gold. Gold-mining stocks have been 2016's best-performing sector by far, and that dominance will once again accelerate as gold's next major upleg gets underway. The elite gold stocks still remain very undervalued relative to prevailing gold levels.

The bottom line is this week's dovish FOMC likely just unleashed gold to start powering higher in its next major upleg. For years futures speculators' perceptions of the likelihood of imminent Fed rate hikes has battered gold around. That's proved very true in this year's young gold bull too. But with the critical US presidential election rapidly approaching in early November, the Fed can't risk sending any hawkish signals.

The heavily-Democrat ruling dovish faction of the FOMC won't risk doing anything that could incite a stock-market selloff. US history has proven abundantly that weak stock markets leading into presidential elections greatly lower the incumbent party's chances of winning. With the Fed bowing out, gold is just starting to enjoy a rare multi-month window devoid of Fed hawkishness to retard buying or spark selling.

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.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.


Platinum Bling
Platinum Bling
Apr 5, 2010
Gold Hostage To Stocks

Apr. 29, 2017 9:45 AM ET

Gold is hostage to stocks. This unique asset tends to move counter to stock markets, so gold investment demand is inversely correlated with their fortunes.

That’s why gold suffered such heavy selling in the wake of Trump’s surprise victory. The stock markets soared on the resulting Trumphoria, killing gold demand.

But as this extreme rally driven by hopes unwinds, so too will the gold-investment trends. GLD will again see heavy differential buying as investors rush to re-diversify, catapulting gold higher.

Gold has had a wild ride since Trump's surprise election win in early November. This metal first plunged then surged, ultimately making little headway. It wasn't until mid-April that gold regained its pre-election levels. This overall lackluster gold action was confounding given all the mounting uncertainties. But it once again highlights that gold investment demand is often hostage to the US stock markets' fortunes.

Before the election, gold surged every time Trump appeared to advance in the polls. Trump had a well-earned reputation as a loose cannon, implying far greater unpredictability. Increasing prospects of a Trump victory drove gold to $1305 the Friday before the election. But that weekend the FBI cleared Clinton again on her classified-e-mail front. So gold sold off sharply on rising odds Clinton would indeed win.

On Election Day gold closed near $1276, a price that essentially wasn't seen again until just a couple weeks ago. As the early voting results came in that evening, Trump took a surprise lead in Florida which started to grow. As the biggest battleground state with 29 electoral votes, Florida was an absolute must-win for Trump. Gold futures soared in real-time to $1337 that evening, 4.8% over that day's close hours earlier!

For months before that vote, all indications were gold would surge on a Trump victory. Gold investment demand grows on uncertainty, and Trump is unpredictability personified. Gold's election-evening gains didn't seem unreasonable, merely matching the 4.8% surge seen the day after the UK's Brexit vote in late June that also surprised. But a couple days after Trump's victory, gold spiraled into a 5-week-long plunge.

How could gold's price action pivot so radically across that election as uncertainties indeed soared? It was an exceedingly-vexing outcome for gold investors and speculators, leaving them confounded and disheartened. This improbable result sprung from an equally-improbable one. Contrary to virtually all expectations pre-election, the stock markets surged in extraordinary Trumphoria after his underdog win.

Though traders often forget, gold has long been hostage to stocks. Gold is a unique asset that tends to move counter to stock markets, making it something of an anti-stock trade. So gold investment demand surges when stock markets weaken, as investors seek to prudently diversify their stock-heavy portfolios. But when stock markets surge, counter-moving gold is soon forgotten so its investment demand withers.

Given gold's global supply-and-demand fundamentals, it's remarkable just how dominant investment demand is in driving gold's prevailing price levels. The definitive arbiter of gold fundamental data is the World Gold Council. It reported that global gold investment demand accounted for only 36% of overall total demand in 2016, and just 22% in 2015. Jewelry dwarfed that at 47% and 57% respectively those years.

Yet it's not gold's perennial largest demand category of jewelry that really moves its price, but its much-smaller investment one. Investment demand drives gold prices at the margin because it is exceedingly volatile compared to gold's other demand categories. Between 2010 and 2016, the best jewelry-demand year was only 31% bigger than the worst one. But this same variance in investment demand was huge at 119%!

And there's nothing that's driven global gold investment demand in recent years like US stock-market fortunes. That sounds dubious, but the hard market data is crystal-clear. Gold investment demand surges when US stock markets weaken, and slumps when they strengthen. That's what birthed the apparent gold anomaly after the election. Trump won, but gold demand didn't surge because stock markets soared.

This strong inverse relationship has played out for years, but it's often forgotten. The sole reason gold plunged between 2013 and 2015 was extreme Fed easing was artificially levitating the US stock markets. That killed gold investment demand, as there is no perceived need for prudent portfolio diversification when stocks seemingly do nothing but rally indefinitely. This same dynamic continued to play out last year.

This first chart looks at the benchmark S&P 500 stock index (SPX) and gold since early 2016. Much of if not most of gold's price action since then can be explained by stock-market moves. While other gold drivers arise from time to time like Fed machinations, gold is hostage to stocks. That makes gold one of the best investments to own when stock markets suffer in the major bears that inevitably always follow major bulls.

Back in mid-December 2015 leading into the Fed's first rate hike in 9.5 years, gold was despised. The SPX was less than 3% under its all-time-record peak of 2131 seen the prior May. Complacency was off the charts, as the stock markets had fully recovered from their first correction-magnitude selloff seen in an astounding 3.6 years in August. The Fed's extreme easing and jawboning for more short-circuited all selling.

Thus gold slumped to an extreme 6.1-year secular low climaxing a long bear. With those Fed-distorted stock markets magically powering higher month after month with no meaningful selloffs, investors didn't want anything to do with gold. It hadn't seen a bull market since 2011, and was left for dead. But that soon reversed after some long-suppressed SPX selling finally erupted in the wake of that initial Fed rate hike.

The SPX plunged 1.5% and 1.8% in the couple trading days after the first rate hike of the Fed's recently-confirmed 12th rate-hike cycle since 1971. Then a few weeks later in the first week of 2016, the SPX suffered more big down days of 1.5%, 1.3%, 2.4%, and 1.1%. American traders were selling in sympathy with plunging Chinese stock markets rebelling against ill-fated new circuit breakers designed to retard selling.

Throughout January 2016, more sharp SPX down days of 2.5%, 2.2%, 1.2%, 1.6%, and 1.1% were seen. While there were some big daily rebound rallies in between, investors started to realize something was changing. The effective Fed Put they had relied upon for years to buy every dip was no longer assured with rate hikes underway. So after years of neglect, investors finally turned to gold to shore up bleeding portfolios.

The SPX ultimately dropped 13.3% in 3.3 months leading into mid-February 2016, its worst selloff seen in 4.4 years! That led to massive gold buying soon rekindling a new bull market. Note above that gold's huge rally that month coincided exactly with the SPX's plunge. Gold's initial surge climaxed with a monster 4.1% daily rally the very day the SPX bottomed. A stock-market correction unleashed a new gold bull.

But out of those lows the SPX soon reversed sharply in a V-bounce. So gold's upward progress all but ceased between mid-February and mid-April as the stock markets clawed higher again. Gold could only surge to new bull highs in late April once the SPX started rolling over again. After intensely studying this young new gold bull since its birth, I'm convinced it never would've happened without a major stock selloff.

As the stock markets recovered in mid-May, gold plunged on a hawkish FOMC meeting. It wasn't until the UK's Brexit vote in late June with its surprise outcome clobbering the SPX that gold was finally able to surge to new bull-market highs. But that renewed gold run ceased the very day the SPX managed to hit its first new record high in nearly 14 months in mid-July. Gold investment demand immediately waned.

Gold suffered a healthy correction exacerbated by a rare futures mass stopping in early October. Gold couldn't catch a meaningful bid again until the stock markets began rolling over in October as Clinton started sliding in the polls. Then leading into the day before the election, the FBI cleared Clinton on her classified e-mails for a second time. The SPX surged sharply, driving a parallel sharp gold plunge that day.

Then contrary to expectations, the stock markets soared after Trump's victory. With a Republican sweep of the presidency, Senate, and House, euphoria set in over fast passage of deregulation, health-care reform, and massive tax cuts. With the SPX blasting to dazzling new record highs, investors jettisoned gold they'd amassed before the election. That heavy selling persisted until mid-December just after the SPX peaked.

See the strong inverse correlation here between gold and stocks? It isn't always mathematically precise, with gold sometimes rallying and falling with stocks instead of against them. But from a broad-brush-stroke level, gold investment demand and hence gold prices weaken when stock markets are rallying. Gold buying doesn't materially resume until those stock rallies cease, which rekindles gold investment demand.

Gold's latest major bottom in mid-December happened the day after the Fed hiked rates for the second time in 10.5 years. Gold fell not on that universally-expected rate hike, but the FOMC officials' more-hawkish-than-expected forecast of three rates hikes in 2017. Despite that, gold still only started rallying again as the SPX's raging Trumphoria surge in the election's wake petered out. Stock markets were the key.

Gold's newest upleg slowed considerably in early February when the SPX surged on Trump teasing of "something … phenomenal in terms of tax". And as the SPX powered to a series of new record closes in the weeks after that, investors soon started dumping gold again. Gold didn't stabilize and bottom until the Fed's 3rd rate hike in mid-March confirming a new cycle. By that time the SPX's progress had stalled again.

But investors didn't start really bidding gold higher again until mid-April as the SPX started threatening to break below its critical 50-day moving average. Sub-50dma levels hadn't been seen since Election Day. A 50dma breakdown after a strong, euphoric run often heralds more serious selling nearing. The prospects of the first major post-election stock selloff erupting once again rekindled gold investment demand.

Just this week this inverse relationship reasserted itself after Sunday's presidential election in France. The results came in exactly as expected, averting the markets' worst-case scenario of far-right and far-left candidates winning both runoff spots. European stock markets soared, rekindling stock euphoria in the US. So gold dropped sharply early this week despite a much-weaker US dollar driven by a big euro rally.

The sentiment of gold investors is heavily influenced by stock-market fortunes. They only want to buy en masse when the SPX weakens. That makes them remember diversifying their stock-heavy portfolios with gold is a wise idea. But once the SPX rebounds, that newfound marginal gold investment demand soon wanes. Because of this critical psychological link, gold is effectively held hostage by stock-market levels.

But this warring inverse relationship between gold and stocks is also fundamental, not just sentimental. This next chart looks at the physical gold bullion held in trust for shareholders of the world's largest and dominant gold ETF. The GLD SPDR Gold Shares (NYSEARCA:GLD) act as a conduit for the vast pools of stock-market capital to flow into and out of the global gold markets. GLD is the actual mechanism for stocks' gold influence!

GLD's mission is to mirror the gold price, but its shares have their own unique supply-and-demand profile independent of gold's. So the only way to maintain GLD tracking of gold prices is to shunt any excess GLD-share supply or demand directly into gold itself. Thus rising GLD holdings reveal stock-market capital flowing into gold bidding it higher, while falling ones show capital leaving forcing gold lower.

As the biggest SPX selloff in 4.4 years spawned gold's young bull market back in early 2016, stock-market capital flooded into physical gold bullion via GLD shares. This differential GLD-share buying by scared stock investors desperately seeking diversification drove this ETF's biggest monthly build in its holdings in 7.0 years! That heavy GLD buying by American stock investors was gold's whole story in Q1'16.

The World Gold Council only publishes gold's global fundamental data quarterly, so that's the highest-resolution read available. In Q1'16 GLD's holdings soared 176.9 metric tons. According to the WGC's latest data published in February 2017, total global gold demand only climbed 183.8t YoY in Q1'16. Thus the heavy GLD gold buying alone accounted for a staggering 96.3% of total worldwide gold-demand growth.

That GLD buying soon stalled in mid-March as the SPX rallied sharply out of its correction low. But as the stock markets started rolling over again, differential GLD-share buying resumed in late April. That excess share demand forced GLD's managers to issue new shares to keep GLD tracking gold. All the proceeds were immediately plowed into buying gold bullion. Excess GLD-share demand flows through to gold.

In Q2'16 GLD's holdings climbed by another 130.8t. That accounted for an incredible 91.4% of the total 143.1t YoY growth in total world gold demand per the WGC's latest data! Quite literally, without all that differential GLD-share buying from American stock investors there would be no new gold bull! And the driving force behind their flight into counter-moving gold was weakness in the general stock markets.

With US stock markets inexplicably surging to new record highs soon after late June's Brexit surprise, gold investment demand evaporated. GLD's holdings actually fell 2.1t in Q3'16. And without differential GLD-share buying pressure, global gold demand actually fell a considerable 105.3t YoY that quarter. American stock investors were still carrying the entire young gold bull at that point, there was no other real buying.

Note above in this chart that GLD's holdings started climbing in Q4'16 before the election surprise and resulting extreme Trumphoria stock rally. But once the SPX started soaring on big-tax-cuts-soon hopes, stock investors started fleeing gold. The intense greed and complacency in the stock markets left gold relatively unattractive. Why diversify portfolios when stocks are soaring and expected to continue to do so?

So in Q4'16, GLD's holdings plunged 125.8t. Once again, that was the entire story in worldwide gold demand. The WGC reported total global gold demand dropped 128.7t YoY that quarter, so that crazy Trumphoria-fueled mass exodus from GLD was responsible for a staggering 97.7%! You just can't make this stuff up, these numbers are stunning. Last year, GLD was truly the entire story behind gold's price action!

GLD's holdings only rebounded modestly in Q1'17, up just 10.2t. And as of this writing, the WGC's read on last quarter hasn't been published yet. But there was evidence in the initial months of this new year that Asian investors were taking the gold-buying baton from American stock investors. Not only did gold see overnight rallies when US markets were closed, but the weak GLD build can't explain gold's 8.5% Q1 rally.

The key gold lesson since early 2016
is that US stock-market fortunes heavily influence if not dominate gold investment demand. So the crazy Trumphoria stock-market surge after the election is likely the sole reason why gold fared so poorly in the initial months. Despite the great uncertainties that Trump brings to the table, the perceived need to diversify portfolios waned dramatically as stocks soared on euphoria.

Thus as soon as these very-overvalued stock markets inevitably roll over into their long-overdue next bear market, gold investment demand should explode again. Gold is the best investment to own during major stock bears, as surging investment demand drives it higher while stocks fall. That's way superior to holding traditional cash during stock bears, as gold actually grows capital while cash merely preserves it.

April's GLD-holdings action showed gold investment demand already starting to pick up again as the latest SPX record highs of early March fade. That trend will accelerate as stock selling starts to intensify. Without the overwhelming distractions from excessive euphoria, greed, and complacency, investors will soon remember the great wisdom of prudently diversifying stock-heavy portfolios with counter-moving gold.

While gold being hostage to stocks has been bearish for it during the stock markets' recent terminal bull years, the opposite will prove true in the coming stock-market bear years. Gold is the bear-market asset of choice, climbing when everything else is falling. GLD shares and gold itself will enjoy high demand as long as stock markets drift lower on balance. But the gold miners' stocks will really leverage gold's gains.

During the last secular gold-stock bull, the leading gold-stock index amplified gold's underlying gains by 2.8x. Gold stocks can actually multiply wealth during stock bears when everything else is slowly getting mauled. This young gold-stock bull's upside targets are radically higher than current levels, creating vast opportunities to profit greatly as this Fed-distorted freakishly-artificial stock bull faces its overdue reckoning.

The bottom line is gold is hostage to stocks. This unique asset tends to move counter to stock markets, so gold investment demand is inversely correlated with their fortunes. Investors ignore gold when the stock markets are high and euphoric, feeling no need to diversify their stock-heavy portfolios. But once stocks inevitably start retreating, investors soon remember gold's value and flock back to deploy capital in it.

That's why gold suffered such heavy selling in the wake of Trump's surprise victory. The stock markets soared on the resulting Trumphoria, killing gold demand. But as this extreme rally driven by unfounded hopes unwinds, so too will the gold-investment trends. GLD will again see heavy differential buying as investors rush to re-diversify, catapulting gold and its miners' stocks to new bull-market highs in coming months.

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.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks, which have been recommended to our newsletter subscribers.


Platinum Bling
Platinum Bling
Apr 5, 2010

Silver Stocks Comatose

Adam Hamilton October 20, 2017 3230 Words

The silver miners’ stocks have mostly drifted sideways this year, looking vexingly comatose. Such dull price action repels speculators and investors, so they’ve largely abandoned this lackluster sector. That weak trader participation has led to silver stocks’ responsiveness to silver price moves decaying. What can shock silver stocks out of their zombified stupor? And how soon is such an awakening catalyst likely?

Silver stocks’ flatlined behavior so far in 2017 is surprising and odd. Silver-stock prices are ultimately driven by silver-mining profits, which are overwhelmingly driven by prevailing silver price levels. Silver in turn is slaved to gold’s fortunes, the yellow metal is the white metal’s dominant primary driver. With gold faring quite well this year despite the euphoric record stock markets, silver and its miners’ stocks should be shining.

Since silver is a tiny market compared to gold, silver’s moves tend to leverage gold’s. The best global silver and gold supply-and-demand fundamental data available comes from the Silver Institute and World Gold Council respectively. According to them, worldwide silver and gold demand last year ran 1027.8m ounces and 4337.4 metric tons. Along with average prices, these can be used to approximate market sizes.

Silver and gold averaged $17.12 and $1250 last year. Run these numbers, and 2016’s total global silver and gold markets were worth about $17.6b and $174.3b. This latest-available data shows silver’s market is literally an order of magnitude smaller than gold’s! With silver only enjoying 1/10th the capital flows of gold, silver tends to be far more responsive. Any dollar of buying or selling is 10x more impactful for silver.

The silver market’s small size is one of this metal’s greatest strengths. Compared to the vastly-larger broader markets, it doesn’t take much new buying to catapult silver dramatically higher. Speculators and investors alike usually get interested in shifting capital into silver when gold is already rallying. Silver then tends to rally much more than gold, leveraging its upside, because silver inflows are relatively larger.

Given gold’s good performance this year, silver and the stocks of its miners should’ve surged. Year-to-date gold is up 11.3%, well ahead of full-year 2016’s 8.5% gain. But instead of amplifying gold’s 2017 advance by 2x to 3x like usual, silver is only up 6.7% YTD as of this week. This makes for really poor leverage to gold of 0.6x. Last year silver rallied 15.1%, yielding still-weak-but-more-normal 1.8x upside leverage.

Silver’s serious underperformance relative to gold this year has greatly retarded traders’ interest in the silver miners’ stocks. The leading silver miners’ trading vehicle and sector-index proxy is the SIL Global X Silver Miners ETF. Because of the great profits leverage to silver inherent in the silver miners, their stocks usually amplify silver’s upside. But YTD SIL is only up 4.0%, for extremely-poor 0.6x leverage!

Gold stocks aren’t having a great year either, with their leading GDX ETF only up 11.5% YTD compared to gold’s 11.3% gains. Like silver stocks, their gains tend to multiply their underlying metal’s gains by 2x to 3x. But the gold stocks’ weak in-line performance so far in 2017 highlights just how bad silver stocks’ lagging performance is. They have been largely drifting comatose this year, hardly even responding to silver.

Silver stocks have serious problems, and they certainly aren’t fundamental. Every quarter I analyze the latest operating and financial results from the top silver miners of SIL. They will soon start reporting their new Q3’17 results, but the prior quarter’s are the latest now available. In Q2’17 SIL’s elite top silver miners reported average all-in sustaining costs of $11.66 per ounce, well below average silver prices of $17.18.

That implies hefty industrywide silver-mining profits of $5.52 per ounce. While the average silver price did slump 2.0% sequentially in Q3 to $16.84, that’s certainly no fundamental threat. Assuming flat mining costs, the silver miners still should’ve been able to earn $5.18 per ounce last quarter. That’s down 6.2% quarter-on-quarter, but is still very profitable. Fundamentals can’t explain silver stocks’ vexing malaise this year.

That narrows down the suspect list to technicals and sentiment. This first chart looks at the price action in SIL and silver over the past couple years or so. Silver miners’ responsiveness to silver moves was excellent last year, but is decaying dramatically this year. With speculators and investors abandoning this sector, it’s barely budging. That has spawned a vicious circle convincing other traders to avoid silver stocks.

Silver stocks’ troubling lethargy is new this year. Back in December 2015 two days before the Fed’s first rate hike of this cycle, silver slumped to a major 6.4-year secular low in concert with gold. Silver stocks bottomed just over a month later in January 2016 paralleling the gold stocks. SIL fell to an all-time low in split-adjusted terms that day. A couple months earlier, Global X had executed a 1-for-3 reverse split in SIL.

Silver stocks were so deeply out of favor in late 2015 that this leading ETF’s managers feared SIL’s price would collapse low enough to risk delisting! Out of that very despair, strong new bull markets in silver and its miners’ stocks were born. In just 6.9 months from mid-January to mid-August 2016, SIL rocketed 247.8% higher on a 40.6% silver rally! That made for outstanding 6.1x upside leverage to silver prices.

Naturally silver and its miners’ stocks were soon sucked into gold’s correction following its own new bull’s initial upleg. Those silver and SIL corrections ballooned to monstrous proportions, thanks to gold-futures stops being run then Trump’s surprise election victory unleashing stock-market euphoria. So over the next 4.2 months, silver and SIL plunged 20.1% and 42.5%. SIL’s downside leverage to silver of 2.1x was modest.

2016’s behavior is the way silver stocks normally react to silver-price moves. The blue SIL and red silver lines above were closely intertwined last year. Silver stocks generally rallied and fell sharply in lockstep with silver itself. This normal behavior carried over into the first couple months of 2017, when SIL surged 33.6% between late December 2016 and early February 2017 on a mere 12.5% parallel rally in silver itself.

Silver stocks were leveraging silver’s upside by 2.7x, near the high end of their usual 2x to 3x range. So back in late January the silver stocks’ 2017 prospects looked really bullish. Things started going awry in February and March. The silver stocks corrected hard, plunging 21.1% in a month on a relatively-small 4.5% silver pullback. That made for big 4.7x downside leverage that was quite excessive, scaring traders.

So they started to flee silver miners’ stocks, a trend that’s continued ever since. With each subsequent silver rally since March, silver stocks have become less and less responsive to silver upside. This year’s blue SIL line above is no longer mirroring and amplifying the underlying volatility in the red silver line. It’s as if silver stocks are flatlining relative to silver, which is very strange. I can’t recall seeing anything like this.

Thus silver stocks have been stuck in a descending-triangle consolidation pattern for much of this year. They finally enjoyed breakouts from this triangle’s upper resistance and SIL’s 200-day moving average in August, mirroring similar major breakouts in gold stocks. But silver stocks’ responsiveness to silver continued decaying. In a month leading into early September, SIL only climbed 11.3% on an 11.5% silver rally.

Technically it looks like silver stocks have largely disconnected from silver. They’ve lapsed into this super-weird zombified comatose state. Speculators and investors alike aren’t the least bit interested in silver miners today, because they’re performing so poorly. And the resulting lack of participation in this sector scares away other traders, exacerbating the problem. Silver stocks have effectively been left for dead.

After decades studying and actively trading silver stocks, I’ve pondered this strange anomaly quite a bit in recent months. It’s certainly not fundamentally-driven, as silver miners’ earnings are looking good. It’s likely not technical either. While silver stocks are really underperforming, they haven’t suffered a serious selloff. SIL’s triangle support around $33 has held rock solid all year long, so this is a consolidation not a correction.

That leaves sentiment as the culprit behind silver stocks’ vexing stupor this year. Traders’ psychology is important in all markets, but disproportionately so in silver. Silver is a tiny highly-speculative market, exceptionally sensitive to shifting winds of sentiment. While weak technicals breed bearish sentiment and that becomes self-reinforcing, there had to be some root causes poisoning silver psychology earlier this year.

I suspect multiple factors are to blame. Once again silver sentiment is heavily dependent on gold. In the wake of Trump’s election win almost a year ago, stock markets soared in Trumphoria on hopes for big tax cuts soon. That hammered gold, which is hostage to stock-market fortunes. Gold is an anti-stock trade that usually moves counter to stock markets, so gold investment demand collapsed after the election.

Gold’s own psychology was utterly miserable late last year, exceedingly bearish. When gold fell to $1128 right after the Fed’s second rate hike of this cycle last December, Wall Street forecasts calling for a plunge under $1000 exploded. Traders don’t get interested in silver until gold is already rallying, so the extreme gold gloom and doom late last year certainly tainted silver sentiment. It has yet to recover from that.

Though gold bounced sharply and has enjoyed a good 2017, silver oddly didn’t join in. Gold itself likely played a major role. Despite gold’s gains this year, gold sentiment has remained pretty bearish. With the stock markets magically levitating in Trumphoria on those fervent big-tax-cuts-soon hopes, gold was flying under traders’ radars. With virtually no enthusiasm for gold, silver psychology had nothing to feed on.

The speculative traders who flock to silver for its sharp rallies and big gains were finding greener pastures elsewhere. Throughout the year various mainstream stock-market sectors have surged, so traders could find strong gains outside the precious metals. I’m certain this year’s extraordinary bitcoin bubble diverted interest away from silver too. The stratospheric skyrocketing of bitcoin prices has captivated traders.

Bitcoin’s value is hyper-speculative, as bitcoins are a synthetic virtual construct given perceived worth by software creating artificial scarcity. Having been in the financial-newsletter business for almost a couple decades now, I hear and read endless market anecdotes. This year I’m seeing the same types of traders who are usually interested in speculative silver raving about bitcoin instead. Bitcoin is a speculative mania!

Both in my own private feedback from countless traders around the world, and on the Internet’s popular gold and silver forums, the usual gold and silver conversations have shifted to gold and bitcoin this year. There’s no doubt bitcoin has stolen some limelight from silver, and almost certainly sucked away some of the capital that would’ve flowed into silver in 2017 too. Bitcoin is this year’s alternative speculation of choice.

But bitcoin’s meteoric rise won’t eclipse silver forever. Silver investment has been around for millennia, but bitcoin was just introduced in January 2009. As of this week bitcoin is up an astounding 485% YTD in 2017 alone! Such extreme vertical gains are never sustainable, as history has abundantly proven. So bitcoin’s epic competition this year for mindshare and capital from traditional silver speculators won’t last.

While bitcoin is definitely a factor in the lack of interest in silver and silver stocks this year, these record-high Trumphoria-goosed stock markets are far more important. As long as gold psychology is bearish as stocks seemingly do nothing but rally forever, silver’s speculative appeal will languish. Once these lofty stock markets inevitably roll over, gold and therefore silver investment will return to favor just like in early 2016.

Gold and silver slumped to brutal 6.1-year and 6.4-year secular lows in December 2015, everyone hated the precious metals. But the US stock markets finally succumbed to their first corrections in 3.6 years, an extreme near-record span. As the S&P 500 fell 12.4% in 3.2 months in mid-2015 followed by another 13.3% in 3.3 months into early 2016, long-neglected gold and silver demand returned with a vengeance.

Gold and silver surged 29.9% and 50.2% higher over the next half-year or so, igniting their first new bull markets in years! The next correction-grade stock-market selloff, over 10% on the S&P 500, will spark another renaissance in gold and silver investment demand. After being miraculously delayed for so long, that next major stock-market selloff is overdue and imminent. The risk factors stacking against stocks are legion.

The US stock markets are literally trading in bubble territory, over 28x earnings on the traditional trailing-twelve-month basis. They’ve rallied so long and so high that euphoria is extreme, with all measures of sentiment showing dangerous bull-slaying levels. And the Fed just birthed quantitative tightening for the first time in history, which is exceedingly bearish for these quantitative-easing-inflated artificial stock markets.

The stock markets finally decisively rolling over is the most-likely catalyst to shock silver and the stocks of its miners out of their comatose malaise. The silver stocks are perfectly poised for a first-half-of-2016-like scenario, where SIL rocketed 247.8% higher in just 6.9 months. The driver will be silver’s next major bull-market upleg. Silver remains radically undervalued relative to gold, thus enjoying colossal upside potential.

This next chart looks at the Silver/Gold Ratio, which simply divides the daily silver close by the daily gold close. Technically that results in little decimals that are hard to parse mentally, so I prefer using a scale-inverted gold/silver ratio which is the same thing. It yields more-meaningful whole numbers like 75.5 where the SGR stands today. This is way too low based on historical precedent, an unsustainable anomaly.

This week it took over 75 ounces of silver to equal the value of one ounce of gold. That’s a really-high SGR historically, meaning silver prices are really low relative to gold. Silver’s extreme undervaluation is a key reason speculators and investors aren’t interested in silver stocks today. That will change dramatically as silver inevitably resumes mean reverting higher relative to gold. Silver will outperform for a long time.

Before 2008’s stock panic, the SGR averaged 54.9. After the stock panic between 2009 to 2012, the SGR averaged 56.9. So outside of the extreme SGR anomalies driven by the stock panic and later the Fed’s QE3-conjured stock-market levitation from 2013 on, a mid-50s SGR is normal. This has proved true all throughout modern history due to geological and relative silver-and-gold supply-and-demand reasons.

During late 2008’s stock panic, the SGR briefly averaged an extremely-low 75.8. That soon gave way to a sharp mean reversion higher to reestablish silver’s usual relationship with gold. That mean reversion overshot dramatically, as is often the case with silver after an SGR extreme. In April 2011 when silver was enjoying mania-like popularity the SGR briefly peaked at 31.7! Silver’s upside is extreme after low SGRs.

Incredibly since Q4’15, when silver and gold hit their major 6-year secular lows, the SGR has averaged just 73.6. That’s not much better than late 2008’s stock-panic levels! So silver is long overdue to mean revert relative to gold, rallying much faster than gold for months on end until this relationship is restored. We don’t need to assume a likely overshoot, as a simple mean reversion alone would drive huge silver gains.

Assuming a 56 normal SGR, at this week’s $1280 gold price silver should be trading over $22.75. That’s 35% above prevailing price levels. But with gold itself readying to rally, silver’s mean-reversion targets climb much higher with gold prices. Another 30% gold upleg like in early 2016, which is modest by gold’s historical standards, would take it to $1665. At a 56 SGR, silver would have to soar 75% to around $29.75!

Since silver prices remain so depressed relative to their primary driver gold’s, the silver upside potential from here is enormous. This overdue silver mean reversion higher is what will shock silver stocks back to life. Once speculators and investors see silver starting to run, they are going to flood back into beaten-down silver stocks with reckless abandon. That will catapult this small sector radically higher like in early 2016.

The trigger reigniting silver will be gold powering higher, and again that will likely result from these crazy stock markets rolling over. Once these bubble-valued stock markets start decisively weakening, traders will rush to return to gold, silver, and their miners’ stocks to prudently diversify their stock-heavy portfolios. The Fed’s QT juggernaut ramping up over the next year will likely set this chain of events in motion.

Recent months’ comatose silver stocks are largely the product of general-stock euphoria leaving silver radically undervalued relative to gold. Silver psychology is very bearish, so traders aren’t the least bit interested in owning its miners. Sprinkle in the extreme allure of the bitcoin mania for the speculative traders who crave silver’s normal volatility, and that explains 2017’s serious anomaly in silver and silver stocks.

When this all changes, silver will move fast. This restless and volatile metal has a long history of drifting sideways and doing little. But occasionally the winds of sentiment shift enough to ignite enormous bull markets and uplegs generating fortunes. Traders who have the discipline to wait out silver’s sometimes-vexing consolidations are greatly rewarded when capital really flows into silver again, catapulting it far higher.

The greatest gains in this next major silver upleg won’t be won in silver-stock ETFs like SIL. They are burdened with too many companies that aren’t primary silver miners, the majority of their revenues come from other metals. So they aren’t very responsive to silver’s upside. But the purer individual silver miners with superior fundamentals will enjoy massive gains trouncing the ETFs. They are the best way to play silver.

The key to riding any silver-stock bull to multiplying your fortune is staying informed, both about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research through our popular newsletters.

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The bottom line is silver stocks have largely drifted comatose this year, with decaying responsiveness to silver moves. The extreme stock-market euphoria has left gold psychology bearish, bleeding into silver sentiment. And the spectacular bitcoin bubble has diverted speculative traders’ interest and capital away from silver as well. All this has led traders to largely abandon silver miners, condemning their stocks to consolidate.

But the likely catalyst to shock silver stocks from their zombified stupor is nearing with each passing day. Once these QE-inflated stock markets inevitably succumb to QT, gold and silver investment demand will return. The tiny silver market will rapidly surge on major capital inflows, with lots of room to mean revert far higher relative to gold. Then speculators and investors alike will rush to buy the cheap silver miners’ stocks.