Gold Stocks

cropped-bob-shapiro.jpg   By Bob Shapiro

I have been following the monetary metals, Gold and Silver, for over 40 years, as the US government and the FED have debased our currency, the US Dollar. Other countries also make bad choices with most governments on Earth spending more than their income (through taxes). Even the Little Country That Could, Switzerland, gave up Gold backing of their Franc several years ago, and in a recent referendum, Swiss voters defeated a proposal which would have required the Central Bank to buy enough Gold to give the Franc only a 20% backing.

One side effect of governments printing (“or the electronic equivalent”) ever larger quantities of their paper money is that each of those paper Dollars, Francs, Euros, Yen, or whatever lose value. Consumer prices around the world rise – and have risen continuously for many generations. My family’s first home was a split level in Blauvelt, NY, which cost $17,000 in 1955. Today’s Zillow estimate values it at $313,000! The house hasn’t changed significantly over the last 60 years, as the selling price went up over 18 times. Rather, it’s the value of the paper Dollar which has plummeted – based on this home, the Dollar has lost over 5% a year COMPOUNDED.

Rule of 72

The reason that the loss to debasement of the Dollar isn’t greater is that the creative ingenuity of Americans has made production of goods and services more efficient year after year. Productivity gains have averaged around 2 1/2% yearly since 1955. Without these gains in productivity, the general price level would be around 10 times higher still – in line with all the paper Dollar printing.

If the US Dollar had remained 100% backed by Gold (and Silver) as it was 100+ years ago, we would have prevented the price increases that we’ve seen, plus we would have had prices falling by the 2 1/2% productivity gains – the CPI would have been less than 1/100 of today’s levels. Another way of looking at it is that Gold should be buying well over 100 times what it did 60 years ago. Some people, myself included, believe that our government has been suppressing the Price of Gold, and that it should be 3-4 times its current price.

As the Dollar continues to lose its Reserve Currency status internationally, Gold and Silver prices will return to much higher prices. The companies which mine these metals stand to gain more than just 1:1 on any metal price increases, so they offer some degree of leverage.

But which mining companies to buy? There are numerous analysts within the mining sector, just as there are many in other industries as well. Some know what they’re talking about while others don’t. Below is a Re-Blog from Adam Hamilton, who writes weekly at (We have no business relationship, but I believe you will find his a reliable voice.)

Gold Stocks Turning Up… by Adam Hamilton

The gold miners have seen impressive investor interest in their beaten-down stocks in this young new year, with capital inflows fueling a sharp rally.  And this buying is likely just beginning, as major market changes are afoot that should catapult gold much higher.  With gold stocks trading at fundamentally-absurd price levels relative to prevailing gold prices, this sector’s upside potential is vast and unequalled.

But after the gold miners suffered a miserable couple of years, it sure takes a contrarian to understand that.  The leading gold-stock investment vehicle and metric is Van Eck Global’s Gold Miners ETF, which trades under the symbol GDX.  It is an excellent well-constructed gold-stock benchmark that matches the traditional HUI gold-stock index very well.  So it naturally reflected the extreme carnage ravaging this sector.

GDX dropped 13.0% in 2014, following 2013’s disastrous 54.5% plummet.  With the general stock markets levitating endlessly higher thanks to the Fed’s aggressive QE3 campaign and associated jawboning, demand for alternative investments withered.  These are led by gold, which often moves in the opposite direction of the stock markets.  With stocks soaring, investors shunned it and prudent portfolio diversification.

And since gold stocks are ultimately just a leveraged play on gold, their prices cratered.  Investors simply wholesale abandoned them, leaving an entire sector for dead.  As they seemingly perpetually spiraled ever lower, all but the hardest-core contrarians capitulated and sold.  But this extreme selling created an epic opportunity, as gold-stock prices plunged far below fundamentally-justified levels based on their profits.

As long as the Fed’s stock-market levitation continued, gold and thus its miners would remain deeply out of favor.  But with the inflationist US central bank ending QE3 late last year and planning the first rate hikes since mid-2006 this year, the Fed has abandoned these lofty and overvalued stock markets.  As they inevitably roll over without trillions of dollars of QE liquidity injections, gold will gradually return to favor.

All financial markets are forever cyclical, with periods of outperformance always following periods of underperformance and vice versa.  So smart contrarian investors are well aware the stock markets are overdue to reverse lower while gold mean reverts higher.  Thus they are starting to buy the dirt-cheap gold stocks in anticipation of these inevitable major reversals.  And that’s why gold stocks are turning up this year.

Institutional investors including pension, mutual, and hedge funds control the vast majority of capital in the stock markets.  And their performance is judged by current and prospective clients in calendar-year blocks.  So as 2014 wound down, few funds wanted to show the despised gold stocks on their trading books.  But 2015 brings an entire new year for gold stocks to rebound higher, so funds are migrating back in.

This is readily evident in gold-stock technicals, represented here by that flagship GDX gold-stock ETF.  In this young new year’s first three trading days, GDX rocketed 11.4% higher!  That nicely leveraged the also-excellent 3.1% gold rally over that same period.  This outstanding gold-stock price action worked to solidify this sector’s nascent uptrend, while triggering a bullish breakout above GDX’s 50-day moving average.

gold stock technicals

Gold stocks have definitely been trending higher in recent months, defying the universal bearishness still plaguing this sector.  GDX’s higher lows and higher highs have formed this nascent uptrend, which will probably grow into a major new upleg.  This leading gold-stock ETF is already up 23.4% from its dismal early-November low.  And such a strong breakout above its 50dma implies upside momentum is building.

To understand the significance of all this, some context is essential.  After suffering an extraordinarily anomalous down year in 2013 thanks to the Fed’s stock-market levitation crushing gold demand, the gold stocks spent the large majority of last year performing quite well.  GDX enjoyed a solid consolidation uptrend between January and September 2014, with uplegs fueled by big-to-massive gold-futures buying.


14 thoughts on “Gold Stocks

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