Bear Markets Lead to Bull Markets.
Gold stocks have been in a vicious bear market, but a new bull market may be emerging. Bull markets are always born out of extreme pessimism. They usually take off with as few investors on board as possible!
Sunday, October 30, 2022
Bull Markets are Born from Bear Markets
Just like day follows night, bull markets are born from bear markets!
Yes, gold stocks have once again been caught in a devastating bear market. The main gold stock indices are down more than 50% since their highs of August 2020. In plain English, this means that many junior mining equities are down more than 70% from their highs.
But is everything so miserable? Or are we in the land of opportunities?
Physical gold is still in a long term bull market.
The yellow metal has corrected some 20% from its recent high. These types of drawdowns are not uncommon in a long term bull market.
Last Friday's action was good with what could turn out to be a significant one day reversal at $1620 with a New York closing of $1654.
Furthemore, the safe haven has done its job in 2022 falling only 9.95% when the SP 500 was down 18.5%, Nasdaq 29% Arkk -60% and -54.7% for Bitcoin.
Gold is strong against most currencies
We are too focused on the price of gold in US dollars, most people in the world live outside of the United States so what matters the most for them is what happens to gold in their own currencies.
Yes, the yellow metal has proven time after time that it protects long term wealth. Ask the Venezuelans, ask the Argentines or even the Japanese or the Europeans!
The dollar is topping
The US dollar has already had a huge run, so the potential for it to go higher is very limited. We believe it will reverse. The Bank of Japan is finally starting to intervene massively to defend the Yen, which means they will sell US treasuries.
The US dollar is still fiat money. It is only paper, backed by huge amounts of debt, enormous trade deficits (and the United States' declining military forces)! That is not the hallmark of a currency that can climb indefinitely.
Gold Fundamental Remain Strong
The fundamentals for gold have not changed and they remain very strong.
The debt levels of most governments are still unsustainable and they cannot be substantially reduced without destroying the value of their own currencies. Many emerging and BRICS countries (China, Russia, India and Turkey among others) are still adding bullion to their coffers. Meanwhile, gold mine production will not grow significantly to address potential demand.
As for the United States Federal Reserve Bank, the markets have already discounted large rate increases for their next two meetings. Two Fed branch presidents have already indicated a more dovish Fed.
How can this be different since most advanced economic indicators point to a recession in the United States. And do not forget gold and gold mines go up when economies are weak!
Sentiment on gold stocks at historic lows
Night is darkest just before dawn. This certainly is true of precious metal equities. Investors are likely to remain bearish at least until mid-December, the end of tax loss season.
On gold the DSI (Daily sentiment index) recently hit all time lows at 7.
$BPGDM (the Gold Miners Bullish Percentage Index) also touched its all time low at 3.46.
The Commitment of Traders also Shows Extreme Bearish Sentiment
The October 21, 2022 Commitment of Traders (COT) Report for gold also indicates an extreme level of bearishness.
COT open interest for gold very low - only 434K contracts - below almost all previous gold bottoms. Levered traders (Managed Money) net short 26K gold futures contracts (only other two times short - around 2015 & 2018 bottoms). Institutions heavily long US $— fred hickey (@htsfhickey) October 22, 2022
In sum, sentiment indicators are all at historic lows. When sentiment becomes this negative, it usually happens only before major market bottoms.
A significant weekly reversal in gold stocks
Late September, the GDX (the VanEck Gold Miners ETF), the most liquid index in which to invest in gold stocks, made a significant weekly reversal, touching a low of $21.52 before closing at $ 24.12 - on huge volume. It also has begun to form a bottom versus the price of gold, which may also indicate the likelihood of a new bull market.
Many major gold equities have already made significant gains from their recent lows.
The bearishness in the COT Report, when coupled with the very significant technical turnaround in the GDX could very well mark the beginning of a new huge bull market.
Most market participants are still awaiting a bloody, seasonal tax loss selling period. Seasoned investors in this space know how treacherous markets are, especially at this time of the year. However, as the great Richard Russell once said, new bull markets are well known to take off with the fewest investors on board as possible.
A lot of senior miners are already up significantly from their lows.
Yes, the technical picture is improving. Gold miners are starting to outperform bullion. The A/D lines are improving. The number of 52 week lows are diminishing.
Gold stocks are so cheap can we be reckless?
This breakout needs some confirmation, but if you wait too long stocks can rise very quickly. Bottoming processes can be erratic. False breakouts are not unusual.
Buy the dips, but with indestructible companies!
One strategy for periods of uncertainty is to accumulate indestructible equities with plenty of cash and which are substantially cheap on all metrics.
In the coming days and weeks, we will profile some companies that meet these criteria.