Gold & Silver Mining Stocks Have Bottomed!

It's been a wild ride for investors in Gold and Silver mining shares this year. The benchmark Philadelphia Gold/Silver Mining Shares Index (symbol XAU) carved out a roller-coaster path that probably thwarted bulls and bears alike.

Here are the XAU intra-day highs and lows over the last 52 weeks and the % changes from the previous turn:

1. Low on December 19, 2013 at 79.73

2. High on March 14, 2014 at 107.39 (+34.69%)

3. Low on May 28, 2014 at 83.27 (-22.46%)

4. High on July 10, 2014 at 106.01 (+27.31%)

5. Low on November 5, 2014 at 61.39 (-42.09%)

Unlike the S&P 500 Index, which never corrected a full 10% the entire year so far in 2014, the two-way swings in Gold/Silver mining shares were massive.

Is another major swing in Gold/Silver mining shares now underway?

A weekly chart buy signal was triggered by my computer trading system in the XAU as of Friday's close, December 19th. It was last year around this time that Gold/Silver mining shares also bottomed (after tax selling season was basically done) and then rallied 34.69% over the next 3 months!

Weekly chart buy signals were also triggered at Friday's close in the following Gold/Silver mining shares and related ETF's:

Agnico Eagle Mines (symbol AEM)

Anglogold Ltd (symbol AU)

Endeavour Silver (symbol EXK)

Gold Junior Mining Shares ETF (symbol GDXJ)

Philadelphia Gold/Silver Mining Shares Index (symbol XAU)

Silver Junior Mining Shares ETF (symbol SILJ)

Silver Mining Shares ETF (symbol SIL)

Yamaha Gold (symbol AUY)

Rumors that Russia has been selling its gold reserves recently, in an attempt to halt the slide in the Russian Ruble on foreign exchange markets, are spurious and without merit. In fact, according to latest report from the Russian Central Bank, Russia actually bought 600,000 ounces of gold in November. While we won't know for sure whether Russia bought or sold gold in December, I have no doubt that when the next report is delivered in January it will show that Russia bought gold again in December to add to the 150 tonnes of gold that it has already purchased so far this year in 2014! I now believe that Russia will be the first of many countries to announce an official gold backing to its currency, and I would not be at all surprised if China then quickly followed Russia with its own gold backing for its currency.

Here are two weekly charts worth reviewing in any decision to commit long-side capital to Gold/Silver mining shares over the very near term. In the interest of full disclosure, I have already allocated 30% of my assets under management to Gold/Silver mining shares.

Philadelphia Gold/Silver Mining Shares Index (XAU) with 200-Week Moving Average Line & Computer Signals

Silver Mining Shares ETF (SIL) with 200-Week Moving Average Line & Computer-generated Buy & Sell Signals

The Perfect Storm

The S&P 500 Index was down 3.52% last week, which was fairly representative of almost every broadly-based major stock market barometer. However, except for the Russell 2000 Index which is now down on the year (-0.96%), most major indexes are still nicely higher year-to-date so far in 2014. In fact, the Dow Jones Transportation Index is up almost 20% so far this year, Semiconductor stocks have risen about 25%, and Biotech shares are up almost 50% year-to-date. There are two sectors that stand apart from this sea of green arrows. Oil and related Oil-service stocks are down more than 30% and Gold/Silver mining shares are down about 18%, on average, so far this year.

In the interest of full disclosure, over the last six weeks I built a significant hedged position with short sales in the S&P 500 against long purchases in Gold/Silver mining shares and related ETF's. Until this past week, this strategy was less than favorable (to say the least). My ratio was $4 in SPX shorts for every $1 in Gold/Silver longs. With Gold up 2.47% last week, Silver up 4.60% last week, and the S&P 500 Index down 3.52% last week, you would think that I had the perfect hedge with major profits on both sides. While all the portfolios that I manage performed extremely well last week, Gold/Silver mining shares did NOT track the underlying precious metals like they normally do. In fact, Gold/Silver mining shares, as measured by the Philadelphia Gold/Silver Index (XAU) were actually down 2.10% on the week And one last portfolio disclosure before I discuss "The Perfect Storm" that is unfolding now globally. On Friday, December 12th, I covered my entire short in the S&P 500 Index "market-on-close". So now I am long Gold/Silver mining shares (unhedged) with a 30% portfolio allocation, 10% in top-rated corporate bonds, and 60% in cash.

Despite my longer term bearish view on the U.S. stock market, I was never really comfortable with my short position in the S&P 500 Index. In fact, I would never have guessed that it would be my short SPX position that would make the money in my 4:1 hedge with Gold/Silver mining shares as it did this past week (in spades). However, I now believe that a "The Perfect Storm" is unfolding for Gold/Silver mining shares in terms of their massive upside potential. Many of these stocks are now down 75% or more from their peaks set in 2011. In fact, the Gold Junior Mining Share ETF (symbol GDXJ) is down 86.60% from it's all-time high set 4 years ago. And even more incredible is the fact that this ETF is down 48.30% in just the last 5 months alone! Among major gold mining shares, the damage isn't as bad, but the popular Gold Mining Shares ETF (symbol GDX) is still down 32.90% over the last 5 months in response to just a 9.13% decline in the price of Gold over this same period. Silver mining shares have been annihilated over the last 5 months, with individual losses of 67% or more on a 21% decline in the underlying price of silver of the same period.

Here are just some of the reasons why Gold/Silver mining shares may double in price over the next three months:

1. The recent collapse in crude oil prices, and the related shock to global financial markets, will cause the U.S. Federal Reserve to maintain its dovish stance on monetary policy over the very near term at least.

2. The recent collapse in crude oil prices will allow other major global central banks to rationalize "stepping on the monetary accelerator" with major new "quantitative easing" programs to "fight" potentially harmful deflationary forces.

3. Lower oil prices will benefit Japan significantly more than the United States given the dramatic uptick in domestic U.S. oil production in recent years. After 7 straight weeks of upticks for the U.S. Dollar in foreign exchange dealings, the Greenback now looks like it finally topped out last week. A weaker Dollar will provide fuel for sharply higher gold and silver prices immediately ahead.

4. Lower oil prices will greatly enhance profit margins for Gold/Silver mining shares, where diesel oil for mining equipment is a major cost component.

5. On both precious metals charts, Gold and Silver, prices have now advanced above their key 50-day moving average lines, and the key 20-day moving average line is now pointing higher for the first time in 5 months in both. In fact, a crossover buy signal, where the 20-day MA crosses above the 50-day MA, is expected this coming week for Gold and Silver.

6. Gold bullish sentiment among often wrong investors fell to a record low of just 3% in early November. While sentiment has improved slightly since then, there still remains a dearth of believers in the yellow metal after 38 months of lower prices (September 2011 through early November 2014).

7. More and more countries are repatriating their sovereign gold supplies as uncertainty continues to escalate with respect to fiat paper currencies and their real value moving forward. Global central banks have been printing money at a record pace over the last six years, WITH NO END IN SIGHT! Talk of moving to some kind of "gold standard" is quietly building among many central bankers
8. Sales of 1-oz Silver Eagle coins by the U.S. Mint are now on-track to post a new record high this year. According to actual production figures presented daily at the www.usmint.gov website, 42,669,500 silver eagle coins have been sold so far this year as compared to last year's record full-year total of 42,675,000. Reports of silver shortages at sovereign-sponsored mints around the globe are becoming more common as investors and coin collectors step up their purchases in the face of increased uncertainty relating to the value of fiat (paper) currencies.
9. On Friday afternoon, December 12th, France's credit rating was downgraded one notch to AA from AA+ by Fitch Ratings, given the lack of material improvement in the outlook for the country's budget deficit. This is just another example of deteriorating economic conditions in Europe which sets the stage for a major transformation (and possible breakup) of the European Union as we know it today.
10. While the proof is illusive, I strongly believe that the size of gold purchases by China are dramatically understated in official reports. However, even if we use the "official" reported numbers, total combined gold purchases this year (2014) by India, Russia, and China are likely to exceed the entire year's global mined production now estimated at just short of 3,000 tonnes. It's just a question of time now before a major central bank announces some sort of gold backing for its domestic currency. My prediction is that a smaller central bank will act first (seemingly out of the blue), but then China will quickly follow with its own gold standard. Gold prices will jump at least 5% on that day, and a 10% single-day advance can't be ruled out!

First Majestic Silver (symbol AG) Weekly Chart with 200-Week Moving Average Line

U.S. Dollar Index (DXY) Monthly Chart with 200-Month Moving Average Line

Gold ETF (GLD) Weekly Chart

Silver ETF (SLV) Weekly Chart

Disdain For Gold

I think it's pretty safe to say that last week's news climate for Gold was just about as bearish as it could get. And the "narrative" in the financial press seemed more negative than ever. Here are just a few examples:

1. Last Sunday, the Swiss Gold Referendum ("Save Our Gold") was handily defeated by Swiss voters. The financial press had a field day with this story. I counted more than three dozen separate headlines in a 24-hour period following the release of the Swiss poll results on this issue. However, an equally important story about the lifting of import restrictions on gold in India received almost no coverage during this period.

2. On Thursday, December 4th, Mario Draghi, President of the European Central Bank, seemed to go out of his way to emphasize that any future asset purchases (with printed money) to stimulate the EU economy would NOT include gold. His comments put to rest some minor speculation over the last 10 days or so that any future ECB "quantitative easing" measures might actually include gold.

3. Crude Oil prices continued to be pressured lower following the Thanksgiving announcement by OPEC that output would NOT be cut by swing producers (i.e. Saudi Arabia). Wall Street research and the financial press have focused almost entirely on the potential deflationary forces connected to lower oil prices and how these forces may be negative for gold prices. Of course, almost no press has been given to the potential defaults in the energy sector where many companies are heavily leveraged in support of expensive drilling and exploration activities that are probably NOT profitable without substantially higher oil prices. And almost no one is talking about the potential negative impact on employment or CapEx spending if serious problems persist in the U.S. energy sector.

4. And most important, the U.S. Dollar continued to soar in foreign exchange dealings, with the benchmark U.S. Dollar Index advancing 1.24% last week to its highest level since March 2009. Almost every negative report on Gold attributes bearish price action in the yellow metal to the rise in the U.S. Dollar. However, I have yet to read any mainstream report on how resilient gold prices have been in the face of the stronger Dollar, and even though it may SEEM that Gold prices are sharply lower on the year so far in 2014, Gold is actually FLAT on the year! The U.S. Dollar Index is up a staggering 11.64% year-to-date, which effectively means that Gold is up 11.64% against the average foreign currency component in the U.S. Dollar Index!!

So what happened to Gold and Silver prices last week against the backdrop of all this bearish narrative?

Gold ended the week at $1192.60/oz, which was UP 2.23% from the prior Friday close and UP 4.46% from its intra-day low on Monday, December 1st.

Silver ended the week at $16.29/oz, which was UP 5.23% from the prior Friday close and UP 15.04% from its intra-day low on Monday December 1st.

Food for thought?

In the interest of full disclosure, I am short the S&P 500 Index and long Gold/Silver mining stocks on a ratio of four to one ($4 short in the SPX for every $1 long in Gold/Silver stocks).

Am I the only one who thinks the latest U.S. Employment Report (for November) looks a bit strange as reported early Friday morning, December 5th? The headline Non-Farm Payrolls increase was reported at +321,000 for November (a giant upside surprise to Wall Street analysts). However, the Household Survey increase for November employment was reported at just +4,000. And the BLS "Adjusted Household Survey" Employment, which is supposed to mimic Non-Farm Payrolls, actually showed a decline in employment of -115,000 in November. Which number is correct?

The National Retail Federation estimated that shoppers on average spent $380.95 at stores this past Thanksgiving holiday weekend, four days which began on Thursday (11/27), compared with $407.02 a year ago, and that total spending fell about 11 percent year-over-year to $50.9 billion over this key sales weekend. These negative retail sales results seem much more consistent with the sharply lower Household Survey November Employment results as compared to the more visible and more popular headline Non-Farm Payrolls results. More food for thought!

Postscript (Sunday Evening, December 7th): Apparently, there are others who see something strange in last Friday's U.S. Non-Farm Payrolls Report. I just read an extraordinary piece of research on U.S. Payroll Tax receipts as written by Jeffrey Snider of Alhambra Investment Partners (and reprinted on www.zerohedge.com). It looks like total U.S. Payroll Tax receipts are NOT consistent with the surprisingly strong Non-Farm Payrolls growth as reported by the BLS recently or for this entire year. Here is the link for your convenience:

http://www.zerohedge.com/news/2014-12-07/something-stinks-inside-bls-jobs-data

U.S. Dollar: The Buck Stops Here!

The U.S. Dollar has been on a tear over the last 8 months. In early morning dealings today, Wednesday, December 3rd, the U.S. Dollar Index (DXY) advanced above its June 2010 peak of 88.71, and as of this time at 7:30 AM Central Time, the intra-day high so far today is 88.96. 

As can been seen below on the attached monthly chart, the U.S. Dollar Index is approaching its March 2009 peak at 89.51. There is also fairly significant overhead resistance at the 200-month moving average line.

I strongly believe that the U.S. Dollar Index will soon reverse to the downside as the U.S. Treasury begins a "stealth" program of selling Greenbacks in the open market to protect the U.S. export market and to halt the import of deflationary forces attributed to a strong Dollar.

The implications of a downside reversal in the Dollar are significant. Gold will be the primary beneficiary, of course!

U.S. Dollar Index (DXY) Monthly Chart with 200-Month Moving Average Line