Zeal011813ASubmitted by Adam Hamilton:

Before investors can sell high and multiply their wealth, they first have to buy low.  The lower any trade’s entry price, the greater its ultimate profits.  The best time to buy low is when stocks are deeply out of favor, when few others are willing to buy.  And that certainly describes gold and silver stocks today.  This sector is universally loathed despite fantastic fundamentals, offering vast opportunities for brave contrarians.

Gold stocks are trading today as if gold was far lower, as if they had little hope of ever earning big future profits.  There is a vast fundamental disconnect between these miners and the price of the metal that drives their profitability.  This critical point is easily illustrated through a simple construct known as the HUI/Gold Ratio.  It divides the premier gold-stock index, known as its symbol HUI, by the price of gold.

Contrarian investing is simple in concept, yet very difficult in execution.  The fortunes of stocks flow and ebb, their prices rising and falling.  After they’ve risen, they quickly become popular.  Everyone wants them and bids up their prices.  That’s when it feels the best to buy, so that’s when the great majority of investors rush in to chase the rally.  But following the herd leads to buying high, the recipe for failure.

 

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Before investors can sell high and multiply their wealth, they first have to buy low.  The lower any trade’s entry price, the greater its ultimate profits.  The best time to buy low is when stocks are deeply out of favor, when few others are willing to buy.  And that certainly describes gold and silver stocks today.  This sector is universally loathed despite fantastic fundamentals, offering vast opportunities for brave contrarians.

Contrarian investing is simple in concept, yet very difficult in execution.  The fortunes of stocks flow and ebb, their prices rising and falling.  After they’ve risen, they quickly become popular.  Everyone wants them and bids up their prices.  That’s when it feels the best to buy, so that’s when the great majority of investors rush in to chase the rally.  But following the herd leads to buying high, the recipe for failure.

 

Contrarians seek to buy low, which is only possible after stocks have fallen.  The very definition of contrarian is “an investor who makes decisions that contradict prevailing wisdom, as in buying securities that are unpopular at the time”.  But this is very hard psychologically, as fighting the crowd is never easy.  All our instincts scream against buying into a sector that the great majority is utterly convinced is doomed.

 

Nevertheless, that’s the surest and safest way to grow your capital as history has proven countless times.  Stock prices are the lowest in unpopular left-for-dead sectors.  And if their fundamentals remain bullish, there is no doubt they will recover.  Contrarians buy low when few others want to, wait for the rest of investors to recognize the value they saw early, and then sell into the subsequent rally for huge profits.

 

I know fighting the crowd works because I’ve walked the walk, gradually forging myself into a contrarian through decades of trading.  And the results speak for themselves.  Since I founded my financial-research company in 2000, we’ve formally recommended 637 stock trades in our pair of newsletters.  Their average annualized realized gains are +33.9%!  This includes all losers, in a secular stock bear no less.

 

And after dedicating much of my life to contrarian trading, I’m marveling at the opportunity in gold and silver stocks today.  It is one of the best I’ve ever seen!  This small mining sector wrests precious metals, which remain in high demand globally by investors, from the bowels of the Earth.  Gold miners’ profits are a direct function of the gold price, and universally in the stock markets profits ultimately determine stock prices.

 

Yet gold stocks are trading today as if gold was far lower, as if they had little hope of ever earning big future profits.  There is a vast fundamental disconnect between these miners and the price of the metal that drives their profitability.  This critical point is easily illustrated through a simple construct known as the HUI/Gold Ratio.  It divides the premier gold-stock index, known as its symbol HUI, by the price of gold.

 

Charted over time, this HGR chronicles gold-stock prices relative to the price of gold.  Sometimes gold stocks outperform gold pushing this ratio higher, and other times gold outperforms its miners’ stocks forcing the HGR lower.  The best time to buy gold stocks low and cheap in fundamental terms is when they slump dramatically relative to gold.  And today the HGR is actually languishing near stock-panic levels!

Zeal011813A

 

Incredibly, the main reason gold stocks are so beaten down today remains 2008’s stock panic!  That epic fear superstorm was a psychological juggernaut that eviscerated this entire sector, scarring most gold-stock investors of the time so deeply that they would never come back.  And so far, not enough new investors have stepped up to take their place.  So this sector’s constituency remains woefully small.

 

Before that once-in-a-lifetime stock panic, the HUI spent 5 full years meandering in a tight secular trading range relative to gold.  You can see it above, bound by the HGR’s lower support line of 0.46x and upper resistance line of 0.56x.  The HGR average between mid-2003 and mid-2008 was 0.511x.  In other words, the HUI tended to trade at just over half the prevailing gold price.  But the panic shattered that norm.

 

While gold was hit hard too, the gold stocks plummeted far faster than the metal that drives their profits.  So the HGR ultimately bottomed in the unbelievable 0.21x range in late October 2008.  The HUI had plunged 71% in less than 8 months since its all-time high, so it isn’t hard to understand why the gold-stock investors of the time were so demoralized.  It was the biggest disaster imaginable psychologically.

 

But just because stocks are low doesn’t mean their prices are justified fundamentally.  The heart of contrarian trading is recognizing that popular sentiment swings between extremes like a great pendulum.  Near major highs, greed reigns supreme.  But near major lows, and the ones in the panic went far beyond major, fear dominates everything.  Fear leads to excessive selling, driving stock prices far below where profit fundamentals merit.

 

If you weren’t paying close attention to gold stocks in late 2008, believe me the depth of despair then made today’s bearishness look like a picnic.  The great majority of investors truly believed this sector was so catastrophically damaged in the stock panic that it would never rise again.  But as a battle-hardened contrarian, I sure didn’t.  Using this same HGR analysis then, we started buying and recommending gold stocks aggressively.

 

And the resulting profits were mind-boggling.  Between October 2008 and the HUI’s latest bull-market high in September 2011, this index rocketed 319% higher!  Gold stocks more than quadrupled over that post-panic span, more than doubling the underlying gains in gold itself.  The very time that gold-stock pessimism was the highest ever seen proved to be the greatest buying opportunity of their secular bull!

 

The post-panic gold-stock rally was so fast initially that these miners regained much ground relative to the gold price that drives their profits.  By late 2009, the HGR was back up near 0.44x.  After that it stabilized, consolidating sideways for the next year and a half or so.  The gold stocks as measured by the HUI kept on advancing to new all-time highs, rewarding the brave contrarian investors who bought low after the panic.

 

But psychology was starting to shift again.  Gold had soared dramatically in an anomalous summer rally in mid-2011 during the US government’s last debt-ceiling debate.  Afterwards it was very overbought and a correction was due.  As gold started correcting, the still-fragile post-panic gold-stock sentiment crumbled.  The gold-stock investors were really worried, and pushed the HUI down faster than gold itself was being sold off.

 

This bearish psychology ultimately culminated in this past spring’s gold-stock capitulation.  The HUI was hammered down to 376 as the great sentiment pendulum pegged itself on the extreme fear end of its arc.  The emotional selling was so overwhelming that it battered the HGR back down to 0.24x.  Gold stocks were back down at levels relative to gold only seen before during 2008’s once-in-a-century stock panic!

 

And that’s where today’s amazing contrarian buying opportunity in gold and silver stocks was born.  The anomalous stock-panic lows led to the biggest gold-stock rally by far of their entire secular bull.  And with gold stocks once again at panic levels relative to gold, with fear at a similar extreme, shouldn’t they have similar upside potential in the coming years?  I certainly think so, and have been hammering home that point since May.

 

But being bullish on this hated sector is a hardcore contrarian stance.  And as the investment world’s rebels, contrarians are always ridiculed when we buy low.  The great majority of investors want to give in to the excessive fear that spawns fundamentally-unjustified lows, so they look for rationalizations.  Mainstream non-contrarian commentators rush to fill this void, dutifully arguing that gold stocks will never rally again.

 

If you are already a gold-stock investor, you are well aware of the anti-gold-stock arguments permeating this sector.  Gold stocks are dead because stock investors are all switching to the GLD gold ETF instead.  Gold miners are doomed because they can no longer earn sufficient profits with global mining costs rising.  Gold stocks will never regain favor because they can’t attract any investors to bid them higher.

 

The problem is none of this stuff is true!  It is all rationalizations, contrived attempts to justify the popular fear and despair plaguing gold-stock investors who crave being accepted by the crowd.  As a contrarian speculator running my own financial-research company, I’ve had lots of time to extensively investigate each major anti-gold-stock argument.  And they all quickly crumble, as their roots are fear instead of fundamentals.

 

On the GLD front, that awesome flagship gold ETF was born in November 2004.  Between that day and the HUI’s pre-panic all-time high years later in March 2008, the premier gold-stock index surged 115% higher even while GLD’s bullion holdings soared around 8000%!  Their gains are not mutually exclusive.  GLD is great for stock-investor portfolio diversification, but it doesn’t leverage gold like gold stocks.  It was created for an entirely different constituency.

 

And on the profits front, our extensive research proves those fears false.  After this past May’s capitulation, conventional gold-stock valuations as measured by HUI components’ price-to-earnings ratios fell to their lowest levels of the entire secular bull.  They were much lower than during the stock panic, and even lower than broad general-market valuations as measured by the S&P 500 components!

 

Gold and silver stocks are earning big profits with prevailing gold and silver prices so high.  We’ve been buying high-potential small miners in recent months that actually had P/E ratios around 10x earnings!  All the anti-gold-stock arguments emotional investors are using to attempt to justify their own fear are unfounded rationalizations.  The majority always hates and argues against heavily beaten-down sectors.

 

But contrarians don’t blindly buy into conventional wisdom, we have to do our own research in order to be brave and tough enough to buy low when few others will.  And not only does the HGR now reveal one of the best contrarian gold-stock buying opportunities since 2008’s crazy stock panic, the gold-stock performance trends are already subtly improving.  This final HGR chart zooms into just the post-panic period.

Zeal011813B

 

After the HGR plunged to panic levels during this past spring’s brutal gold-stock capitulation, it has since been bottoming and climbing.  There is a new support line buttressed in the last couple months, an HGR uptrend that is holding despite the rotten psychology plaguing gold since late November.  Even with the incredible bearishness permeating this sector, the HGR has risen on balance for over 8 months now.

 

Note above that this is easily the longest period of gold-stock outperformance relative to gold since the HGR’s post-panic uptrend failed back in mid-2011.  Psychology is stealthily changing in gold-stock land.  The vast majority of the older emotional investors who drove this sector’s recent capitulation are gone, leaving newer stronger investors who better understand the bullish fundamentals of gold and gold stocks.

 

So even as gold weathered heavy fund selling in recent months triggered by fiscal-cliff tax-hike fears, the beaten-down HUI largely held its own.  Gold stocks have certainly been weak, but nowhere near as weak as they could have been in light of the relentless gold selling.  A new cadre of contrarian investors has been establishing positions in gold stocks with their recent panic-like prices, buying low and holding.

 

And we are certainly among them.  It isn’t easy psychologically buying gold stocks near panic levels relative to gold, but that is the contrarian path to huge future gains.  It is kind of funny too, as the anti-gold-stock crowd often looks no farther than the HUI to claim gold stocks are garbage.  But we are already enjoying solid gains in many of our trades despite the headline HUI lollygagging along near support.

 

Even this week with the HUI merely near 430, we are seeing great gains in some of our elite gold and silver stocks.  A silver stock we bought in May had 57% unrealized gains.  A gold stock we bought in late July was already up 125%.  And a couple silver juniors we only bought in mid-December were already both up over 40%.  Buying low when stocks are wildly unpopular starts yielding gains well before the crowd catches on!

 

If gold-stock fundamentals reassert themselves as they ought to, if the gold-miner stock prices ultimately reflect their underlying profits streams driven by prevailing gold prices, then sooner or later enough new investors will enter this sector to catapult the HUI back to its pre-panic relationship relative to gold.  That was that 5-year secular-average HGR.  This second chart shows where the HUI would be at 0.511x the price of gold.

 

It’s the yellow line above.  At today’s gold prices, which most investors have conditioned themselves to believe aren’t that great, the HUI would need to soar to 859 to trade at its pre-panic-average relationship with gold.  That is a double from current levels, a staggering gain!  Interestingly the gap between where the HUI is trading today and where it would be at this bull’s pre-panic-average HGR is back near panic extremes.

 

And that panic anomaly happened to be the best gold-stock buying opportunity of this entire secular bull, leading the HUI to more than quadruple in the subsequent years.  Could that happen again from the recent spring lows?  Absolutely!  Universally in the stock markets, stock prices are ultimately bid up to reflect their underlying profits.  And high gold prices drive big profits for the best gold-mining companies.

 

Importantly for this loathed sector, underlying profit fundamentals always trump sentiment in the end.  Even if most investors who once owned gold stocks are too discouraged today to ever come back, other investors will gradually learn about this sector and deploy capital in it for the first time.  New investors, led by the vanguard of brave contrarians chasing this extraordinary opportunity, will more than replace the fallen.

 

And it’s not like the gold price will be static in the coming years, its secular bull will continue powering higher on great fundamentals.  This will both accelerate the migration of new capital into gold stocks and expand their profits so they are ultimately bid to much higher levels than today’s gold prices would support.  And the elite hand-picked miners with the best fundamentals will see gains dwarfing those of the headline HUI.

 

Gold stocks today are an incredible contrarian opportunity.  I don’t know of any other sectors that are so radically undervalued, unpopular, and ripe for discovery by mainstream investors.  Sooner or later their stock prices will be bid up to reflect the large profits the high prevailing gold prices drive.  And the early contrarian investors will see massive gains, just like we did after the last time gold stocks fell so deeply out of favor.

 

If you have cultivated the mental toughness necessary to be a contrarian, you ought to join us.  At Zeal we’ve been buying elite gold and silver stocks aggressively since the spring capitulation.  We are already seeing big gains on some, even with the HUI languishing near lows.  And as the great sentiment pendulum gradually swings back from extreme fear towards extreme greed, gold-stock prices will explode higher.

 

You too can easily share in the profitable fruits of our research.  We spend months at a time researching the entire population of certain groups of stocks, like silver juniors most recently.  Then we whittle them down to our dozen fundamental favorites and profile each winner in fascinating reports.  If you want to quickly get up to speed on the high-potential gold and silver stocks with the best fundamentals, buy some reports today!

 

We also publish acclaimed weekly and monthly subscription newsletters for speculators and investors.  In them I draw on our vast experience, knowledge, wisdom, and ongoing research to explain what is going on in the markets, why, and how to capitalize on it with specific contrarian stock trades as opportunities arise.  Subscribe today and bring decades of proven contrarian acumen into your corner!

 

The bottom line is gold and silver stocks now offer one of the greatest contrarian opportunities seen in years.  Sentiment has swung so far to the fear extreme that even in the midst of a powerful secular gold bull the gold miners’ stocks have been left for dead.  A whole cottage industry has sprung up to rationalize these fears, trying to convince investors they are right in believing gold stocks are doomed.

 

But contrarians know the best times to buy low are when sectors with outstanding fundamentals slump to great unpopularity.  The markets are ever-cyclical, so sentiment extremes never last for long.  As the fear washes out old investors, new investors soon flood in to chase the resulting bargains.  This ignites major rallies that ultimately attract in mainstream investors, leading to huge gains as contrarians sell high.

 

Adam Hamilton, CPA

 

January 18, 2013

 

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 – 2013 Zeal Research (www.ZealLLC.com)

SD Bullion

    • But of course.  The paper-pushers ALWAYS issue calls to invest in paper because shuffling paper is how they make their living.  This is why virtually no brokers ever recommend physical gold or silver.  They know that: 1) they do not profit from such investments; and 2) once money leaves a paper account for physical metals investments, it rarely, if ever, returns.  It is, essentially, a permanent pay cut for these folks.
       
      As to gold stocks… there have been times in US history when the gold stocks have out-performed gold itself and quite handily.  This occurs because a small increase in the price of gold can cause a substantial increase in the profitability of the companies that produce it.  That said, those times occurred many years ago when the US economy and stock market were vastly different than they are today.  We all have been hearing for years now that gold stocks will outperform gold and that if we want to profit handsomely, we need to buy gold stocks.  Unfortunately, these gold stocks just keep getting cheaper and cheaper.  A lot of people who bought into the “buy gold stocks” mantra have lost beau-coup money.  Those who invested in gold, on the other hand, have not.  There very well may come a time when once again gold stocks roar past gold but there is no way to know when or even if this will actually happen.  Because of this, buying physical gold and silver seems a MUCH safer investment. 

  1. Gold stocks, gold stocks, gold stocks……….BALDERDASH! Where in all this is the actual phyzz? The true contrarian metal investor holds it in their posession! The only way you make money in paper is by trusting the system and what system can be trusted today? That is exactly why phyzz is the contrarian’s best friend. Ask Gerald Celente about his gold contracts with MF Global and if he ever saw either the money he made or even the money he laid on the table to invest. Total bust for him and any who chance paper promises. Buy the metal!!!!!!!!!

    • I agree with your comments but have read that Celente, like most other MF Global clients, have received payment of some of the assets from the bankruptcy liquidation.  I don’t know if that process is continuing or not.  Such things often drag on for years, primarily not because the law is confusing but because lawyers tend to be paid by the hour rather than by the task.  Because of this, Celente and others have not lost everything but they have incurred losses.  I read one estimate that said that clients have been reimbursed about 70% of the value of their accounts.  None of them got anything for the rise in gold prices between the time when their accounts were locked up and when the assets of MF Global began the liquidation process.
       
      Personally, it is my belief, although I have no evidence but it fits the character of people like Masters, Dimon, and Corzine, that more MF Global clients had filed for delivery of the metals in their contracts than the COMEX could meet.  What to do?  OK, MFG MUST be sacrificed so that the COMEX is not bankrupted by a failure to deliver incident.  Had this occurred, not even the illusion of gold and silver being available via settling futures contracts would have remained.  The scam would have been laid completely bare and there would be a MASS exodus from the metals futures markets and possibly other futures markets as well.  This would then have caused a cascade failure in the derivatives markets, bringing down the entire world financial system.  It HAD to be avoided AT ANY COST and the collapse of MFG was the cheapest price they could pay, so that’s what happened.  All IMHO, of course.
       
      Events similar to MFG have occurred with PFG-Best and with Sentinel.  While PFG-Best seems to be more a case of outright theft of client assets, Sentinel is a particularly disturbing case because the courts seem to have held that the unauthorized use of client funds to avoid company bankruptcy is not a case of fraud and that Sentinel actually acted in the best interests of their company and their clients by preserving the company.  At least, that is my read on it.  If this is not successfully appealed, it could significantly damage personal property rights in this country because ANY financial institution or company could invoke this case, grab money and other assets that do not belong to them, and use them for company purposes.  If they did this, saved the company, and repaid the clients that would be one thing.  But what if the company fails anyway and all assets are lost?  Too bad, so sad for the clients!  This case seems to be the greatest example of law gone rogue and is all the proof that anyone needs to support the idea that “if you don’t hold it, you don’t own it”.  This is why those who invest in company stocks would be very well advised to hold those stock certificates in hand and in their own name and not allow them to be held by their broker in street name.  If the broker does not hold it, they can’t steal it.
       

  2. Well you guys just bust my bubble. I read the article and I was starting to daydream a little off wealth in buying a few thousand in mining stocks which I have never done before only physical, when the PM’S go up so does stocks, (my thoughts). Then I read your comments and brought me back to reality of stacking the physical. LMAO
    But lordy, lordy, I’m still thinking of it. Lol @SRSrocco can we get your take on this please.
     
     

  3. I agree with the above comments.  If you are going to exit the ponzi, then exit.  Don’t get sucked back into the casino.  The metals have a 5000+ year history of wealth preservation.  This market, which these mining companies are a part of, is managed, manipulated, and a fraud.  Why would you want to be a part of it, again?  Until the fraud it banished from the markets, stay out!  That’s my pre-1965 dime’s worth of opinion.

  4. Like the ‘pro’ from Peru, I’m sitting on my money maker, a nice stack.
    The problems with miner stocks IMO, aside from being a paper investment, are the dynamics of each mine’s financial situation. These are determined by forces that are almost completely outside their control. Any firm that produces a commodity is a price taker, not a price maker. A company that produces something everyone needs, like food, can rely on people’s needs to fill their stomachs, yielding a steady earnings growth. Miners are not so fortunate thus are normally too risky for the average investor.

    • Agreed, AG.  Not only that but because of all the possible problems that miners can have, it can be very difficult to ascertain their value and when they are good, reasonable, or bad buys.  This can change rather suddenly too, such as when a rich ore vein is discovered or peters out, when countries start making nationalization noises, when mine employees strike, when a mine becomes unexpectedly flooded, etc.  Money CAN be made in these stocks.  I have no doubt of that at all, but it can also be lost quite easily.  I could see someone putting a small percentage of their investment money into them but not a major portion. 

    • Never really left Charlie, been reading most everything, not all of it,  just staying away from the infighting and will be throwing in a comment or two when I think there is something to say.

  5. Gold and silver juniors are a no brainer at these prices. I have already had buyouts with 30% to 100% profit on 2 in my basket since I bought the basket last summer. I would stick with the physical ETFs like Sprott if the historical ratio between miners and physical was more reasonable. I have some physical gold and silver but find silver much to bulky to store for the dollars i have invested.

    • I have found that after 36+ years as a successful investor, no-brainer situations are best avoided because they can make sudden and adverse turns that can make one’s head spin.  It takes every bit of brain I can manage to make money in the markets, especially these days.  Glad to hear that it is working out for you.  I hope that it continues to do so.  Keep your stops close.
       
      Agree on the bulk of silver being a problem.  My stash is out-growing my safe and buying another safe seems imminent.  It is one thing to have up to a couple of hundred ounces that can be stashed easily but when one is approaching 1500 or so ounces, things begin to get a little dicey in the storage volume department.  Buying some gold could reduce this problem, though.  Still, silver looks really good to me over the next several years.  I fully expect the gold / silver ratio to drop considerably.  If it does, then a trade of silver for gold could be good, both for long-term investment as well as space saving benefits.
       

  6. Plot the GDXJ against bullion on stockcharts and see if this is a no brainer. Over the course of the precious metals bull (until a new monetary system is in place) the juniors will have to regain some of their distance from bullion.
    With the large basket(+/- 40) I don’t bother with stops and exit any that begin to outperform the index to be replaced with better values. Lots of fun checking out book values, total resources, etc. I especially like the ones that have both gold and silver deposits.
    These are traded on the TSX and Vancouver exchanges and I suspect a lot of them would not be avaiable to U.S. investors. 
     

  7. Paper, paper, paper, that won’t be worth wiping with if things collapse. I will stick to physical. The derivatives bubble is about to burst and when it does the entire world banking system is going down.

  8. Okay it is paper…and while I hold very little in the way of Gold stocks and only a slighly larger amount of Silver shares…last week I bought some shares of Stillwater (SWC) expressly because I wanted exposure to Platinum and Palladium….Metals I have zero of…
    Am I off my rocker???

    • Exposer to platinum, at the current gold/platinum ratio is a good thing.  It just caught back up to gold recently.  As long as the ponzi holds together and it’s not your core holdings, it should be a good bet. Myself, I am quite content to be completly out of their system. 

    • No, that could work out.  I bought shares of the ETF PPLT when platinum hit $1400 an oz.  Each share represents about 1/10th of an oz. of metal and the ETF is independently audited so that the share to ounce of metal ratio is maintained.  Yes, it IS a paper investment but it also has a fat gain that I will harvest one of these days and then buy more phyzz with the profits.  The really sweet part of this is that these shares were purchased in a Roth IRA, so no jingle for Uncle Sugar.  :-D

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