The world’s financial markets are changing dramatically with the Federal Reserve on the verge of ending its third quantitative-easing campaign. The Fed’s massive deluge of inflation drastically distorted markets, which are finally starting to normalize. The precious metals were crushed by the Fed’s artificial levitation of the stock markets, leading to extreme futures shorting. But that looks to have peaked, a very bullish omen.
The US dollar has relentlessly blasted higher in recent months, achieving its longest consecutive-week rally in history. Speculators have flooded into the world’s reserve currency for a variety of reasons, ranging from Federal Reserve rate-hike hopes to festering Eurozone worries.
But the resulting massive dollar surge has left it super-overbought while breeding universal bullishness, the precursors to a sharp selloff.
Nevada is well known as the United States’ top gold-mining jurisdiction. The numerous mines within its massive gold trends combined to produce a whopping 5.4m ounces in 2013, which accounted for 74% of total domestic output. This output ranks Nevada as the world’s fourth-largest gold producer, behind only the countries of China, Australia, and Russia.
With Nevada’s geopolitically-stable mild desert region pumping out more gold than global juggernauts South Africa, Peru, and Canada, it is naturally a top destination for mining companies looking to hit it big.
And an emerging producer has hit the trifecta with a trio of advanced-stage projects poised to add to Nevada’s gold-mine tally.
Since early 2013 the US stock markets have done nothing but rally, levitating thanks to the Fed’s oft-implied backstop. This incredibly unnatural behavior has left sentiment dangerously unbalanced, with hyper-complacency and euphoria running rampant. Only a major selloff can restore normal psychology.
And with the Fed’s third quantitative-easing campaign ending, odds are high such a big downside event looms.
Gold stocks have plunged in September, crushed by the withering selling pressure from heavy futures shorting hammering gold. As usual, these falling prices have kindled extreme bearishness on this left-for-dead sector.
But despite this rotten sentiment, gold stocks’ young upleg remains very much intact technically.
This impressive resiliency is fueled by these miners’ incredibly-cheap fundamental valuations.
Gold and silver have been pounded lower over the past month, contrary to their bullish seasonals. This selling pressure has come from the usual suspects, American futures speculators. They’ve been busy aggressively dumping gold and silver futures, particularly on the short side. But each time they pressed this bet in the past 15 months, gold soon surged higher.
Shorts are bullish since they must soon be covered.
Silver has also seen a huge spike in speculator shorting, raising the odds it too is on the verge of its own parallel short-covering rally when gold’s starts.
The Federal Reserve’s third quantitative-easing campaign is on track to wind down in late October. At that point the Fed will likely stop printing new money to buy bonds, a sea-change shift with ominous implications for the stock markets. Their entire surreal levitation during QE3 mirrored the huge growth in the Fed’s balance sheet from QE3’s bond monetizations. When they cease, another major selloff is likely.
Prudent investors and speculators today don’t have to guess about what the end of QE3 means for the lofty Fed-inflated US stock markets. We have the precedent of the ends of QE1 and QE2. This next chart looks at the flagship S&P 500 stock index superimposed over the Fed’s balance sheet.
And out of all the many thousands of charts I’ve created over the years, this probably tops the heap as the scariest.
The gold stocks are almost certainly in the early stages of a major new upleg. Given the widespread apathy and antipathy still plaguing this beaten-down sector, that’s hard for most traders to swallow. But the gold stocks’ performance this year has already been outstanding.
And heading into gold’s strong season, their gains should only accelerate.
Gold stocks’ overdue mean reversion higher is well underway.
(Editor note: the question is where will GLD find the physical gold to replace the inventory that was sucked East in 2013?)
The mighty GLD gold ETF’s bullion holdings have remained stable in 2014, an impressive feat. Last year they suffered an epic outlying record plummet as the Fed’s stock-market levitation sucked capital out of alternative investments. (and as the East sucked every ounce of AU out of the vaults)
This year’s resiliency in the face of the ongoing stock-market melt-up almost certainly means the bottom is in. GLD’s holdings are set to surge as weaker stock markets entice traders back.
Gold stocks have surged dramatically in recent weeks, defying the odds to catch a serious bid.
Extreme bearishness still plagues this sector, which is certainly the most despised in all the stock markets.
So why are investors returning? The universally-hated gold stocks are absurdly cheap, easily the greatest bargains anywhere. And after a long year of basing, they are finally breaking out relative to the gold price.
The US stock markets’ Fed-driven melt-up has accelerated again in recent weeks, with a string of new nominal record highs. This has reignited truly extraordinary levels of greed, euphoria, and complacency.
But for traders who have witnessed past bull toppings, there is an ominous sense of deja vu.
It turns out this past year’s strong stock-market action nearly perfectly matches that leading into the last bull-market top in 2007.
Today’s stock markets look exactly like a bull topping.
The current crazy/frustrating/scary/pick-your-expletive level of instability in today’s market is actually GOOD news.
The disconnect between financial asset prices and fundamentals simply must — per the laws of Nature — resolve itself.
And given the interruption-free 45-degree ramp the markets have experienced since 2009, we can definitively say that we are closer to the coming correction than we have been at any time in the past half-decade .
The bullet has been dodged for five straight years — given the instability and the inevitability, how much longer can it be dodged? Not for long, is our conclusion. And given the uninterrupted rise to record highs, the potential energy stored in the system now should be much more kinetically destructive than it would have been had it happened sooner.
So, we are at a time in the markets when confidence is high that a big move will happen soon, and happen to the downside.
The precious metals plunged last week, knifing through key support zones to unleash an explosion of bearish sentiment. This troubling heavy selling wasn’t news-driven, it emerged out of the blue. Who was dumping gold and why? Later data confirmed it was American futures speculators short selling gold and silver at record levels.
Extreme shorting is very bullish, as these bets soon have to be covered.
Mexico has been a popular destination for mining companies seeking out their fortunes amidst gold’s secular bull market.
And considering the huge lack of modern exploration across its rich precious-metals belts, some of the first movers like Alamos Gold have found smashing success.
The lofty US stock markets have stalled out, looking more and more top-heavy with each passing day. This is spawning growing unease among prudent investors, who sense the long-overdue major selloff is nearing. Many are seeking shelter in sectors they hope will weather the storm. And energy stocks, with their lower valuations, are a leading one. Unfortunately history proves they too offer no refuge in stock bears.