I don’t think most investors realize what kind of sea change is taking place in the gold stocks sector right now.
It’s a process that can turn gold stocks into one of the most stable cash flow cows… in the history of investing.
The world gold market is in a state of transition. It’s transitioning from a Western fear trade orientation, to an Eastern love trade orientation, and thus gold is on the cusp of a “bull era”.
A “bull era” is clearly here. Chinese banks are mandated by the Chinese government to promote gold in a positive way.
The world’s largest banks dominate gold trading. They are the “commercials”, and it’s clear they have been very aggressive buyers into the tail end of gold’s seasonal weakness.
Today’s FOMC announcement could lay the foundation for a multi-month rally in gold, silver, and mining stocks.
India is the world’s main market for silver, and demand shrivels a bit during the May – June time-frame.
As a result, the silver price usually swoons, and frustrated investors can make irrational statements about this mighty metal.
It’s just a seasonal swoon, like an ocean tide change. The silver price tide will come back stronger than ever, because demand from the Hindu religion is cyclical and inelastic.
The bottom seasonal line: Eager gold and silver price enthusiasts should expect a major rally to begin in about two weeks, and continue for several months.
Today is gold options expiry day on the COMEX. As expiry day approaches, gold has a tendency to trade sideways to lower.
The most successful investor now is the one who dials down their obsession with predicting the next price move, and simply pours themselves a glass of fine bull era infrastructure construction wine.
The 2008 crisis saw the Fed use some of its tools, but not all of them.
The Fed’s most powerful tools, gold revaluation and money printing, were never employed in that crisis.
QE4, if used to fund government infrastructure spending, can be inflationary, but if the next crisis is severe, only gold revaluation will work to end it.
When some individual gold stocks rise by 100% – 400% in just four months, investors can begin to feel it’s a stock picker’s market. While the best stocks will always produce bigger returns than the worst ones in any sector, I think what is occurring in the precious metal stocks is something very much “bigger”.
There are three powerful forces coming together that could soon create “upside thunder” across the entire gold stocks sector:
The big action now, is not in the US stock or bond markets, and it’s not in gold and silver bullion.
It’s in gold and silver stocks.
Fear trade enthusiasts should keep a close eye on the actions of the PBOC (China’s central bank). Most major actions of the PBOC are not related to the love trade. They’re related to the fear trade.
A growing Chinese QE program, a possible announcement of higher official gold reserves, and/or a public endorsement of gold by the PBOC could create a very powerful rally in gold, and an even bigger one in gold stocks!
If China engages in a major QE program, its stock market could soar higher for years, and citizens would celebrate by buying vastly more gold jewellery.
Nothing the Fed does in its meeting this week will change Apple’s plans for massive sales growth in China, and nor will it change the insatiable and exponentially growing appetite of Chinese citizens to own a lot more gold.
The rise in the stock market is creating a lot of wealth for Chinese investors, and they are celebrating by buying gold jewellery. The first issue of the Apple gold watch sold out in less than an hour in Chinese stores!
Over the next two to three years, Apple will likely need substantial amounts of gold to meet the massive demand for its gold watches. Each watch is made with about two ounces of gold.
Below is a daily chart for ZiJin Mining, the largest gold mining company in China. I own the stock, and I’m an eager buyer of much more stock, on every 25 cent decline in the price.
This great company is clearly poised to be a leader in the gold jewellery oriented “bull era”.
The love trade in China and India has experienced astronomical growth in the past several years, as signs of wage price inflation in America are appearing.
These two events are highly supportive for gold prices. With all due respect, most of the amateur analysts still regularly drawing arrows to Pluto or Hades on their gold charts may need to take a large “chill pill”.
Here’s one reason why:
The latest US jobs report has stunned most analysts, with its dramatic weakness. Most investors in the Western gold community are nervous about rate hikes, and this report supposedly gives the average gold investor a little breathing room.
I beg to differ. In the current situation, rate hikes are not bearish for gold prices.
They’re BULLISH, and here’s why:
Bloomberg reports that investor short positions are now at the highest levels since 2006.
Incredibly, retail investor short positions on the COMEX, are now larger than their long positions!
Clearly, the gold market window is open, for a violent short covering rally!
On March 20, 2015, global gold price discovery changed. Transparency was introduced to the London gold market, as the new “LBMA Gold Price” was launched.
Now, the Eastern love trade is starting to overwhelm the Western fear trade. It’s a theme that will probably accelerate very dramatically in the second half of this year.
Without the Eastern love trade, gold probably would trade in the $700 – $1000 area, if another financial crisis didn’t occur. That’s because Western fear traders simply don’t buy enough tonnage to overwhelm mine and scrap supply, except in the most extreme and temporary situations.
In contrast, the Eastern love trade should produce consistent 5% – 15% annual gold price appreciation, with very limited volatility, for decades to come.
I expect to see gold stocks make a “stealth” change over the next 1 -2 years, from being the most hated asset class in the world, to one of the most respected.
The FOMC meeting looms ahead, as the main driver of global gold prices, in the short term. The policy announcement will be made at about 2PM on Wednesday, and most analysts believe Janet Yellen will remove the word “patience” from the Fed’s position on interest rate hikes.
My analysis suggests gold could trade down to $1095, if the Fed removes the word “patience”, and from there a major trade-able rally would begin.
I’m hard pressed to remember a time where the morale of the Western gold community was much lower than it is now.
Regardless, some very good technical and fundamental news for gold enthusiasts has suddenly appeared.
Is the greatest gold rally in years on the horizon?
Below is a nice snapshot of the latest COT report for gold. The commercial traders (banks) have been sizable buyers of gold, into the current price decline.
It appears they are betting on a duties cut in the Indian budget, but whatever the reason is for their current buy program, the commercial traders have a winning track record. Amateur investors who are shorting gold now, are essentially taking the other side of that trade.
That’s a dangerous and reckless approach to take in the gold market. As the Indian budget is released, the bearish amateur traders are at great risk of receiving a serious financial beating!
Gold could make a new low in 2015, while Janet hikes rates, the dollar rallies, and gold stocks surge higher…
Most gold analysts are vastly underestimating the importance of the titanic changes taking place in the world gold market.
In the big picture, 2015 is likely to go down in history as the year that transparent and legitimate price discovery returned to gold.
All gold community eyes should be on the month of March, for three key reasons:
Gold is off to a great start in 2015. The daily gold chart looks superb!
Gold is arguably already fundamentally stronger and more stable now, than at any point of time in world history, and silver looks even better!
I see much more gold-positive news coming out of both China and India in 2015. If India chops the import duties in the upcoming budget (roughly scheduled for February 28), there’s a good chance that gold stages steady price advances against the dollar, during every single calendar month of this year.