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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

Are You Prepared?

On Nov. 8, 2017, Lupaka Gold Corp. (TSX-V: LPK) received $2 million to further advance its Invicta Gold Project in Peru. This funding was Tranche 2 of the forward gold purchase agreement with Pandion Mine Finance (PLI). This is an important step on the path to production for Lupaka and is an effective alternative to equity financing that links success to production not just share price appreciation.

The receipt of this money satisfied the company’s agreement with Pandion to register the Lacsanga Community Agreement in the Public Registry system in Peru, which was completed on Nov. 6, 2017. These funds will partially go towards the widening of the road up to the site which the company hopes to complete before the rainy season in Peru.

With the registration of the Lacsanga Community Agreement now complete, the only significant conditions remaining to be completed in order to receive Tranche 3 are the requirements to put a mineral offtake agreement in place and to raise an additional US $2 million from other sources.

To meet the conditions for third and final tranche, the company entered into an agreement to sell the Crucero Gold Project to GoldMining Inc. (TSX-V: GOLD) for total approximately $6 million ($750,000 in cash and 3,500,000 shares of GoldMining).

The prepaid forward gold purchase deal with Pandion was announced at the end of June and is an attractive way to finance Lupaka’s Peruvian development project because it is non-dilutive to shareholders and has a fixed end-date.

In an interview earlier this year in the Northern Miner, Chairman of Lupaka Gold Gold Ellis outlined the strategy and benefits of this agreement.

“This is not a royalty agreement that goes on forever…We don’t pay anything for the first 15 months and we only pay them a small percent of what we produce for the next 45 months, and we’re done. It’s gone, it’s clean, there is no residual.”

Furthermore the agreement allows for a 15-month payment holiday which is important as it allows Lupaka the ability to complete development of the mine and ramp up cash flow before having to make any gold repayments.

A prepaid commodity forward agreement is where a buyer agrees to purchase a certain quality and quantity of a commodity from a producer in exchange for an upfront payment. In short, the buyer is acting as a lender in the sense that it is providing money up-front in exchange for future production.

Getting up and running will not be as onerous as other development mining projects as the company plans on using contract miners, contract trucking, and using toll milling facilities.

Tying financing to certain conditions and goals is an excellent way to ensure capital is not wasted on “general corporate purposes” plus tying financing to production is a great way to avoid dilution for shareholders. Lupaka Gold is on the path to production with a clear vision of how to fund and become the next producing mine in Peru.

Bonterra Resources, Inc. (Bonterra) was a story I wanted to bring to your attention a few years back but it rose in price so rapidly I left it behind in favor of others that appeared to offer better price-to-value opportunities at that time. However, based on the company’s aggressive drill program this year, which will continue aggressively through the winter months with six drills turning, Bonterra should soon be reporting a dramatic increase from its Gladiator Deposit in Quebec. In addition, its secondary project, the Larder Lake Deposit in Ontario, which has a resource of 917,000 ounces of gold grading 5.55 g/t, should also increase in size simply by factoring in past drill data that had not been factored into the existing resource. So Bonterra has two very worthwhile projects. But with the magnitude of success on the Gladiator Project, management is focusing its resources there for the time being. When tax loss selling is out of the way and as we enter a new year, I believe Bonterra’s shares have the potential to double or triple from their current level through 2018.

The Gladiator Deposit

The reason I am so optimistic about this company’s shares is because I’m convinced the Gladiator Deposit is going to become much larger than the current 273,000 ounces grading 9.37 g/t. I say that because the existing resource is based on a strike length of 200 meters to a depth of 200 meters. Ongoing drilling since then has expanded the dimensions of gold mineralization over 1.2 km to a depth of 1,000 meters in this high-grade multiple vein system. At this stage, six vein sets have been identified and this mineralization is open along strike at below the 1,000 meters intercepted to date. The grades remain high and mining widths are good. In addition, management states that this steeply dipping mineralized system with sharp contacts have excellent rock mechanics for underground mining.

In its latest press release relating to the Gladiator deposit, management reported that it has extended these multiple gold zones by an additional 300 meters along strike and to depth by another 300 meters, thus expanding the deposit to its current size of 1.2 km along strike by 1 km at depth. But with the deposit remaining open at depth and along strike, and with drilling taking place all through the winter, investors should have a lot to look forward to in the way of high-grade assays and eventually a new, much larger high-grade gold deposit at Gladiator.

Ongoing drill success has not only confirmed continuity of gold mineralization along strike and at depth as drilling moves westward, but management believes that its geological model is proving to be very dependable in predicting the location of mineralization. Moreover, management stated in its last press release that “Our geological model has demonstrated additional success up to eight km westward, in the southern part of our Coliseum property.” (Note the green circles to the northeast and in particular to the southwest of the growing Gladiator Gold Deposit. Also note the three assays denoted by yellow stars in the illustration below with nice grades of gold and one with 44.6 g/t silver.)

As you can see from the illustration above, mineralization either from surface samples or drill holes has been traced from about 4 km west of the existing deposit for another 6 km along trend to the southwest. It’s my understanding that some drilling will take place in this area during the winter when this marshland freezes over. I don’t expect any drilling to add to the existing resource when a new resource is announced in mid 2018. But it clearly provides a potentially large blue-sky prospect toward the end of 2018 and into 2019.

What might the picture above left mean in terms of a gold resource at the Gladiator Project? The initial resource of 273,000 ounces was calculated from a small area measuring 200 by 200 meters denoted by the very dense areas of drilling pictured toward the top of the mineralized zone. With ongoing drill assays holding with the 9.37-g/t grade in the maiden resource, I believe it is fairly safe to get an idea of the extent of gold mineralization through extrapolating a value in line with the increased dimensions known to date, to something like 2.7 million ounces. I’m not saying enough drilling will be carried out to meet 43-101 specifications. But by the end of this drill season through the end of March 2018, some 40,000 more meters of drilling beyond those shown in the diagram above will have been drilled, leaving the total drill program this year for the Gladiator at 60,000 or 65,000 meters.

The bottom line for me is that Bonterra is on to a multimillion-ounce high-grade discovery. While the several veins that host the gold are too far apart to be mined together, the high grade of these veins means that the amount of ounces per vertical depth is very high, which is an important economic consideration. Also positive for the economics is the fact that mining widths are a reasonably good 2½ to 3 meters, and they begin on surface. So while access is likely to be via a ramp, the cost of ramping down to pay dirt shouldn’t be overly expensive.

Regarding metallurgy, a standard milling operation is anticipated. At this time or in the very near future, a more specific recovery process will be determined from wide core drill samples that will be drilled solely for that purpose. As far as infrastructure and geopolitical jurisdiction, it doesn’t get much better than operating in the Abitibi Gold Belt of Quebec. All of what I can see for now bodes well for a gold deposit considerably in excess of this company’s current market cap likely being developed.

Larder Lake

The first illustration shown on this report under the stock chart is a map showing the Gladiator Property in Quebec and the Larder Lake Property across the border in Ontario. This project has a 43-101 resource of 43,800 ounces in the indicated category grading 4.07 g/t and an inferred resource of 917,000 ounce grading 5.55 g/t. Although this project actually has more ounces than the Gladiator, management has prioritized and stayed focused on the higher-grade Gladiator. But make no mistake. Larder Lake is a very strong project. In fact, it is my understanding that the ounces on this project will likely grow without putting another drill hole down because there is a large amount of drill core previously drilled by Goldfields that Bonterra is in possession of that has been assayed but never factored into the existing resource. With management’s focus strictly on Larder Lake in quest for a multimillion-ounce high-grade gold deposit, I’m not sure when this project will be worked on in a serious manner. But it’s a very good second project that, as long as the bull market persists, is an asset worth holding.

MANAGEMENT

Nav Dhaliwal, President & Chief Executive Officer – Mr. Dhaliwal brings a wealth of entrepreneurial, sales, and financing experience. He is particularly adept at nurturing early stage companies through their critical phases of evolution, having founded a number of companies over his career. Mr. Dhaliwal is also very experienced in corporate development, corporate communications and investor relations, bringing valuable business relationships with international analysts, brokers and investment bankers from Canada, the United States and Asia.

Dale Ginn, B.Sc., P.Geo., VP of Exploration & Director – Mr. Ginn is an experienced mining executive and geologist of nearly 30 years. He is the founder of a number of exploration and mining companies and has led and participated in numerous gold and base metal discoveries, many of which are in production today. While specializing in complex, structurally-controlled gold deposits, he also has extensive mine-operations, development and startup experience. Mr. Ginn is recognized as an advocate of First Nations and local community participation in mining and exploration.

Mr. Ginn’s career has included mine and exploration geology, mine management and various executive roles. Dale has held senior positions with Sprott Mining, Jerritt Canyon Gold and was a founder of San Gold Corporation. Prior to that, he held positions with Harmony Gold Mining, Hudbay, Westmin, Goldcorp and Granges Exploration. Mr. Ginn is a registered professional geologist in Manitoba and Ontario and is a graduate of the University of Manitoba.

Richard Boulay, B.Sc, Director – Over 40 years of experience in the exploration and mining industries in Canada and internationally, including 15 years of mining and infrastructure financing experience gained with Bank of Montreal, Royal Bank of Canada and Bank of Tokyo. He has extensive experience in the management and financing of public companies in Canada and the United States. He is a also a Director of Moneta Porcupine and Latin American Minerals Inc.

Robert Gagnon, Geo., Director, Mr. Gagnon has +10 Years as a professional geologist, earning his Mining Techniques Diploma from the Collège de la Région de l’Amiante (1995) . Ordre des géologues du Québec (circa 2002), Board of Directors of the Quebec Mineral Exploration Association (circa 2009). President of the Association des prospecteurs du Nord du Québec (circa 2012) BSc., Geology from the University of Quebec (1999)

Joseph Meagher, Chief Financial Officer & Director – Mr. Meagher is a Director at Triumvirate Consulting Corp., a financial consulting firm, where he specializes in accounting and financial reporting. Mr. Meagher currently serves as the Chief Financial Officer and a Director for several publicly listed companies. Prior to joining Triumvirate, Mr. Meagher worked at Smythe Ratcliffe LLP as a manager focusing on publicly listed and private company audits, as well as staff training and development. He was a member of Smythe Ratcliffe’s IFRS conversion team as well as a technical reviewer for complex accounting topics. Mr. Meagher holds a CPA, CA designation and a Bachelor of Commerce from the University of British Columbia.

Allan J. Folk, Director – Mr. Folk brings over 35 years of extensive leadership experience in the Canadian mining finance industry. During his career, he has financed and advised both junior and advanced Canadian companies at the senior board or executive level. Mr. Folk is a graduate of the University of Wisconsin, and currently is Vice President of Brant Securities Ltd. He is also a director of Barkerville Gold Mines Ltd., Interim CEO of Monarca Minerals Inc. and is the Chairman of Atlanta Gold Inc.

THE BOTTOM LINE

Having a high regard for the geological and exploration skills of geologist Dale Ginn, I wanted to follow this company when the markets turned in early 2016. Some good drill results early in that year drove the stock to levels that made it less attractive at the time compared to some others stories I was following. So I put Bonterra on the back burner. However, given the fact that the stock has not risen much at all despite the fact that so much has been accomplished since early 2016, I view this as a good time to pick up shares. By mid 2018, I anticipate a 2+ million-ounce high-grade deposit will have been outlined with the potential for much more upside from the new discoveries along trend to the southwest.

I believe a very strong high-grade underground mine at Gladiator is in the making. But that does not dismiss the company’s second very good asset, the Larder Lake Project, which will likely rise well over 1 million ounces once the Goldfields data is baked into the resource. With a lot of drill results to be reported between now and mid 2018 when a new and much larger resource will be reported, and with no need to raise additional capital until a new resource is reported, I believe this is a stock you may want to pay attention to, and pick up some shares during this period of weakness due to tax loss selling.

Business: Exploration and development of gold mining projects in Quebec and Ontario

Traded Toronto: BTR

USOTC: BONXF

Price 11/3/17: US$0.36

Shares Outstanding: 161.8 million

Market Cap: US$58.2 million

Insiders & Institutional Holdings: ~44%

Eric Sprott 5%
Kinross 5%
Kirkland Lake 5%
Van Eck Gold Fund 5%
Osisko Gold Royalty 0%

Progress Rating: A3

Telephone: 604 678 5308

Website: www.Bonterraresources.com

________

J Taylor’s Gold, Energy & Tech Stocks (JTGETS), is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA), Tel.: (718) 457-1426. Website: www.miningstocks.com. THMA provides investment ideas solely on a paid subscription basis. Companies are selected for presentation in JTGETS strictly on their merits as perceived by THMA. No fee is charged to the company for inclusion. The currency used in this publication is the U.S. dollar unless otherwise noted. The material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information contained herein is based on sources, which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available information. Any opinions expressed are subject to change without notice. The editor, his family and associates and THMA are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein. No statement or expression of any opinions contained in this report constitutes an offer to buy or sell the shares of the company mentioned above. Under copyright law, and upon their request companies mentioned in JTGETS, from time to time pay THMA a fee of $250 to $500 per page for the right to reprint articles that are otherwise restricted solely for the benefit of paid subscribers to JTGETS.

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Gold has largely been drifting sideways for the better part of a couple months now, sapping enthusiasm. Gold investment demand has stalled due to extreme stock-market euphoria. Investors aren’t interested in alternative investments led by gold when stocks seemingly do nothing but rally indefinitely. But once stock-market volatility inevitably returns, so will gold investment demand which fuels major gold uplegs.

Like nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows. When investors are buying gold in a meaningful way, demand exceeds supply which drives gold’s price higher. When they’re materially selling, supply trumps demand thus gold’s price naturally retreats. The past couple months have been stuck in the middle, with gold investment flows neutral on balance.

The World Gold Council is the leading authority on global gold supply and demand, publishing quarterly Gold Demand Trends reports that offer the best fundamental reads available on the gold markets. The latest Q3’17 GDT was just released early yesterday morning. While it doesn’t cover the ongoing Q4 where gold is drifting, it does offer great insights into what’s happening with gold investment demand.

Overall world gold demand was quite weak in Q3, dropping 8.6% YoY to 915.0 metric tons. That made for an 86.1t absolute drop. Investment demand, though it only accounted for just over a quarter of the total, was responsible for this entire demand decline. Gold investment demand plunged 27.9% YoY in Q3, or 93.4t! The WGC further breaks down that category into bar-and-coin demand and ETF demand.

The traditional physical-bar-and-coin gold demand was actually quite strong in Q3, surging 16.9% YoY to 222.3t. That’s up a healthy 32.1t YoY. But the stock-market gold demand via exchange-traded funds far more than offset this, plummeting an astounding 86.9% YoY or 125.4t! If ETF demand had been stable in Q3, overall global gold demand would’ve climbed a healthy 3.9% YoY. Gold has stalled because of ETFs.

Gold exchange-traded funds act as conduits enabling vast amounts of stock-market capital to slosh into and out of physical gold bullion. These big changes in collective buying or selling really move gold. Since the gold ETFs seek to mirror the underlying gold price, they have to shunt excess ETF-share supply or demand directly into actual gold bars. There’s no other way for gold ETFs to successfully track their metal.

The world’s leading and dominant gold ETF is the venerable American GLD SPDR Gold Shares. Every quarter the World Gold Council also ranks the world’s top-ten gold ETFs. At the end of Q3, GLD alone accounted for a whopping 36.9% of their total gold-bullion holdings! GLD was 3.8x larger than its next biggest competitor, which is the American IAU iShares Gold Trust. GLD is the behemoth of the gold-ETF world.

The supply and demand of GLD shares, and all gold ETFs, are totally independent from underlying gold’s own supply and demand. So when stock investors buy GLD shares faster than gold is being bought, the GLD share price starts decoupling from gold to the upside. That is unacceptable, as GLD would fail its mission to track gold. So GLD’s managers must vent this differential buying pressure directly into gold.

They do this by issuing sufficient new GLD shares to meet the excess demand. All the money raised by these GLD-share sales is then plowed into physical gold bars that very day. This mechanism enables stock-market capital to flow into physical gold. Of course this is a double-edged sword, as excess GLD-share selling pressure forces this ETF to sell real gold bars to raise the capital to buy back its share oversupply.

What American stock investors are doing with GLD shares is the primary driver of gold’s trends! GLD has grown massive since its launch 13 years ago this month, and acts as a direct pipeline into gold for the immense pools of stock-market capital. So nothing is more important for gold prices now than GLD inflows and outflows. These are very transparent, as GLD reports its physical-gold-bullion holdings daily in great detail.

I call stock-market capital inflows into GLD as evidenced by rising holdings builds, and outflows as seen by falling holdings draws. In recent years there have been plenty of quarters where GLD builds and draws accounted for the entire global change in gold demand! That wasn’t the case in Q3 though. While the world gold-ETF demand fell 125.4t YoY, GLD’s holdings were actually up 12.1t in Q3. So gold edged up 1.4%.

But if American stock investors had been buying or selling GLD shares aggressively, gold certainly would’ve risen or fallen accordingly. Gold has been drifting in recent months because GLD’s holdings are flat, with stock investors neither buying nor selling GLD shares at differential rates relative to gold. That’s why gold investment demand has stalled. GLD has grown into the tail that wags the global-gold-price dog!

Amazingly many if not most investors still don’t grasp GLD’s critical role in gold price trends. They attempt to understand today’s gold’s price action in historical pre-gold-ETF-era terms. But for better or for worse, the gold world is radically different now. GLD, and to a lesser extent the other large gold ETFs trading in foreign stock markets, changed everything. Gold investors ignoring GLD’s holdings are flying blind.

This chart drives home this critical point. It superimposes GLD’s daily physical-gold-bullion holdings in blue over the gold price in red. Carved into calendar quarters, gold’s performance in each one is noted above GLD’s quarterly holdings changes in both percentage and absolute terms. The correlation between GLD’s physical-gold-bullion holdings and gold prices is very strong. GLD capital flows explain much for gold.

Rising GLD holdings reveal stock-market capital is flowing into gold bullion via GLD, due to differential GLD-share demand. Conversely falling GLD holdings show stock-market capital coming back out of gold, thanks to differential GLD-share selling. When American stock investors are either buying or selling GLD shares at much-faster rates than gold is moving, their collective capital flows greatly impact its price.

This is readily evident in strategic and tactical terms. GLD’s holdings are highly correlated with gold price levels. American stock investors sold down GLD’s holdings in 2015, and gold fell in lockstep. But that all reversed sharply in early 2016, when stock investors flooded back into GLD which catapulted gold into a new bull. Gold kept surging as long as differential GLD-share demand persisted, then stalled when it abated.

After Trump’s surprise election win a year ago, stock investors dumped GLD shares at dizzying rates and gold plunged. Then since GLD’s holdings have largely drifted sideways on balance this year, so has gold. GLD capital flows and gold prices are joined at the hip. So what American stock investors are doing and likely to do with GLD shares collectively is absolutely critical for gaming where gold is likely heading next.

Thus the key question for gold investors is what motivates American stock investors to buy or sell GLD shares en masse? The answer is simple, stock-market fortunes. Gold is effectively the anti-stock trade since it tends to move counter to stock markets. So gold investment demand via GLD shares surges as stock markets suffer major selloffs, and withers when stock markets rally to lofty euphoria-generating highs.

The entire reason gold investment demand has stalled out in recent months, which has left gold drifting, is the extreme euphoria in US stock markets. Wall Street constantly claims there’s no euphoria, but that’s not true. The words “euphoria” and “mania” are often confused. Mania means “an excessively intense enthusiasm, interest, or desire”. In the stock markets, manias are associated with bubbles at bull-market tops.

Euphoria is a milder term meaning “a strong feeling of happiness, confidence, or well-being”. While the stock markets haven’t rocketed vertical in a mania, there’s no doubt euphoria is extreme. Investors feel happy and confident about stocks after this past year’s incredible Trumphoria rally. Polls now universally show investors are the most confident stocks will keep rallying over the next year since 2000, a bubble peak!

Following gold’s usual summer doldrums, gold investment demand as evidenced by rising GLD holdings was robust until late September. Differential GLD-share demand started petering out as the flagship S&P 500 stock index (SPX) started powering to seemingly-endless new record highs with no meaningful selloffs in between. Gold peaked at $1348 in early September right before the first SPX record close in 5 weeks.

The 43 trading days since then have seen a mind-boggling 23 record stock-market closes! The worst SPX down day in that entire surreal span was merely -0.5%, trivial. The SPX’s VIX implied-volatility fear gauge has averaged just 10.1 since then, exceedingly-low levels betraying extreme complacency. The stock investors as a herd don’t have a care in the world. They are totally convinced stocks can rally indefinitely.

So why bother with gold? Why prudently diversify stock-heavy portfolios with counter-moving gold if the perceived risk of a major stock-market selloff is nil? Investors have little interest in gold when the stock markets are trading near record highs after an exceedingly-long and exceptionally-massive bull. Gold investment demand has always had a strong negative correlation with stock-market fortunes, they are opposed.

That new Q3 GDT from the World Gold Council said overall global gold demand last quarter was actually the weakest since Q3’09. In Q3’17 the SPX powered 4.0% higher, seeing 15 new all-time record closes. Back in Q3’09, the stock markets were also exciting. Coming out of a once-in-a-century stock-panic low, the SPX rocketed 15.0% higher in that single quarter! Exciting stock markets really retard gold demand.

Conversely one of gold’s best global-demand quarters was Q1’16, when stock markets were weak. The SPX suffered two corrections in a row leading into early 2016, after going a near-record 3.6 years without a single one. The first 10 trading days of January that year ignited much fear. In that short span the SPX suffered serious down days of 1.5%, 1.3%, 2.4%, 1.1%, 2.5%, and 2.2%! So gold investment demand exploded.

Gold had been deeply out of favor before that, suffering a 6.1-year secular low in mid-December 2015 just after the Fed’s first rate hike of this cycle. GLD’s holdings slumped to a 7.3-year low of their own that same day. Yet once the stock markets started rolling over, investors were quick to remember gold’s role as the ultimate portfolio diversifier. Total global gold demand rocketed up 17.1% YoY or 185.8t in Q1’16!

American stock investors were overwhelmingly responsible, as GLD’s colossal 176.9t quarterly holdings build accounted for 95.2% of that total jump in world gold demand per the latest WGC data! Gold was catapulted into a new bull market on a mere couple of stock-market corrections. Q2’16 saw this major GLD-share buying momentum continue, with GLD’s 130.8t build alone driving gold’s entire 120.2t world demand growth.

Make no mistake, gold investment demand will explode again and drive gold sharply higher when today’s lofty hyper-complacent bubble-valued stock markets inevitably roll over again. Leading into Q1’16 the SPX corrections were only 12.4% and 13.3%, not serious. Corrections can grow as big as 20% before they become new bear markets. Imagine what an SPX selloff around 20% would do for gold investment demand.

And that’s coming far sooner than most think. Investors as a herd are always wrong at major market turning points. Major bull-market toppings are always marked with extreme euphoria just like today’s. Countless sentiment indicators are showing investors are now the most complacent or most bullish since late 2007 or early 2000. Those were the last bull-market toppings before brutal 49.1% and 56.8% SPX bears!

Stock-market bulls fail once valuations grow excessive. Over the past century and a quarter, the stock markets have averaged a 14x trailing-twelve-month price-to-earnings ratio which is fair value. Twice that at 28x is formally bubble territory, exceedingly dangerous. As October ended, the simple-average TTM P/E of all 500 SPX companies was a terrifying 30.1x! Stock markets can’t trade at bubble valuations for long.

But these super-bearish sentiment and fundamentals pale in comparison to what’s coming from the Fed and European Central Bank in 2018 and 2019. This stock bull grew so monstrous because major central banks were injecting hundreds of billions of dollars a year into markets via quantitative easing, which is a euphemism for money printing. Next year this QE stock-market rocket fuel will slam to a screeching halt.

A couple weeks ago I explained what’s coming in depth in an essay on the Fed and ECB strangling this stock bull. Because of the Fed’s new quantitative tightening reversing its QE, and the ECB just starting to taper its own QE bond buying, 2018 will see these dominant central banks effectively tighten by $950b compared to 2017! Then again in 2019 that will expand to another $1450b of tightening compared to this year.

The QE era that helped levitate stock markets is over, with $2.4t of central-bank liquidity that exists this year vanishing over the next couple years. There’s nothing more ominous for QE-inflated stock markets than the Fed starting to reverse QE through QT and the ECB greatly slowing its own QE. There’s simply no way possible that won’t eventually fuel a major stock-market selloff, a large correction or more likely a new bear.

When these stock markets roll over materially, when investors face a couple weeks of big down days like in January 2016, gold investment demand will explode again. Investors will stampede back to counter-moving gold to stabilize their bleeding stock-heavy portfolios. GLD’s holdings will soar again like they did in the first half of 2016, which catapulted gold 29.9% higher igniting a major new bull. Gold stocks fared far better.

The leading HUI gold-stock index skyrocketed 182.2% higher in essentially the first half of 2016 on that gold rally! When American stock investors aggressively buy GLD shares in response to stock-market selloffs reintroducing fear, gold surges and gold stocks soar. This well-worn pattern will play out again in the next major stock-market selloff. Once differential GLD-share buying resumes, gold is off to the races.

So if you want to understand why gold is doing what it’s doing and where it’s likely heading next, it’s imperative to follow GLD’s holdings. Stock investors’ capital flows into and out of gold via that key ETF conduit have utterly dominated recent years’ gold trends. Quite literally, gold is hostage to stocks! The higher the stock markets, the less gold investment demand. The more they sell off, the more gold demand surges.

With stock euphoria so extreme today after this past year’s incredible Trumphoria rally, gold investors need to focus on the stock markets. As long as stocks remain high which stalls gold investment demand, gold will likely continue to drift on balance. But once stocks sell off long and deep enough to rekindle sufficient fear, gold investment demand will explode again. Big GLD-share buying will catapult gold sharply higher.

Gold and especially its miners’ stocks remain deeply undervalued today due to the extreme stock-market euphoria. But that never lasts. Gold’s bull market will resume with a vengeance once American stock investors get interested in GLD shares again. That should coincide with the coming months’ major winter rally, the strongest seasonal span for gold and its miners’ stocks. Gold miners have enormous upside potential.

At Zeal our core mission has always been profitable real-world trading, so we doggedly focus on what’s actually moving the markets and why. And really since 2013, the dominant driver of gold’s fortunes has been American stock investors’ capital flows via GLD. Following GLD’s holdings and the stock-market trends driving them is crucial for all gold and gold-stock investors and speculators, enabling better trading decisions.

Staying informed is essential for market success, which is why we’ve long published popular weekly and monthly newsletters. They are easy to read and affordable, with an explicitly-contrarian focus to help you avoid being deceived by herd sentiment. They draw on my decades of experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. We’ve recommended and realized 967 newsletter stock trades since 2001, with average annualized realized gains including all losers of +19.9%! Subscribe today to get smarter and make better trades!

The bottom line is gold investment demand has stalled out in recent months, condemning gold to drift sideways. American stock investors in particular aren’t doing any differential GLD-share buying, which is essential to fuel gold uplegs. Mesmerized by the extreme stock-market euphoria, they no longer fear any material stock-market selloff. Thus they feel no need to diversify their portfolios with counter-moving gold.

But this anomaly can’t and won’t last for long. Sooner or later the hard bearish realities of bubble-valued stock markets and looming epic central-bank tightening will shatter today’s hyper-complacency. Then once again vast amounts of stock-market capital will migrate back into gold, catapulting it dramatically higher. As always the prudent contrarians who invest before the herd arrives will reap massive gains.

Adam Hamilton, CPA

November 10, 2017

1. The synergistic relationship between gold and economic growth is quite healthy, and poised to become even more healthy in 2018 – 2019.

2. Please click here now. Double-click to enlarge this fabulous South Korean stock market ETF chart.

3. Big name Western money managers are finally racing to move money into Asian markets, and this is great news for both gold and global stock markets.

4. For several years I’ve recommended that the gold community slightly reduce (but not drop) their focus on gold’s Western world fear trade and increase their focus on the Eastern stock markets and the love trade for gold.

5. South Korea’s stock market sports 50% earnings growth and a P/E ratio of just 10! Japan’s market is also red hot, and so are the markets of China and India.

6. US markets have risen strongly, but with anemic economic growth and nosebleed valuations. Growth is vastly stronger in Asia, but without European and US money manager participation, Asian stock markets have previously languished.

7. This situation has changed dramatically in 2017, and 2018 should see an acceleration of this new trend.

8. The bottom line: American markets are hot but overvalued. Asian markets are red hot but not overvalued.

9. I own ETFs (and some individual stocks) in the “Big Four” Asian markets; India, China, Japan, and Korea. I urge all Western gold bugs to “get with the (good) times”. The fear trade for gold will never disappear, but it’s a new era, and this new era is dominated by Asia.

10. Investors should be very comfortable owning Asian stock markets and gold… at the same time. The bottom line: America isn’t out, but Asia is in!

11. When times are good (and they are now very good in Asia), Asians buy more gold. Exponentially more. Chinese demand reflects this fact. It’s rising again; demand is up almost 20% over 2016, and poised to rise even more strongly in 2018.

12. Please click here now. Next, please click here now. Double-click to enlarge this daily gold chart.

13. Technically, gold’s rally ended in early September because of significant resistance at $1362 (the demonetization night high).

14. Fundamentally, gold peaked then because of the Modi government’s August 23rd launch of the hideous PMLA program. That launch immediately sent Indian imports plunging towards the zero marker. When Indian gold imports sink, the price of gold sinks. It’s that simple.

15. The good news: The government has rescinded PMLA and imports are growing again. Wedding season is beginning and Chinese New Year buy season approaches. As a result, the price is showing firmness, and a gold price rally appears imminent.

16. I’ve predicted that Indian GDP growth should hit 10% by 2020. America’s could fall to 1% by then while US inflation starts surging and gold mine production shrinks noticeably. This is an epic win-win situation for gold.

17. Sentiment in the gold and hedge fund communities is now generally negative, as it always is when significant rallies begin.

18. Please click here now. Double-click to enlarge. There’s a bear wedge in play on this dollar-yen chart now, which is more good news for all gold price enthusiasts. The commercial traders are also adding to their short positions in the dollar against both the yen and the Swiss franc.

19. Please click here now. Double-click to enlarge this GDX chart. There’s a modest head and shoulders top pattern in play, and that has a lot of old timer gold bugs nervous.

20. Unfortunately, these old timers may be too obsessed with the Western fear trade era of the past, and missing out on the Asian stock markets and gold price synergy that defines the new gold bull era.

21. Minor H&S top patterns like this one are irrelevant in the big picture, and this one may be getting technically voided anyways.

22. On that note, please click here now. Double-click to enlarge. This is just what the gold bug doctor ordered, to spread some bull era cheer!

23. A fabulous bull wedge pattern is destroying the H&S top pattern, which makes sense given the great fundamental action taking place in India and China.

24. Owning the “Big Four” stock markets of India, China, Korea, and Japan while engorging on gold, silver, gold stocks (with some bitcoin for extra wealth building fun), is perhaps the greatest “no-brainer” investor play in the history of markets!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “All Aboard The Golden Train!” report. I highlight eight must-own gold stocks, growth stocks, and key ETFs to participate in the biggest upside markets action from now until December 2018!

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Cheers
St

Stewart Thomson
Graceland Updates

Email:
stewart@gracelandupdates.com

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The gold miners’ stocks have largely ground sideways this year, consolidating their massive 2016 gains. That lackluster trading action, along with vexing under performance relative to gold, has left gold stocks deeply out of favor. But these uninspiring technicals and resulting bearish sentiment should soon shift. The gold stocks are just now entering their strongest seasonal rally of the year, the super-bullish winter rally.

Gold-stock performance is highly seasonal, which certainly sounds odd. The gold miners produce and sell their metal at relatively-constant rates year-round, so the temporal journey through calendar months should be irrelevant. Based on these miners’ revenues, there’s little reason investors should favor them more at certain times of the year than others. Yet history proves that’s exactly what happens in this sector.

Seasonality is the tendency for prices to exhibit recurring patterns at certain times during the calendar year. While seasonality doesn’t drive price action, it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals. We humans are creatures of habit and herd, which naturally colors our trading decisions. The calendar year’s passage affects the timing and intensity of buying and selling.

Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities experience, as its mined supply remains fairly steady all year long. Instead gold’s major seasonality is demand-driven, with global investment demand varying dramatically depending on the time within the calendar year.

This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. And the biggest seasonal surge of all is just now getting underway heading into winter. As the Indian-wedding-season gold-jewelry buying that drives this metal’s big autumn rally winds down, the Western holiday season is ramping up. The holiday spirit puts everyone in the mood to spend money.

Men splurge on vast amounts of gold jewelry for Christmas gifts for their wives, girlfriends, daughters, and mothers. The holidays are also a big engagement season, with Christmas Eve and New Year’s Eve being two of the biggest proposal nights of the year. Between a quarter to a third of the entire annual sales of jewelry stores come in November and December! And jewelry historically dominates overall gold demand.

According to the World Gold Council, between 2010 to 2016 jewelry accounted for 49%, 44%, 45%, 60%, 58%, 57%, and 47% of total annual global gold demand. That averages out to just over half, which is much larger than investment demand. During those same past 7 years, that ran 39%, 37%, 34%, 18%, 20%, 22%, and 36% for a 29% average. Jewelry demand remains the single-largest global gold demand category.

That frenzied Western jewelry buying heading into winter shifts to pure investment demand after year-end. That’s when Western investors figure out how much surplus income they earned during the prior year after bonuses and taxes. Some of this is plowed into gold in January, driving it higher. Finally the big winter gold rally climaxes in late February on major Chinese New Year gold buying flaring up in Asia.

So during its bull-market years, gold has always tended to enjoy major winter rallies driven by these sequential episodes of outsized demand. Naturally the gold stocks follow gold higher, amplifying its gains due to their great profits leverage to the gold price. Today gold stocks are once again now heading into their strongest seasonal rally of the year driven by this robust winter gold demand. That’s super-bullish!

Since it’s gold’s own demand-driven seasonality that fuels the gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold is absolutely in a young bull market. After being crushed to a 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold powered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in early March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated following Trump’s surprise election win. Investors fled gold to chase the Trumphoria stock-market surge. Gold’s correction cascaded to monstrous proportions, hitting -17.3% in mid-December. But that was shy of a new bear’s -20%.

Gold’s last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! And while gold consolidated high in 2012, that was technically a bull year too since gold just slid 18.8% at worst from its bull-market peak. Gold didn’t enter formal bear-market territory at -20% until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed’s QE3 bond monetizations.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2017. Thus these are the years most relevant to understanding gold’s typical seasonal performance throughout the calendar year. We’re interested in bull-market seasonality, because gold remains in its young bull today and bear-market action is quite dissimilar.

This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016. 2017 isn’t included in this analysis yet since it remains a work in progress. This chart distills out gold’s bull-market seasonal tendencies in like percentage terms. Quantifying gold’s bull-market seasonal tendencies requires all relevant years’ price action to be recast to be perfectly comparable.

That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Then all gold price action of the following year is calculated off that common indexed baseline, normalizing all years regardless of price levels. So gold trading at an indexed level of 105 simply means it has rallied 5% from the prior year’s close, while 95 shows it’s down 5%.

This methodology renders all bull-market-year gold performances in like percentage terms. That’s critical since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011. Finally each calendar year’s individually-indexed gold prices are averaged together to arrive at this illuminating gold-bull seasonality. Gold has always had a strong tendency to enjoy major winter rallies, starting right about now.

During its modern bull-market years from 2001 to 2012 and 2016, gold’s major winter rally started on average in late October. Technically gold’s key seasonal bottom averaged being carved on that month’s 16th trading day, which was October 23rd this year. From there gold surges into its strongest seasonal rally of the year. Between late October and late February in these bull years, gold blasted 9.5% higher on average!

These big winter-rally seasonal gains are much larger than the 3.8% and 6.9% averages seen in gold’s other major seasonal rallies in spring and autumn. That makes late October one of the best times of the year to deploy capital into gold. That Western holiday gold-jewelry buying fuels such outsized demand that November has long proved one of gold’s best months of the year with average bull-year gains of 3.1%.

While this bullish gold seasonality really moderates in December with an average 0.6% bull-year gain, it soon accelerates again in January on that surplus-income gold investment buying. The 2.9% average gain gold enjoyed in January during those bull years between 2001 to 2012 and 2016 makes for this metal’s third best month of the calendar year. This winter-rally span is when gold enjoys peak seasonal tailwinds.

Unfortunately the great majority of speculators and investors remain wary of deploying into gold to ride its strong seasonal winter rally. Just like the last couple years, traders are worried about the Fed’s next rate hike once again very likely in mid-December. Gold-futures speculators in particular have spent recent years fooling themselves into believing Fed rates hikes are gold’s mortal nemesis, despite history proving that totally false.

The record is crystal-clear, gold actually thrives during Fed-rate-hike cycles! Before today’s there have been 11 since 1971, and gold has averaged impressive 26.9% gains across the exact spans of all these Fed-rate-hike cycles. In the majority 6 of these where gold actually rallied, its average gains were a staggering 61.0%! In the other 5 where gold retreated, its average losses were an asymmetrically-small 13.9%.

Gold blasted higher during Fed-rate-hike cycles when they started with gold relatively low, and unfolded at a gradual pace. Gold not only entered today’s 12th modern rate-hike cycle at major secular lows, but the Fed has never been slower in raising rates. Gold is still up 20.2% cycle-to-date since the day before the Fed finally started hiking again in December 2015. Fed rate hikes are bullish for gold, contrary to the myths.

During its last rate-hike cycle between June 2004 to June 2006, the FOMC hiked at 17 consecutive meetings for a total of 425 basis points! That more than quintupled the federal-funds rate to 5.25%, an inconceivably-high level today. Even though that was a very-aggressive rate-hike cycle, gold still managed to power 49.6% higher over that exact span! Rate hikes are no threat to gold’s strong winter seasonals.

Meanwhile investors remain distracted by this past year’s absurd Trumphoria rally, which is retarding gold investment demand. When stock markets melt up to endless record highs drenched in stellar complacency, investors aren’t interested in prudently diversifying into gold. Since gold tends to move counter to stock markets, investment demand surges when stocks weaken. A stock correction ignited this young gold bull.

As the Fed’s surreal stock-market levitation cracked in early 2016, American stock investors flocked to gold via shares in the flagship GLD SPDR Gold Shares gold ETF. When they buy its shares faster than gold itself is being bought, this ETF’s managers must issue sufficient new shares to offset all this excess demand and maintain gold tracking. The proceeds from these GLD-share sales are then used to buy gold bullion.

Thus GLD holdings builds show stock-market capital migrating into gold. In 2016 massive differential GLD-share buying drove a 28.0% or 179.8 metric-ton holdings build, helping drive gold 8.5% higher. But year-to-date in 2017, GLD’s holdings are only up 3.3% or 27.4t. Despite that gold is still impressively up 10.9% YTD, but it will surge dramatically when investment demand returns as these euphoric stock markets roll over.

That day of reckoning is inevitable. Back in late September the Fed finally started unwinding its trillions of dollars of quantitative easing that levitated stock markets for years. Quantitative tightening has never before been attempted, and it is exceedingly ominous for QE-inflated stock markets. While QT is starting small, it will ramp up to a $50b-per-month pace in Q4’18. That accelerating QT juggernaut will strangle stocks.

When these lofty Trumphoria-fueled stock markets finally mean revert, investors’ capital will flood back into gold for prudent portfolio diversification. If that happens in the coming months, it will really amplify gold’s strong winter seasonals. But gold’s biggest seasonal rally doesn’t need to be kick started by flight capital from bubble-valued stock markets. All that’s necessary is November’s usual outsized gold-jewelry demand.

So neither speculators’ Fed-rate-hike fears nor investors’ current apathy towards gold thanks to record stock markets are likely to short circuit gold’s strong winter rally this year. And if gold’s bull-market seasonals again prevail, that’s super-bullish for gold stocks in the coming months! They also enjoy strong winter seasonals thanks to gold’s, because gold miners’ profitability and thus stock prices leverage gold’s price action.

This next chart applies this same bull-market-seasonality methodology to the leading benchmark HUI NYSE Arca Gold BUGS Index. Naturally gold-stock seasonals closely mirror gold’s, so the miners too are also just entering their strongest seasonal rally of the year. On average in those last bull-market years from 2001 to 2012 and 2016, the HUI powered a big 15.4% higher between late October and late February!

Gold stocks’ strong 15.4% average winter rally bests their 14.0% and 11.2% rallies heading into spring and autumn. On average gold stocks’ major seasonal bottoming heading into their winter rally arrives on October’s 19th trading day, which translated into October 26th this year. Like their primary driver gold, gold stocks tend to rally strongly in November, moderate in December, and then surge again in January and February.

And given the sentimental, technical, and fundamental setups for gold stocks entering this year’s winter rally, the usual seasonal tailwinds are likely to help propel them much farther than usual. Just like gold and because of it, gold stocks entered a mighty new bull market early in 2016 as well. Between mid-January and early August last year, the HUI soared 182.2% higher in just 6.5 months! It was a wildly-profitable run.

That left the red-hot gold stocks very overbought last summer, then they got sucked into gold’s correction. Just like gold, their correction ballooned to monstrous proportions thanks to that post-election Trumphoria stock rally’s impact on gold investment demand. At worst the HUI plunged 42.5% in 4.4 months, a brutal drop. But ever since then gold stocks consolidated sideways on balance, recently seeing major upside breakouts.

But after surging 8.4% in August, the very next month the gold stocks were whacked back down 7.5% in sympathy with gold. Gold-futures speculators fled as futures-implied Fed-rate-hike odds at its upcoming mid-December meeting skyrocketed from 32% to 83% in less than three weeks! So the HUI spent late September and much of October languishing under 200, low technical levels breeding bearish sentiment.

The gold stocks are now entering their seasonally-strongest time of the year deeply out of favor at weak prices. These are powerful buy signals within ongoing bull markets, really upping the odds this year’s new winter rally will prove exceptionally large. Bullish sentiment and technicals really amplify the usual seasonal tailwinds. Even better, the gold miners’ fundamentals are all lined up to drive major gains in coming months.

Every quarter I analyze the operating performances of the top individual gold miners’ stocks included in the leading gold miners’ ETFs. These of course are the GDX VanEck Vectors Gold Miners ETF for the larger majors, and its sister GDXJ VanEck Vectors Junior Gold Miners ETF for the smaller juniors. The gold miners are now in the midst of reporting their Q3’17 earnings season, which should end up being impressive.

As always I’ll write comprehensive essays analyzing the latest quarterly results from the top GDX and GDXJ components once they finish reporting in mid-November. But a few weeks ago I gave a preview of what they are likely to collectively report based on average gold prices and Q3 seasonals in production and costs. Crunching the numbers for GDX yields big potential Q3’17 quarter-on-quarter profits growth around 14%!

Thus as the rest of the gold miners report their Q3’17 results by mid-November, there will likely be plenty of upside surprises. That includes higher production, lower costs, and better full-year-2017 guidance for the gold miners than today’s bearish traders expect. So good fundamentals could supercharge this first month of gold stocks’ winter rally this year. Improving fundamentals aligning with seasonals portends big upside!

If the gold stocks were entering this winter-rally period drenched in greed after a major upleg, seasonal tailwinds probably couldn’t overcome the healthy correction tendency. If the gold miners’ fundamentals were deteriorating, that would likely prove too much heavy lifting for seasonals. But with the strong winter-rally seasonals synchronizing with very bullish technicals, sentiment, and fundamentals, gold stocks should surge.

This last chart breaks down gold-stock seasonality into more-granular monthly form. Each calendar month between 2001 to 2012 and 2016 is individually indexed to 100 as of the previous month’s final close, then all like calendar months’ indexes are averaged together. While this November-to-February winter-rally period doesn’t encompass most of gold stocks’ strongest months, it does enjoy the most-consistent gains.

On average in bull-market years, November enjoys the fifth-best gold-stock gains of the calendar year at 4.6% in HUI terms. That’s not far off August’s and September’s average bull-market-year rallies of 4.7% and 4.8%, weighing in at fourth and third. May is better yet, ranking second at 5.3%. But gold stocks’ second-, third-, and fourth-best months are largely surrounded by flat or lower months offsetting those big gains.

That’s not the case during gold stocks’ winter-rally months, where the solid-gains streak persists for the whole time. November’s 4.6% average gains are followed by December’s respectable 2.3%, January’s accelerating 3.1%, and February’s massive first-place 6.2%! This unbroken winter-rally streak is what makes this period between late October and late February the best time of the year to be heavily long gold stocks.

There is no other seasonal streak with such unparalleled consistency of big gold-stock gains. Since they continue to march higher on balance throughout their winter-rally span, it yields the best seasonal gains of the calendar year. The rest of the year’s two-steps-higher-one-step-back action just doesn’t happen during the winter on average. There are no significant gold-stock selloffs in this amazing winter-rally span!

Of course the standard seasonality caveat applies that these are mere tendencies, not primary drivers of gold or gold stocks. Seasonal tailwinds can be easily drowned out by bearish sentiment, technicals, and fundamentals. Seasonality doesn’t always work, especially when it doesn’t align with the primary drivers of sentiment, technicals, or fundamentals in that order. Thankfully that certainly isn’t the case this year.

The gold miners’ stocks aren’t heading into November at overbought levels following a major upleg, thus sentiment is quite bearish. And with the HUI up just 2.2% YTD compared to gold’s 10.9% gains, the gold stocks are far underperforming the dominant driver of their earnings. Their big profits leverage usually translates into upside running 2x to 3x gold’s, so they are overdue to mean revert much higher to normalize.

And the gold miners’ fundamentals look excellent heading into this seasonally-strongest span, with big sector-wide sequential profits growth likely to come in around 14% in their latest Q3’17 results. That will probably generate plenty of exciting upside surprises for traders who’ve largely abandoned gold stocks this year. Add in a major gold upleg fueled by stock markets rolling over, and this winter rally ought to be huge.

The greatest gains in this coming winter rally won’t be won in the popular ETFs like GDX and GDXJ, as they are far-overdiversified and burdened with way too many under-performing gold miners. So it’s much more prudent to deploy capital in the best individual gold miners with superior fundamentals. Their gains will handily trounce the ETFs, further amplifying the already-huge upside potential of this sector as a whole.

The key to riding any gold-stock bull to multiplying your fortune is staying informed, both about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research through our popular newsletters.

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The bottom line is gold stocks are just entering their seasonally-strongest period of the year. Their big winter rally is fueled by gold’s own, which is driven first by outsized demand from holiday jewelry buying and later new-year investment buying. So both the metal and its miners’ stocks have strong tendencies to rally between late October and late February in bull-market years. It’s the best calendar span to own gold stocks.

And this year’s coming winter rally looks exceptionally bullish because the seasonal tailwinds won’t be overpowered by bearish sentiment, technicals, or fundamentals. All of these primary drivers are bullish today and closely aligned with the strong seasonals, making for a powerful united force to propel gold stocks dramatically higher. Speculators and investors alike should be fully deployed for the coming months.

Adam Hamilton, CPA

November 3, 2017

With the third quarter’s earnings season now underway, the gold miners will soon join in and report their latest results. No data is more highly anticipated by investors, for good reason. Quarterly reports dispel the dense fogs of herd sentiment that usually obscure gold stocks, revealing their operations’ underlying fundamental realities. Q3’17’s upcoming results are likely to prove quite bullish for this neglected sector.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. The gold miners generally release their quarterly reports in the latter half of this span. So Q3’17’s will arrive between late October and mid-November.

After spending decades intensely studying and actively trading this contrarian sector, there’s no gold-stock data I look forward to more than the miners’ quarterly financial and operational reports. They offer a true and clear snapshot of what’s really going on, shattering the misconceptions bred by ever-shifting winds of sentiment. Nearly all fundamental analysis is based off the data gold miners provide in these reports.

So for many years I’ve delved deeply into gold miners’ quarterly results. They are the dominant source of information I use to winnow down the universe of gold stocks to the fundamentally-superior ones with the greatest upside potential. Every quarter after their latest earnings season ends, I research and write essays discussing the newest results from the major gold miners, junior gold miners, and silver miners.

Q3’17’s analyses are coming starting in mid-November, once that 45-day post-quarter reporting deadline has passed. But before that I eagerly dive into individual companies’ results as they’re reported, since there’s so much to digest. And even earlier right after a quarter ends, I start thinking about what gold miners’ latest quarterly results are likely to show collectively. They can actually be predicted to some extent!

In high-level fundamental terms, gold mining is a simple business. These companies painstakingly wrest gold from the bowels of the Earth, then generally sell all they can produce at prevailing market prices. So their profits are effectively the difference between current gold levels and operating costs. The former is easy to calculate once a quarter ends, and the latter can be fairly-accurately estimated for this sector as a whole.

Gold’s average closing price in Q3’17 was just under $1279, up 1.7% sequentially from Q2’17’s average near $1258. Higher gold prices portend better quarterly results, because gold-mining costs are largely fixed. They are mostly determined back when mines are being planned. That’s when engineers carefully decide which ore bodies to mine, how to dig to them, and how to process the resulting gold-bearing ore.

Quarter after quarter, generally the same numbers of employees, excavators, haul trucks, and mills are used regardless of prevailing gold prices. There are some variable costs like diesel fuel, but they are dwarfed by massive fixed costs. Thus higher gold prices flow right through directly to the miners’ bottom lines, boosting profits. And the relationship between gold’s gains and higher earnings is leveraged, not linear.

The major gold miners are all included in the leading GDX VanEck Vectors Gold Miners ETF, which is the world’s most-popular gold-stock investment vehicle. Every quarter I dig into the latest results from its top 34 component companies, which account for 90%+ of its total weighting. In Q2’17, these top GDX major gold miners reported average all-in sustaining costs of $867 per ounce. These AISC determine profits.

All-in sustaining costs include everything necessary to maintain and replenish operations at current gold-production levels. They include all direct and indirect cash costs of production, exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. AISC are the most-important gold-mining cost metric by far for investors to follow.

At Q2’s $1258 average gold price and $867 average major-gold-miner all-in sustaining costs, this sector was generating profits around $391 per ounce. That’s pretty impressive, implying fat 31% profit margins most other industries would die for. Making the reasonable assumption that AISC will be pretty flat in Q3, its $1279 average gold price would yield profits of $412 per ounce. That’s up 5.4% quarter-on-quarter!

Potential 5.4% sequential gains in quarterly earnings in Q3’17 are big absolutely, probably better than the great majority of stock-market sectors. And 5.4% QoQ profits growth on a 1.7% QoQ gold rally makes for excellent 3.2x profits leverage to gold from the major gold miners. That’s the primary reason gold-mining stocks yield such massive gains in rising-gold-price environments. Their profits explode as gold rallies.

But the major gold miners’ potential to bullishly surprise in their upcoming third-quarter earnings season goes well beyond that. Between Q2s and Q3s, all-in sustaining costs actually tend to fall rather sharply. Last year between Q2’16 and Q3’16 for example, the average AISC of GDX’s top-34-component major gold miners fell 3.5% from $886 to $855. I fully expect to see a similar third-quarter drop in AISC this year.

The reason is global gold-mining production tends to surge between Q2s and Q3s. This phenomenon is readily evident in the latest data from the World Gold Council, which collects the best gold fundamental data available. During the seven Q3s from 2010 to 2016, world gold production soared 8.0%, 4.4%, 5.3%, 9.0%, 8.8%, 6.1%, and 7.0% sequentially quarter-on-quarter from Q2 to Q3! That averages out to +7.0%.

Such big and consistent quarterly growth in Q3s is interesting. I suspect at least a couple major factors feed into it, mining-plan management to boost managers’ compensation and summer. The managers of gold miners are usually partially paid in stock or stock options, giving them big incentives to do everything they can to boost stock prices. Their annual stock-based bonuses are usually figured late in calendar years.

Thus these guys seem to plan mining to attack any necessary lower-grade ores that yield fewer ounces earlier in years if possible. Then they shift back to higher-grade ores in the second halves when stock prices matter more for compensation. Exceeding investors’ expectations of production rates in Q3s also leads them to bid gold-mining stocks higher into year-ends, compounding gains from mining-plan management.

In addition most of the world’s major gold mines are in the northern hemisphere, where mining is easier in the summer. The weather is warmer and clearer, with less snow or monsoon rains to slow down mining operations and mess with heap-leaching gold recoveries. I’m amazed at the number of quarterly reports I’ve seen over the years that attributed lower gold production to unexpected weather interfering with operations.

Because most gold-mining costs are largely fixed, production and costs are inversely related. The more ounces being produced in any quarter, the more ounces to spread gold mining’s big fixed costs across. So higher production directly leads to lower all-in sustaining costs. Higher production and the resulting lower per-ounce costs will make Q3’17’s results look way more bullish than from just higher gold prices alone.

Gold production varies seasonally within calendar years partially due to mining-plan timing. Gold-bearing ore was certainly not created equal, with even individual deposits seeing big internal variations in their metal-to-waste-rock ratios. Miners often have to dig through lower-grade ore to get to the higher-grade zones underneath. This still has economically-valuable amounts of gold, so it is run through the mills.

These mills are essentially giant rock grinders that break ore into smaller pieces, vastly increasing its surface area for chemicals to later leach out the gold. Mill capacity is fixed, with limits on ore tonnage throughput. So when miners are blasting and hauling lower-grade ore, fewer ounces are produced. As they transition into higher-grade zones, the same amount of rock naturally yields more payable ounces.

Regardless of the ore grades being blasted and milled, the overall quarterly costs of mining don’t change much. Operations require the same levels of employees, diesel, maintenance, and electricity no matter how rich the rock being processed. So higher gold production directly leads to lower per-ounce mining costs. The big fixed costs of gold mining are spread across more ounces, making this business more profitable.

Back to the upcoming Q3’17 results from the major gold miners, where profits should surge on the order of 5.4% QoQ due to higher gold prices alone. Let’s conservatively assume their gold production rose 4.0% sequentially, far below Q3’s 7.0% average since 2010 and making for the worst Q3 growth in at least 8 years. Naturally 4% higher gold production should lead to a proportional increase in gold-mining profits.

That takes the projected Q3’17 profits growth in the top major gold miners included in GDX to the 9%-to-10% range quarter-on-quarter. But that doesn’t take into account the lower production costs generated by higher production. Once again a year ago in Q3’16, the top 34 GDX components saw their average all-in sustaining costs fall 3.5% QoQ. Let’s conservatively assume average AISCs are 2.0% lower in Q3’17.

That would drag the major gold miners’ sector-wide AISC back down near $850 per ounce. Incidentally that is totally plausible, in line with Q3’16’s $855. At Q3’s average gold price near $1279 and $850 AISC, operating profits would surge to $429 per ounce. That’s up a whopping 9.9% sequentially from Q2’17’s $391! Add in that 4% higher production likely, and we’re talking big quarterly profits growth around 14%.

Now don’t read too much into the precise number, it’s merely an estimate based on simple sector-level math. The Q3’17 profits growth in the top-GDX-component major gold miners won’t exactly match, as each of these individual companies will have its own triumphs or challenges in Q3. The key takeaway here is we are set up for big quarterly profits growth in the upcoming results of the major gold miners.

While 14% quarterly profits growth would be extreme for most other stock-market sectors, it’s nothing for the gold miners. Last year in Q3’16, the average gold price surged a much-larger 6.0% QoQ to $1334. That fueled a huge 41.6% QoQ surge in the total operating cash flows generated by the top 34 GDX gold stocks, and a staggering 230.7% QoQ rocketing in their total GAAP accounting profits! 14% in Q3’17 isn’t a stretch.

The gold miners are truly set up to report excellent Q3’17 results in the coming weeks. I expect to see many upside surprises fueled by higher production and the resulting lower costs per ounce. That might lead to widespread favorable guidance changes for full-year 2017, upping production forecasts while lowering per-ounce cost estimates. Good Q3’17 results will make investors take notice of gold stocks again.

Any material new capital inflows from impressed investors ought to light a fire under today’s beaten-down gold stocks. While they enjoyed some major technical breakouts back in August, gold’s sharp pullback in September weighed heavily dragging them lower again. That leaves the major gold miners’ stocks ready to rally fast if good Q3’17 results start bringing back scared or indifferent investors. The upside potential is huge.

All stock prices are ultimately dependent on underlying corporate profits. And for gold miners, nothing is more important for earnings than prevailing gold prices. Again gold-mining profits really leverage gold rallies, so their fundamental relationship is ironclad. Higher gold drives higher gold-mining profits which leads to higher gold-stock prices. And today gold stocks remain radically undervalued relative to gold.

That leaves them with lots of room to rally in the coming months if their Q3’17 results indeed manage to impress investors. The HUI/Gold Ratio is a great proxy for distilling down that core fundamental link between gold prices and gold-stock prices. It simply divides the daily close in the leading HUI NYSE Arca Gold BUGS Index that mirrors GDX by gold’s daily close, revealing whether gold stocks are high or low.

As this blue HGR line shows, gold stocks remain very low relative to prevailing gold prices. This week the HGR was merely running 0.157x, which is extremely low historically. Gold stocks have only been lower relative to the metal that drives their profits briefly in late 2014, in much of 2015, and in the first few months of 2016. That happened to be late in a major secular bear driven by a deep parallel secular bear in gold.

If today’s 0.16x HGR was actually righteous, it would’ve been seen plenty of times in modern history. But it hasn’t been. Such extremely-low gold-stock prices relative to gold were only able to persist for a short spell late in a massive bear. But back in early 2016, the gold stocks soared with gold to birth a major new bull market. That persists to this day, with the HUI still up 101.5% bull-to-date since mid-January 2016.

With gold stocks in a young bull market, seeing them at deep-bear-low valuations relative to gold is truly absurd. It makes no sense at all fundamentally! Gold stocks have vast room to rally from here merely to return to normal levels relative to current gold prices. Good Q3’17 results could very well be one of the sparks, along with gold rallying, that motivates investors to resume returning and normalizing gold-stock prices.

Remember the Fed started aggressively levitating the US stock markets in early 2013, wreaking havoc on alternative investments led by gold. The gold market’s last normal years were sandwiched between 2008’s stock panic and 2013’s radical Fed distortions. That’s the best recent baseline for where the HGR ought to trade. And between 2009 to 2012, it was running way up at 0.346x. That’s over double today’s levels!

To simply mean revert back up to those last normal levels relative to gold, the major gold miners dominating the HUI and GDX would have to power 120% higher from here to 447! To restore some semblance of normalcy fundamentally, the gold stocks need to more than double from here even at this week’s $1293 prevailing gold levels! Gold stocks certainly can’t stay disconnected from their own earnings realities forever.

All markets are cyclical, including gold stocks. Extreme undervaluations relative to gold are followed by overvaluations as the pendulum swings back the other way. Mean reversions after extremes never stop in the middle. Their momentum leads them to overshoot to the opposite extreme! That makes gold stocks’ coming upside far more impressive. A proportional overshoot heralds radically-higher gold-stock prices ahead.

At worst in mid-January 2016, the HGR fell to an all-time low of 0.093x. That was a staggering 0.253x under that post-panic normal-year-average HGR of 0.346x. So a proportional overshoot would briefly boost the HGR 0.253x above that mean, to 0.599x. Such an upside extreme wouldn’t last long, as greed wouldn’t be sustainable. But it could happen in a blowoff top after gold stocks are popular following a bull.

At $1293 gold, that yields a potential HUI topping target of 775! That’s a stupendous 282% above this week’s levels. Is there any other stock sector with the potential to quadruple in the coming years? No way. Gold stocks are the only severely-undervalued sector left after this Trumphoria stock rally, so their upside is unparalleled. And incredibly these simple HGR-derived gold-stock targets are actually conservative.

They assume gold is static, stuck at $1293. That’s exceedingly unlikely. As these Fed-levitated stock markets inevitably roll over with Fed quantitative tightening ramping up, gold itself will catch a major bid as investment capital returns. As a rare asset that generally moves counter to stock markets, gold is hostage to them. So when the stock markets suffer their long-overdue major selloff, gold will soar on capital inflows.

10%, 20%, and 30% gold uplegs from here would take this metal to $1422, $1551, and $1680. Plug in the HGR of your choice, the post-panic average or the mean-reversion overshoot, and you get some potential HUI targets so high they defy belief. And don’t think a 30% gold rally is out of the question. In response to the last stock-market correction, gold powered 29.9% higher in just 6.7 months in early 2016!

Don’t get bogged down in HUI upside targets, they only serve to illustrate a critical point for investors and speculators today. Gold stocks are not only radically undervalued at today’s gold prices, but even more so compared to where gold is heading in its own still-very-much-alive bull market. Even if you think gold stocks only have 50% to 100% upside, that’s vastly better than everything else in these overvalued stock markets.

And gold miners’ upcoming Q3’17 results could very well prove the catalyst that ignites the next major gold-stock upleg. The large gold miners will likely soon report big profits growth on higher production and lower costs, easily surpassing investors’ low expectations. As they start shifting capital back into this forgotten sector, gold stocks will rally. That will soon attract in other investors, fueling a self-feeding upleg.

While investors and speculators alike can certainly play gold stocks’ coming upleg with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will trounce the ETFs’, which are burdened by over-diversification and underperforming gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

The bottom line is the major gold miners’ upcoming Q3’17 results should show strong sequential profits growth. Q3’s higher average gold prices alone will drive higher profits if gold-mining costs are flat. But Q3s have a long history of seeing big sequential jumps in gold-mining production directly leading to lower per-ounce costs. If that proves true again last quarter, the major gold miners ought to report excellent results.

The potent combination of higher prevailing gold prices and bigger production to spread gold mining’s large fixed costs across should lead to sector profits surging rather dramatically. Investors will likely take interest and start bidding gold stocks higher again, fueling a major upleg. And since gold stocks remain so darned low relative to prevailing gold prices, their upside from here is vast as investment capital returns.

Adam Hamilton, CPA

October 13, 2017

The traditional post jobs report rally for gold is in full swing. Please click here now. Double-click to enlarge this daily gold chart. Gold arrived at a key Fibonacci line at about $1268 as the US jobs report was released.
Please click here now. Double-click to enlarge. The dollar has stalled against the yen, and that’s also good news for gold.
Gold tends to stage great rallies in the days following the jobs report, and this rally is a particularly interesting one. Here’s why:
First, Trump has ratcheted up his “hawk talk” in regards to North Korea and Iran. He’s scheduled to make a key speech on Thursday about Iran, a country which is now exporting two million barrels of oil a day.
Second, the Chinese government recently chopped commercial bank reserve requirements. That triggered a massive rally in bank stocks around the world, and in most stock market indexes.
Chinese citizens tend to buy more gold when stock markets are rallying and economic sentiment is positive.
Friday also marked the last day of COMEX gold trading during the Golden Week holiday in China. Chinese gold markets are now open again, and eager buyers are clearly in action.
Perhaps most importantly of all, on Friday the Indian government cancelled the “Know Your Client” rule for gold jewellery buyers and that happens just in time for the launch of Diwali.
Please click here now. This is pretty big news for gold price enthusiasts around the world.
Given all of this gold-positive news, it’s pretty easy to understand why gold has bounced so firmly from the $1268 area Fibonacci line.
Fundamentally, there is nothing negative for gold right now. Gold has rallied after every rate hike. It did that in the 1970’s as the Fed Funds rate soared to 20%. The precious metals and the mining stocks soared like a flock of golden eagles as that happened, and 2018 could see that repeated, albeit on a smaller scale.
The Fed has three rate hikes scheduled for 2018, and aggressive quantitative tightening (QT). By December of 2018, money velocity should reverse and begin a long term bull cycle.
The QE money ball is essentially “toast”. Bond prices will get a haircut as rates rise and QT accelerates. Money will pour out of government bonds and central banks and into the fractional reserve banking system, and… into gold.
Please click here now. Central banks and governments have not propped up their economies since the 2008 financial crisis occurred.
What they have done is prop up financial markets while insidious inflation and no wage gains on Main Street have seen the plight of the average citizen get worse.
That can change. Please click here now. Donald Trump’s three main campaign promises were to cut taxes, chop the price of the US dollar against other fiat currencies, and to give government bond market creditors a haircut.
His promises are essentially a mechanism to move a portion of the fifteen trillion dollars in financial markets liquidity towards Main Street. He has yet to do that, but I think 2018 will probably be recorded in history books as“The Golden Year”.
I’m predicting that 2018 will be the year that Trump begins talking more openly about the bond market and the need for creditors to be realistic about what they can expect to get paid.
Along with the “motherlode” of positive demand coming out of China and India, Trump’s actions and words should help make 2018 the year that gold ends its sideways trading pattern of the past three years, and starts a significant trending move higher.
Please click here now. Double-click to enlarge this fabulous silver chart. There’s a beautiful inverse head and shoulders bottom formation in play, with an ultimate target in the $22 area.
Please click here now. Double-click to enlarge this key GDX chart. GDX has started a strong rally. All fundamental lights are green for the entire precious metals asset class.
Most technical lights are green, except for one. Please click here now. Double-click to enlarge. My “line of concern” at $1300 relates to the head and shoulders top neckline that gold is rallying towards now.
The technical target of that pattern is about $1215. Whether the “Queen of Assets” can successfully surge through that neckline area is likely to be determined in the short term by Trump’s speech on Thursday about Iran. In the medium term, it will be determined by the amount Diwali gold demand that appears (or doesn’t) over the next two weeks.
Tactics? Nervous investors should buy put options and buy them today! On the buy-side, the key for gold bugs is to be light buyers of all their favourite precious metals investments if gold trades at $1270 and to be substantially bigger buyers at $1215 or lower. Do that, while cheering that the price only goes higher!

Thanks

Stewart Thomson

Graceland Updates

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Are You Prepared?

Canada’s North is a mysterious and forbidding land. There are stories of European explorers disappearing without a trace and place names such as Deadman’s Island. Native legends from the original occupants – not to mention strangely colourful lights that often dance across the night sky – add to the intrigue. I saw the Northern Lights for the first time during the site visit. The scientific explanation does little to diminish their mystique.

Sabina Gold & Silver’s Goose camp, Nunavut

Flying over the barren lands of Northwest Territories and Nunavut gave me a renewed respect for Chuck Fipke and all the other Northern pioneers who identified mineral deposits there. Between Yellowknife and Sabina Gold & Silver’s Goose camp, the plane travelled over hundreds of kilometres of waterlogged tundra with nary an interruption. Then, rather suddenly, an open-pit diamond mine – a mineralized pin prick in a pin cushion measuring millions of square kilometres. The diamond mine was Diavik; Ekati is nearby.

This is about as far from “civilization” as it’s possible to get. For perspective, driving from Billings, Montana to Edmonton, Alberta, a major Canadian northern outpost, takes about 11 hours – roughly akin to driving from Durango to Los Angeles. It takes another 15 hours to drive from Edmonton to Yellowknife — the equivalent of travelling from Los Angeles to Portland. Sabina’s Back River project is a further 520 kilometres beyond Yellowknife, to the northeast.

As for Sabina, the main mystery on the company’s vast Back River property may be just how many high-grade ounces are buried under the Arctic tundra. It’s a puzzle this summer’s drill program should go some way to solving. A single early result from the 10,000-metre summer exploration program was promising. The first drill hole, 17GSE516B – released the morning I flew into Yellowknife en route to the site visit – intercepted 9.48 g/t gold over 38.55 metres in a down-plunge extension of the Llama deposit. Not bad for a 460-metre step-out hole.

FIRST IMPRESSIONS

Our plane of analysts landed at the Goose camp on a high-quality air strip made from gravel produced on-site. The camp gets its name from adjacent Goose Lake, which serves as the winter landing strip for 737s that come in laden with fuel. The well-run camp felt more like a mining operation than an exploration camp.

Inside, we were briefed on the objectives of the summer drill program and the path forward by CEO Bruce McLeod, VP Exploration Angus Campbell and Exploration Manager Jamex Maxwell. The broad outlines of the mine were established by the initial project 3,000-tonnes-per-day Feasibility Study (3KFS) McLeod commissioned when he took over in February 2015. At US$1,150/oz gold, C0.80 exchange and a 5% discount rate, the FS showed:

240,000 oz annually for first 8 years, about 200,000 oz for 12-year life of mine;
$415 million initial capex, $185M sustaining capex;
6.3 g/t Au average head grade, 93% recovery;
life-of-mine, all-in cash costs of US$763/oz (incl initial & sustaining capex & closure costs)

VP Ex Campbell spoke about uber-high-grade exploration upside (more on that later), while derisking was the major theme for McLeod: “We can’t afford to make mistakes in this part of the world.” Sabina has spent about $5.5 million on basic engineering since the completion of the Feasibility Study, he said, and is now into detailed engineering.

The CEO describes the Back River project as a straightforward mine in a complex environment. From a geotechnical perspective, McLeod says Back River is probably the simplest project he’s been involved with. His assertion was confirmed by a visit to the nearby mill site, the helicopters landing on flat bedrock terrain. One of the benefits of a vast property is the ability to choose exactly where the mill will be. Standing on the flat terrain of scrub and bedrock, with a 360-degree panorama view, it was easy to visualize a mine taking shape.

Author at the site of proposed Goose plant

I found an analogy McLeod used in his recent presentation at the Beaver Creek precious metals summit useful: “To a layperson, a feasibility is a concept, basic engineering is a plan and detailed engineering is a blueprint.” As Sabina constructs the blueprint, the focus is on investing upfront to avoid problems down the road. During the site visit, McLeod talked about his love for technology and some of the high-tech toys at his house, which he said “has lots of gizmos and bells and whistles and shit that breaks down all the time. It won’t happen here.”

It’s not typical CEO bluster: McLeod has already built a mine in Canada’s North. That was Capstone’s Minto copper mine in the Yukon, built by Sherwood Copper and the first hard-rock mine constructed in the territory in a decade. Sherwood was founded and run by McLeod and later bought by Capstone for $244 million. Minto was built on time and under budget – no small feat in Canada’s North.

CEO Bruce McLeod talks the nuts and bolts of a mining operation at Back River.

Recent problems experienced by Nunavut neighbour TMAC Resources (TMR-T) at its recently opened Hope Bay gold mine illustrate the importance of “doing it right the first time.” TMAC recently slashed its annual guidance in half – from 100,000 to 120,000 ounces of gold to 50,000 to 60,000 ounces – due to processing issues and recovery problems. Sabina is paying close attention to metallurgy and a potential processing change from whole ore leach to flotation is one of the optimizations Sabina is studying.

BACK TO THE FUTURE

Some background on Back River: Sabina Silver became Sabina Gold & Silver with its 2009 purchase of the high-grade gold project from Dundee Precious Metals (DPM-T). Prior to that, the flagship was the silver-rich Hackett River VMS deposit 45 kilometres to the west, which Sabina sold to Xstrata (now Glencore) in 2011 for $50 million cash and a significant silver royalty. That transaction put Sabina into the rare category of well-funded junior, where it remains. More on the silver royalty later.

Sabina has since added about 5 million ounces, bringing the Back River resource to 7.2 million ounces in all categories. Most of the added ounces were drilled in the first two years, followed by a lull in drilling during the 2011-16 bear market. The most recent drill program has taken the number of metres drilled above 500,000.

The scale of the core-cutting facility at Goose is an indication of the size of previous programs. It can comfortably handle 85,000 metres in a single season, so is not stretched at 10,000 metres, McLeod noted. It may seem like a minor detail, but is another box ticked for any major that buys the district-scale project (Goldcorp, for example, is carrying out an aggressive exploration drill program at Coffee).

The Back River project is a banded iron formation project that consists of 10 high-grade gold deposits on Sabina’s 53,000-hectare properties. It’s an 80-kilometre district. Llama is one of four deposits at the main Goose project area, the focus of the 3KFS that McLeod commissioned. (An earlier FS modelled a 6,000tpd operation producing 350,000 oz over a 10-year mine life.) Three of the four Goose deposits are part of the 3KFS: Goose main pit, Umwelt open pit and underground and the Llama open pit. The Llama underground, including hole 17GSE516B, is not.

ECONOMICS OF EXPLORATION

One of the objectives of Sabina’s drilling is to determine if there are enough high-grade ounces underground to define a “treasure box” that could be mined up front. If the company is successful, that would involve shifting sustaining capex into the front end of the mine plan. But it could significantly improve already strong project economics, especially at the front end of the mine life. An increase of just 500 tonnes per day – to 3,500tpd – could vault Sabina into 300,000 oz/year territory.

Angus Campbell, Sabina’s VP Exploration, shed some light on how rich some of the exploration potential is on Sabina’s ground. Being the guy in charge of running exploration programs in a gold-rich 80-kilometre belt must have a kid-in-a-candy-store feel to it. But with McLeod in charge of the candy allocation, Campbell’s targets must be chosen wisely and justified. Despite 500 kilometres of drilling, there remain multiple opportunities for resource expansion, both at existing deposits and at deposits not included in either Feasibility Study.

Consider Sabina’s George deposits, about 50 kilometres away from Goose. George hosts about 2.1 million gold ounces included in the 6KFS but NOT in the 3KFS. Drilling there in the 1980s, outside the resource envelope, also hit several wide, shallow intersections of 6 and 7 g/t Au, McLeod said – rich ore by any standard. Sabina geologists were puzzled why these near-surface intercepts were not followed up at the time.

The answer, from people directly involved in the drill programs: the predecessor company was looking for higher Lupin-like grades of 9 and 10 g/t material. The nearby Lupin mine produced about 3.35 million ounces of gold between 1982 and 2004 at an average head grade of 9.27 g/t.

Under the 6,000tpd plan, George ore was slated to be trucked to the mill at Goose. But McLeod believes George is destined to become a second standalone mine once Goose is put into production. It’s a strategy both Agnico Eagle (Amaruq) and TMAC Resources (Boston) are following with their multi-deposit Nunavut gold districts.

EXPLORING A VAULT

The greatest upside potential, however, is probably where Sabina is drilling now – at the Llama extension and the Umwelt Vault zone. Particularly the latter. Vault assays are outstanding from the summer drill program, which included about 4,000 metres of Vault drilling. A spring hole there hinted at the richness, returning 16.86 g/t gold over 13.5 metres, including 27.11 g/t over 7.95 metres.

The Vault targeting is follow-up from rich 2011-12 intercepts, including 17 metres of 49.24 g/t Au. For perspective, that grade is roughly equal to GT Gold’s (GTT-V) recent intercept that helped send that Golden Triangle focused play to a $200 million market cap briefly (Sabina’s market cap is $517 million. Except Sabina’s 2012 hole was 17 metres, compared to 6.95 metres for GTT. I asked VP Ex Angus Campbell why the rich hits weren’t followed up on at the time – he said the focus then was on building open-pit ounces.

On the infrastructure and development front, Sabina plans to truck supplies to the mine via a 157-km winter road built every year at a cost of $8 million. The CEO described it as a “fairly simple” road, logistically. Sabina will have about 45 days to truck supplies from the marine laydown area, in southern Bathurst Inlet, to the Goose camp.

Sabina is not banking on it, but a Northern road plan that has been decades in the making could also intervene to lower costs for the project. That’s the Grays Bay port and road initiative, a plan for an all-season 230-km road from a deep-water Arctic port that connects to the Yellowknife winter road. With the buy-in of the Kitikmeot Inuit Association, which also strongly supports Back River, this iteration of the plan looks closer to reality than it has for some time. The road would be closer to the George deposit than Goose, but could result in significant savings.

THE PATH FORWARD

Resource Opportunities initiated coverage on Sabina Gold & Silver on May 18, 2015, during the bear market. The catalyst for coverage was McLeod’s hiring. When I met him and Sabina’s VP Communications Nicole Hoeller in a Vancouver coffee shop, McLeod gave me a taste of his tenacity: “My philosophy is like the Italian rule of driving: you rip the rear-view mirror off, put your foot on the gas and it doesn’t really matter what’s behind you but you’re moving forward … You’re not going to let your foot off the gas.” The line implies recklessness, but it’s more about a single-minded focus on advancing projects.

McLeod could not have foreseen the dark days of summer 2016, but the philosophy served him well during that period. That’s when the Nunavut Impact Review Board (NIRB) recommended to the federal government the rejection of the Back River project as currently constituted, despite widespread Inuit and community support. The reasons given were concern over caribou and climate change implications. Ottawa flipped the tables, rejecting the NIRB’s conclusions and ordering the regulatory agency to re-examine its findings. That resulted in a positive recommendation. A final ruling from the federal government is expected before year-end.

The number of high-quality gold discoveries in recent years has dropped along with the exploration budgets of the majors. Ore grades have steadily fallen and the miners are more reliant than ever on junior exploration companies to fill the supply gap. There are precious few district-scale, high-grade gold projects in safe jurisdictions. Sabina’s Back River fits the bill and has no fatal flaws. I expect Sabina to be acquired by a large gold mining company, at prices well above the current levels. In a rising gold price environment – not a given, a bidding war could well be the outcome.

CONCLUSIONS

I have described Sabina previously in the newsletter as a kind of triple leverage play, and it still holds true. The shares were at bear market levels of 39 cents when I initiated coverage, and Sabina had 194 million shares outstanding. Importantly, the share count has risen only 30 million since then as the stock has increased sixfold.

That’s in the rear-view mirror, of course, and the key question is what kind of upside exists from current levels. Gold is showing weakness again, following an increase through US$1,300/oz and rapid rise to $1,350. But I expect the precious metal to resume its rise in an easy-money world, and Sabina’s 7.2 million ounces make the company’s shares an ideal vehicle for exposure to gold. I have added to my position at levels above the current share price. The following factors give Sabina multibagger potential from these levels, and tremendous leverage:

1) Exploration – Drill plays have been getting much of the love in recent months. GT Gold Corp and other plays focused on British Columbia’s Golden Triangle plays have been leading the charge, but there have been others. The junior market’s enthusiasm for drill plays and ambivalence towards development plays reminds me of the Benjamin Graham quote: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Sabina’s recent drill results compare favourably with many drill plays that have added tens of millions of dollars of market cap on favourable assays. In Sabina’s case, the assays are overlain on a very high-grade, FS-stage gold project and potentially have a direct favourable impact on project economics. Votes come and go but the weight remains.

2) Takeover premium. Recent takeover premiums in the gold space have been at healthy premiums (see below). In Sabina’s case, the strength of the project means the premium should at least match the highest-ranking, Integra at about 50%. That offer came from a major (Eldorado Gold) that already owned about 13% of Integra shares. Sabina has no such partner, one of the reasons a bidding war is quite possible. Dundee Precious Metals and Sun Valley Gold are the largest shareholders, each with just above 10%. Here are the takeover premiums a few of the more recent takeovers. The premium to the last close is first, followed by the premium to the 20-day volume-weighted average share price:

Eldorado – Integra Gold ($590 million): 46%, 52% (gold at US$1,233/oz)
Kirkland Lake Gold – Newmarket Gold ($1 billion): 9.4%, 23% (US$1,318/oz)
Goldcorp – Kaminak Gold ($520 million): 33%, 40% (US$1,279/oz).

3) Silver royalty: Sabina retained a valuable royalty when it sold the prior flagship project, the Hackett River polymetallic deposit, to Xstrata (now Glencore). It’s a 22.5% royalty on the first 190 million ounces of silver produced, and 12.5% on the remainder. Hackett River is one of the world’s largest undeveloped VMS deposits and the main price is zinc. Zinc has soared from below US70 cents/lb in January 2016 to about $1.40 today. The royalty was previously assigned a value of $300 million by analysts, and McLeod contends it would trade at a valuation of $300-$400 million in the portfolio of a larger royalty company such as Wheaton Precious Metals or Royal Gold. The silver royalty gets little to no value in Sabina’s portfolio.

Suitors? It’s a long list. Goldcorp has telegraphed its intention to only acquire district-scale projects, and Back River fits the bill. The project is superior on almost every level – grade, size, scalability – to Kaminak’s Coffee project and Goldcorp spent $520 million to purchase that operation. This is pure speculation, but I bet B2Gold CEO Clive Johnson would also love to open a high-grade gold mine in Canada to go with operations in more exciting jurisdictions that include Mali, the Philippines and Burkina Faso.

Management is the single most important ingredient in the junior mining sector, and Sabina’s is impressive. When he took over as CEO, McLeod refocused the company, trimming some fat and beefing up insider skin in the game. Under his stewardship, Sabina has smartly increased the quality of the gold ounces while controlling the share structure. I was impressed during the site visit by both VP Ex Angus Campbell and Exploration Manager James Maxwell.

Finally, a small detail. Sometimes, they tell a tale. There was no swag on the site visit – company shirts, ball caps, pens, etc – and clearly cost considerations were front and centre for Sabina. I’ve seen lots of swag from plenty of lesser projects in my travels. As a shareholder, seeing that kind of focus on the lesser details reassured me that Sabina will pay close attention on the big details, too – such as a fair takeout price.

Sabina Gold & Silver (SBB-T)
Price: $2.31
Shares outstanding: 224 million (243M f-d)
Treasury: $36.6 million (as of June 30, not including financing proceeds)
Market cap: $517.4 million

Disclosure: I own shares of Sabina Gold & Silver and the company paid for costs associated with the site visit. Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein, and may change their positions without notice. (Any positions will be disclosed explicitly.)

Gold suffered a sharp pullback this past month, spawning bearish sentiment. Futures speculators fled on surging Fed-rate-hike odds and new stock-market record highs. That pounded gold lower despite strong investment demand. This healthy sentiment-rebalancing retreat has left gold ready to rally again. Both its technicals and seasonals are very bullish, and futures speculators’ selling overhang has considerably abated.

On September 7th, gold powered 1.1% higher to $1348. That was exactly a 1.0-year high, gold’s best level seen since before Trump’s surprise election victory and the resulting extreme Trumphoria stock-market rally. But since gold had surged 4.9% higher in less than two weeks, greed was mounting again. So a couple trading days later, gold started selling off sharply and birthed this past month’s pullback.

As is usually the case in gold, the pullback spark was multifaceted. When gold had peaked, futures-implied Fed-rate-hike odds for its mid-December meeting were under 32%. But they shot up to 42% on Monday September 11th, when gold’s initial 1.5% drop kicked off this pullback. That day saw a strong relief rally in the stock markets, following a weekend where North-Korea and hurricane-Irma fears failed to materialize.

North Korea didn’t launch another ballistic missile or detonate another nuclear bomb for its Founder’s Day holiday, the anniversary of Kim Jong-un’s grandfather founding the modern country in 1948. And Irma’s eye veered south over Cuba before slamming Florida, dissipating enough of its energy. Thus Florida was thankfully spared from being razed like some of the Caribbean islands that bore Irma’s full force.

So the S&P 500 surged 1.1% that day, hitting its first new record high in five weeks. That lifted perceived Fed-rate-hike odds. As the anti-stock trade that often moves counter to stock markets, gold fell sharply on heavy gold-futures selling. That was pretty much the whole story of this past month’s entire pullback, a parade of new stock-market record highs and higher Fed-rate-hike odds fueling big gold-futures selling.

Thus by this week, gold had retreated 5.7% to $1271 in less than a month. During that span, no fewer than 11 new all-time-record-high S&P 500 closes were witnessed. That’s actually the biggest cluster seen in the entire post-election Trumphoria rally! And futures-implied Fed-rate-hike odds for its December meeting skyrocketed from 32% to 83% in that gold-pullback span. No wonder gold suffered heavy selling.

Big pullbacks always weigh on sentiment, breeding bearishness. So traders are now naturally quite pessimistic on gold’s near-term outlook. But that’s the very reason pullbacks and corrections exist, to rebalance sentiment. That keeps bull markets healthy. The excessive greed seen at major interim highs threatens to suck in too many buyers too soon, exhausting near-term buying. That can prematurely kill bulls.

Major mid-bull selloffs work to bleed away this topping greed. This is especially true for the gold-futures speculators who dominate gold’s short-term price action. As a herd they tend to get excessively long in strong gold rallies leading to interim highs. Pullbacks and corrections force these momentum players to start unwinding those overweight upside bets. Their selling quickly feeds on itself in this hyper-leveraged market.

That ultimately generates fear, restoring psychological balance. This paves the way for buyers to return and drive gold’s next rally higher. That’s where we are today. The past month’s sharp gold pullback has likely largely run its course, close to a major bottoming. This is evident in gold’s technicals, the collective gold-futures positions held by speculators, and gold’s seasonals. Gold’s technicals keep this pullback in perspective.

While a sharp 5.7% drop in just 18 trading days feels miserable, it was no big deal in the grand scheme. Gold’s current bull was born in late 2015, fueled by huge investment demand following the first stock-market corrections in years. This gold bull’s first upleg powered 29.9% higher in just 6.7 months into July 2016. Then gold corrected, which is perfectly normal and expected after all uplegs in healthy bull markets.

But thanks to the extreme Trumphoria stock-market rally ignited by Trump’s surprise win, this gold bull’s first correction snowballed to monstrous proportions. Gold is often hostage to stock-market fortunes, as they effectively control gold investment demand. When stock markets are high, investors feel no need to prudently diversify their stock-heavy portfolios with counter-moving gold. Thus gold languishes in stock euphoria.

That anomalously-large gold correction finally bottomed in December 2016 after a brutal 17.3% loss in just 5.3 months. Nevertheless that remained short of new-bear-market territory at -20%, so gold’s young bull remained very much alive and well. This gold bull’s second upleg has powered higher on balance all year, up 19.5% at best over 8.7 months in early September. This current upleg has proven very impressive.

Gold has carved a well-defined uptrend this year, despite major obstacles. They include the seemingly-endless parade of Trumphoria-fueled stock-market record highs, the Fed’s third and fourth rate hikes of its current cycle, and gold’s usual summer-doldrums low which I warned about in advance. Despite all that, gold kept marching higher. This second upleg’s uptrend is truly outstanding given 2017’s stiff gold headwinds.

As I discussed back in early August, gold usually enjoys a major autumn rally between mid-summer and late September. This year’s proved quite strong, with gold powering 11.2% higher in just 2.0 months by early September. That catapulted gold above its uptrend resistance, and generated plenty of greed. As of early September, gold’s 17.2% year-to-date gain trounced the S&P 500’s 10.1%. Gold is thriving this year!

Again mid-upleg pullbacks are essential to keeping sentiment balanced, ultimately both prolonging and enlarging uplegs. Pullbacks are sub-10% selloffs within ongoing uplegs. Corrections are 10%+ selloffs between uplegs within ongoing bulls. Bull markets without pullbacks and corrections, like these surreal stock markets today, are very dangerous. Suppressing selloffs only delays then later exacerbates them.

Despite gold’s sharp 5.7% pullback in the past month, this current upleg’s technicals are still very bullish. Gold remains well within its upleg’s strong uptrend, well above lower support. And other than the weeks straddling that early-September interim high, this week’s $1270s levels are still among the best seen this year. On top of that gold remains above its trend-defining 200-day moving average, which continues to rise.

So from a pure technical perspective, the bearish gold sentiment these days is totally unjustified. Rather than fearing gold is heading much lower, smart speculators and investors should be salivating at buying relatively low within a strong bull-market upleg. Sharp mid-upleg pullbacks nearing trend support offer the best buying opportunities seen within bull markets outside of the major-correction lows between uplegs.

Most if not nearly all of the gold selling driving this recent healthy pullback came from futures speculators. These traders run extreme leverage that can exceed 25x! Such vast risk forces them to be short-term momentum players. This is evident in this chart showing speculators’ total long and short contracts per the weekly Commitments of Traders reports rendered under gold. These guys have been heavy sellers.

Because of gold futures’ extreme leverage, their speculators punch way above their weight in terms of bullying gold’s price around. It’s impossible to figure out why gold’s price does what it does without first understanding what’s going on in gold futures. Last week I wrote an essay on gold uplegs’ three stages that dives into gold-futures trading in depth. You may need that background to understand this critical chart.

Speculators’ collective gold-futures positions are only reported once a week, current to Tuesdays. Gold peaked at $1348 on Thursday September 7th, which was part of the CoT week ending the next Tuesday the 12th. Total spec gold-futures longs had surged to 400.1k contracts that day, an 11.5-month high. 400k+ is high absolutely too, as the all-time record peak seen in early July 2016 was 440.4k contracts.

That left gold with a futures selling overhang in early September. With these traders largely fully deployed on the long side, they didn’t have much more room to buy. But they had lots of room to sell if something spooked them. And there’s nothing gold-futures speculators fear more than Fed rate hikes. So as the December rate-hike odds rocketed higher in September, these hyper-leveraged traders were quick to sell.

In the first CoT week after that peak, they dumped 23.2k long contracts. In the second CoT week, which is the latest as this essay is published, they jettisoned another 25.1k. Anything over 20k in a single CoT week is huge. So speculators’ gold-futures selling has been fast and furious. The 48.3k long contracts they cast into the markets were the equivalent of 150.2 metric tons of gold! That’s far too much to digest quickly.

According to the World Gold Council’s latest fundamental data, global gold investment demand in the first half of 2017 totaled 699.6t. Divide that by 26 weeks, and it works out to 26.9t per week. So there’s no way the gold-futures speculators’ colossal 75.1t-per-week selling can be absorbed. That’s far too much gold too fast for investment demand to offset. Thus gold fell sharply as supply temporarily overwhelmed demand.

Such extreme selling rates are just as unsustainable from the futures speculators’ side. Out of 978 CoT weeks since early 1999, only 21 or 2.1% have seen spec long-side selling exceed 48.3k contracts in a 2-CoT-week span. Such extreme selling soon peters out, which helps gold bottom. There’s no way that 24k-contract-per-CoT-week spec-long-selling pace can be maintained for long, as long selling is self-limiting.

Speculators’ gold-futures longs are finite. Even in the deep gold despair of late 2016 following that epic Trumphoria-driven gold correction, they bottomed around 254k contracts. They were sitting at 351.8k back on September 26th, the latest CoT data when this essay was published. Since then gold fell still-another 1.8% at worst as of Tuesday this week. So the next CoT report Friday afternoon will show more selling.

If speculators dumped another 20k long contracts, that only leaves 78k over this gold bull’s rock-bottom support. And those levels are seldom seen within uplegs, only between uplegs at the bottoms of major corrections. So a case can be made that the lion’s share of the gold-futures selling that drove this past month’s pullback is likely over. While speculators could sell more, they’ve probably already dumped enough.

Total spec longs certainly aren’t low, but they don’t get low within bull-market uplegs. And spec shorts aren’t high, but they don’t get high without some super-bearish catalyst to drive risky short selling. With those December Fed-rate-hike odds already up at 83%, that eventuality is nearly fully priced in. Those futures-implied Fed-rate-hike odds seldom exceed the mid-80s until a week or so before a hiking FOMC meeting.

Another reason this past month’s gold-futures selling has likely largely run its course is investors are still aggressively buying gold. Futures speculators dominate gold’s short-term trends with their epic leverage, but investors with their far-larger pools of capital drive broader upleg and bull-market trends. While futures speculators rushed to sell last month, stock investors flooded into gold ETFs led by the GLD SPDR Gold Shares.

Again in last week’s essay on gold uplegs’ three stages I explained the crucial GLD mechanics and gold-price impact in depth. In a nutshell, when stock investors buy GLD shares faster than gold itself is rising it forces this ETF to shunt that excess demand and capital into physical gold bullion. In September while gold plunged 3.1%, GLD’s holdings surged 5.9% or 48.2t higher! That reveals very-strong investment demand.

GLD hadn’t enjoyed a bigger monthly holdings build, and thus seen more stock-market capital inflows, since June 2016. That was when gold was in favor as this young bull’s first powerful upleg was starting to top. So to see gold investment demand soaring back toward those levels despite rocketing Fed-rate-hike odds and the biggest Trumphoria cluster of stock-market record highs was remarkable and very bullish.

If investors are already flocking to gold despite these lofty stock markets, imagine how gold investment demand will soar when they inevitably roll over. Remember this entire gold bull was ignited back in late 2015 and early 2016 on the first stock-market corrections in 3.6 years. The next stock-market correction, which is long overdue, will lead to another scramble by investors to prudently diversify their stock-heavy portfolios.

Gold’s seasonals also argue that its pullback is likely largely over, with a major rally imminent. This chart individually indexes gold prices to a 100 baseline within each bull-market year from 2001 to 2012 and 2016. Then all these annual indexes are averaged together to discern bull-market seasonal tendencies. It’s perfectly normal and expected for gold to suffer a major seasonal pullback in late September and October.

In modern bull-market years, gold’s autumn rally tends to top in late September. Specifically it peaks on last month’s 15th trading day on average. That translates this year to Friday September 22nd. Instead gold’s seasonal peak came a couple weeks earlier last month. That may have simply been because gold was overbought, having surged 11.2% in 2.0 months which is much better than the 6.9% autumn-rally average.

After that autumn-rally interim high, gold tends to suffer a seasonal pullback in bull-market years ending in late October. That averages out to this month’s 16th trading day, or Monday October 23rd this year. But since this year’s typical seasonal pullback was pulled forward 11 trading days, it’s not unreasonable to expect it to end proportionally early. That would peg today the 6th as the potential seasonal bottom for gold!

This duration-shifted rationale is flimsy alone, but it gains weight due to the magnitude of gold’s seasonal pullback this year. Gold only tends to retreat 2.2% on average in this late-September-to-late-October span. But this year it has again fallen 5.7% in that rough timeframe, 2.6x the seasonal average. Selloffs generally have a size-and-time tradeoff. The bigger and sharper they are, usually the shorter their duration.

Remember selloffs within healthy ongoing uplegs exist to rebalance sentiment. Greed can be bled away slowly with a gradual shallow pullback, or blasted away rapidly with a sharp deep pullback. And there’s no doubt this past month’s one was the latter in seasonal terms. It should’ve done more than enough work to eradicate early September’s excessive greed and inject fear back into gold-futures speculators.

The really exciting thing is gold’s October seasonal bottom is the last one before this metal’s strongest seasonal rally of the year. On average gold’s winter rally propels it 9.5% higher in bull-market years by late February. That 9.5% winter rally well outguns the 6.9% average autumn rally that recently ended, and dwarfs the 3.8% average spring rally. We are right at gold’s most-bullish time of the year seasonally!

Gold has real potential to enjoy a monster winter rally this year, especially if these insane stock markets start to roll over under the Fed’s just-unleashed quantitative-tightening juggernaut. Just like back in early 2016, gold investment demand will skyrocket again when the long-overdue stock selloff starts generating some fear. This year has again proven gold can rally without weaker stock markets, but they really accelerate it.

And the Fed’s likely December rate hike is nothing to fear despite futures speculators’ paranoia. Gold actually thrives during Fed-rate-hike cycles. It averaged gains of 26.9% in all 11 since 1971 before this current one. During the last one between June 2004 to June 2006, gold soared 49.6% higher despite 17 consecutive rate hikes totaling 425 basis points! In the current cycle to date, this week gold was still up 20.1%.

Despite all the bearishness out there thanks to this past month’s sharp pullback, gold is readying to rally. Its technicals continue to look very bullish, gold-futures speculators’ extreme selling can’t be sustained, investors are still buying big, and gold’s biggest seasonal rally of the year is imminent. These coming major gains as this upleg resumes can be ridden in physical gold bullion or that leading GLD gold ETF.

But far greater upside is coming in the gold miners’ stocks with superior fundamentals. They enjoy big profits leverage that really amplifies rallying gold prices, starting at 2x to 3x for major gold miners and going even higher for smaller ones! The gold miners’ stocks have naturally fallen sharply with gold over the past month. They remain radically undervalued even at today’s gold prices, let alone where gold is heading.

The key to riding any gold bull to multiplying your fortune is staying informed, both about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research through our popular newsletters.

The bottom line is gold is readying to rally. The sharp pullback it suffered over the past month is normal and healthy, serving to rebalance sentiment. Despite the falling prices and resulting bearishness, gold remains well within its bull-market upleg’s strong uptrend channel. The futures speculators responsible for gold’s selloff can’t keep jettisoning long contracts at the extreme and unsustainable rate seen last month.

Meanwhile stock investors continued aggressively buying gold, driving GLD’s biggest monthly holdings build of this gold bull’s second upleg. Their investment demand will explode when these crazy stock markets inevitably roll over. On top of all that, gold is on the verge of starting its biggest seasonal rally of the year. This past month’s sharp pullback created a fantastic opportunity to buy low before gold starts surging again.

Adam Hamilton, CPA

October 6, 2017

Today is options expiry day for gold. That’s almost certainly the reason for gold’s pullback today, after it staged a powerful rally yesterday.
A pause in the price action is normal around these expiry events. The October options contract is expiring, which is recognized by traders as an important one.
Traders will now focus on December options.
Please click here now. Double-click to enlarge this short term gold chart.
For a medium term view of the price action, please click here now. Double-click to enlarge.
From a technical perspective, all the current price movement in the gold market appears to be “textbook” action. To summarize the recent movement: Gold burst above the $1305 area highs and surged to the “Call-In” day highs in the $1352 area.
I issued a “book profits now” call as that happened, and the rally promptly died. The pullback took gold back to the breakout zone in the $1305 area.
Yesterday, gold staged its first rally from that support zone. Gold may soon pull back deeper into that support zone before launching what should be a successful rally above the call-in day resistance zone at $1352 – $1362.
I’ve laid out two buy zones for investors who want to position themselves to participate in the anticipated breakout above $1362.
All pullbacks can make investors nervous, and those nervous investors should look at put options for insurance (both emotional and financial).
Please click here now. That’s a snapshot of the strike price, closing price, change in price, and trading volume for GLD-nyse put options.
These are December options. Different contract months are available and they can be bought through most stock brokers. Send me an Email to stewart@gracelandupdates.com if you want more information about protective put options and I’ll send you a tactical video. Thanks.
Buying some put options at the same time as buying long positions in gold, silver, and related stocks can help amateur investors to buy serious price weakness,yet still get a good night’s sleep.
Please click here now. I’ve annotated this Dimitri Speck seasonal action gold chart. In the case of gold price seasonality, history doesn’t always exactly repeat,but it certainly does rhyme. Note the short term peak that often occurs at the end of September.
October is generally a pullback month ahead of Diwali, but that pullback may have started a bit earlier than usual this year. So, it should end earlier too, probably within about two weeks. There’s an outside chance that it’s already ended, but I wouldn’t bet real money on that idea.
My $1305 – $1295 and $1285 – $1270 buy zones should be the focus of gold bugs for now.
Please click here now. The head of the World Gold Council outlines the case for “peak gold”, and he predicts gold will move to $1400 in 2018 and to all-time highs in “the medium term”.
He may or may not be correct that the world will never produce as much gold as it produces now, but he’s a very influential man.
So, the question isn’t so much whether “Peak Gold” is real, but whether institutional money managers think it’s real or even partially real, and they do appear to be believers!
I predict they will move substantially more money into gold stocks in 2018 than they are moving now, based on the view that supply is unlikely to rise much, if at all.
My personal focus on all price weakness since 2014 has been gold stocks more than bullion. I will also note that gold mining exploration budgets have fallen about 70% since 2012. It takes a long time to put a gold project into production. All the exploration done in the 2012 period doesn’t seem to be bearing much low hanging fruit in terms of viable new projects.
Please click here now. Double-click to enlarge this interesting GDX chart. GDX has been staging numerous technical breakouts to the upside, and the latest one is from a large symmetrical triangle.
The apex of that triangle sits in the $22.50 area. Once option expiry day is out of the way, there is still the US jobs report to deal with next week (October 6, 2017). Gold and gold stocks should make a meaningful seasonal low around that rough time frame. From there, I expect gold to begin a trending move higher into 2018, rising up above key resistance at $1392 and steadily rallying towards $1523.
GDX should easily hit $37 in 2018, with $55 also being a possible target zone if Western money managers continue to allocate money to the SPDR fund as they have in recent months!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Eight Are Great!” senior gold stocks report! I highlight the price action of eight low and medium priced senior producers, with key buy and sell zones highlighted!

Thanks!

Stewart Thomson

Graceland Updates

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Risks, Disclaimers, Legal

Are You Prepared?

This week’s landmark Federal Open Market Committee decision to launch quantitative tightening is one of the most-important and most-consequential actions in the Federal Reserve’s entire 104-year history. QT changes everything for world financial markets levitated by years of quantitative easing. The advent of the QT era has enormous implications for stock markets and gold that all investors need to understand.

This week’s FOMC decision to birth QT in early October certainly wasn’t a surprise. To the Fed’s credit, this unprecedented paradigm shift had been well-telegraphed. Back at its mid-June meeting, the FOMC warned “The Committee currently expects to begin implementing a balance sheet normalization program this year”. Its usual FOMC statement was accompanied by an addendum explaining how QT would likely unfold.

That mid-June trial balloon didn’t tank stock markets, so this week the FOMC decided to implement it with no changes. The FOMC’s new statement from Wednesday declared, “In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.” And thus the long-feared QT era is now upon us.

The Fed is well aware of how extraordinarily risky quantitative tightening is for QE-inflated stock markets, so it is starting slow. QT is necessary to unwind the vast quantities of bonds purchased since late 2008 via QE. Back in October 2008, the US stock markets experienced their first panic in 101 years. Ironically it was that earlier 1907 panic that led to the Federal Reserve’s creation in 1913 to help prevent future panics.

Technically a stock panic is a 20%+ stock-market plunge within two weeks. The flagship S&P 500 stock index plummeted 25.9% in just 10 trading days leading into early October 2008, which was certainly a panic-grade plunge! The extreme fear generated by that rare anomaly led the Fed itself to panic, fearing a new depression driven by the wealth effect. When stocks plummet, people get scared and slash their spending.

That’s a big problem for the US economy over 2/3rds driven by consumer spending, and could become self-reinforcing and snowball. The more stocks plunge, the more fearful people become for their own financial futures. They extrapolate the stock carnage continuing indefinitely and pull in their horns. The less they spend, the more corporate profits fall. So corporations lay off people exacerbating the slowdown.

The Fed slashed its benchmark federal-funds interest rate like mad, hammering it to zero in December 2008. That totally exhausted the conventional monetary policy used to boost the economy, rate cuts. So the Fed moved into dangerous new territory of debt monetization. It conjured new money out of thin air to buy bonds, injecting that new cash into the real economy. That was euphemistically called quantitative easing.

The Fed vehemently insisted it wasn’t monetizing bonds because QE would only be a temporary crisis measure. That proved one of the biggest central-bank lies ever, which is saying a lot. When the Fed buys bonds, they accumulate on its balance sheet. Over the next 6.7 years, that rocketed a staggering 427% higher from $849b before the stock panic to a $4474b peak in February 2015! That was $3625b of QE.

While the new QE bond buying formally ended in October 2014 when the Fed fully tapered QE3, that $3.6t of monetized bonds remained on the Fed’s balance sheet. As of the latest-available data from last week, the Fed’s BS was still $4417b. That means 98.4% of all the Fed’s entire colossal QE binge from late 2008 to late 2014 remains intact! That vast deluge of new money created remains out in the economy.

Don’t let the complacent stock-market reaction this week fool you, quantitative tightening is a huge deal. It’s the biggest market game-changer by far since QE’s dawn! Starting to reverse QE via QT radically alters market dynamics going forward. Like a freight train just starting to move, it doesn’t look scary to traders yet. But once that QT train gets barreling at full speed, it’s going to be a havoc-wreaking juggernaut.

QT will start small in the imminent Q4’17, with the Fed allowing $10b per month of maturing bonds to roll off its books. The reason the Fed’s QE-bloated balance sheet has remained so large is the Fed is reinvesting proceeds from maturing bonds into new bonds to keep that QE-conjured cash deployed in the real economy. QT will slowly taper that reinvestment, effectively destroying some of the QE-injected money.

These monthly bond rolloffs will start at $6b in Treasuries and $4b in mortgage-backed securities. Then the Fed will raise those monthly caps by these same amounts once a quarter for a year. Thus over the next year, QT’s pace will gradually mount to its full-steam speed of $30b and $20b of monthly rolloffs in Treasuries and MBS bonds. The FOMC just unleashed a QT juggernaut that’s going to run at $50b per month!

When this idea was initially floated back in mid-June, it was far more aggressive than anyone thought the Yellen Fed would ever risk. $50b per month yields a jaw-dropping quantitative-tightening pace of $600b per year! These complacent stock markets’ belief that such massive monetary destruction won’t affect them materially is ludicrously foolish. QT will naturally unwind and reverse the market impact of QE.

This hyper-easy Fed is only hiking interest rates and undertaking QT for one critical reason. It knows the next financial-market crisis is inevitable at some point in the future, so it wants to reload rate-cutting and bond-buying ammunition to be ready for it. The higher the Fed can raise its federal-funds rate, and the lower it can shrink its bloated balance sheet, the more easing firepower it will have available in the future.

But QT has never before been attempted and is extremely risky for these QE-levitated stock markets. So the Fed is attempting to thread the needle between preparing for the next market crisis and triggering it. Yellen and top Fed officials have been crystal-clear that they have no intention of fully unwinding all the QE since late 2008. Wall Street expectations are running for a half unwind of the $3.6t, or $1.8t of total QT.

At the full-speed $600b-per-year QT pace coming in late 2018, that would take 3 years to execute. The coming-year ramp-up will make it take longer. So these markets are likely in for fierce QT headwinds for several years or so. At this week’s post-FOMC-decision press conference, Janet Yellen took great pains to explain the FOMC has no intentions of altering this QT-pacing plan unless there is some market calamity.

Yellen was also more certain than I’ve ever heard her on any policy decisions that this terminal $50b-per-month QT won’t need to be adjusted. With QT now officially started, the FOMC is fully committed. If it decides to slow QT at some future meeting in response to a stock selloff, it risks sending a big signal of no confidence in the economy and exacerbating that very selloff! Like a freight train, QT is hard to stop.

With stock markets at all-time record highs this week, QT’s advent seems like no big deal to euphoric stock traders. They are dreadfully wrong. CNBC’s inimitable Rick Santelli had a great analogy of this. Just hearing a hurricane is coming is radically different than actually living through one. QT isn’t feared because it isn’t here and hasn’t affected markets yet. But once it arrives and does, psychology will really change.

Make no mistake, quantitative tightening is extremely bearish for these QE-inflated stock markets. Back in late July I argued this bearish case in depth. QT is every bit as bearish for stocks as QE was bullish! This first chart updated from that earlier essay shows why. This is the scariest and most-damning chart in all the stock markets. It simply superimposes that S&P 500 benchmark stock index over the Fed’s balance sheet.

Between March 2009 and this week’s Fed Day, the S&P 500 has powered an epic 270.8% higher in 8.5 years! That makes it the third-largest and second-longest stock bull in US history. Why did that happen? The underlying US economy sure hasn’t been great, plodding along at 2%ish growth ever since the stock panic. That sluggish economic growth has constrained corporate-earnings growth too, it’s been modest at best.

Stocks are exceedingly expensive too, with their highest valuations ever witnessed outside of the extreme bull-market toppings in 1929 and 2000. The elite S&P 500 component companies exited August with an average trailing-twelve-month price-to-earnings ratio of 28.1x! That’s literally in formal bubble territory at 28x, which is double the 14x century-and-a-quarter fair value. Cheap stocks didn’t drive most of this bull.

And if this bull’s gargantuan gains weren’t the product of normal bull-market fundamentals, that leaves quantitative easing. A large fraction of that $3.6t of money conjured out of thin air by the Fed to inject into the economy found its way into the US stock markets. Note above how closely this entire stock bull mirrored the growth in the Fed’s total balance sheet. The blue and orange lines above are closely intertwined.

Those vast QE money injections levitated stock markets through two simple mechanisms. The massive and wildly-unprecedented Fed bond buying forced interest rates to extreme artificial lows. That bullied traditional bond investors seeking income from yields into far-riskier dividend-paying stocks. Super-low interest rates also served as a rationalization for historically-expensive P/E ratios rampant across the stock markets.

While QE directly lifted stocks by sucking investment capital out of bonds newly saddled with record-low yields, a secondary indirect QE impact proved more important. US corporations took advantage of the Fed-manipulated extreme interest-rate lows to borrow aggressively. But instead of investing all this easy cheap capital into growing their businesses and creating jobs, they squandered most of it on stock buybacks.

QE’s super-low borrowing costs fueled a stock-buyback binge vastly greater than anything seen before in world history. Literally trillions of dollars were borrowed by elite S&P 500 US corporations to repurchase their own shares! This was naked financial manipulation, boosting stock prices through higher demand while reducing shares outstanding. That made corporate earnings look much more favorable on a per-share basis.

Incredibly QE-fueled corporate stock buybacks have proven the only net source of stock-market capital inflows in this entire bull market since March 2009! Elite Wall Street banks have published many studies on this. Without that debt-funded stock-buyback frenzy only possible through QE’s record-low borrowing rates, this massive near-record bull wouldn’t even exist. Corporations were the only buyers of their stocks.

QE’s dominating influence on stock prices is unassailable. The S&P 500 surged in its early bull years until QE1 ended in mid-2010, when it suffered its first major correction. The Fed panicked again, fearing another plunge. So it birthed and soon expanded QE2 in late 2010. Again the stock markets surged on a trajectory perfectly paralleling the Fed’s balance-sheet growth. But stocks plunged when QE2 ended in mid-2011.

The S&P 500 fell 19.4% over the next 5.2 months, a major correction that neared bear-market territory. The Fed again feared a cascading negative wealth effect, so it launched Operation Twist in late 2011 to turn stock markets around. That converted short-term Treasuries to long-term Treasuries, forcing long rates even lower. As the stock markets started topping again in late 2012, the Fed went all out with QE3.

QE3 was radically different from QE1 and QE2 in that it was totally open-ended. Unlike its predecessors, QE3 had no predetermined size or duration! So stock traders couldn’t anticipate when QE3 would end or how big it would get. Stock markets surged on QE3’s announcement and subsequent expansion a few months later. Fed officials started to deftly use QE3’s inherent ambiguity to herd stock traders’ psychology.

Whenever the stock markets started to sell off, Fed officials would rush to their soapboxes to reassure traders that QE3 could be expanded anytime if necessary. Those implicit promises of central-bank intervention quickly truncated all nascent selloffs before they could reach correction territory. Traders realized that the Fed was effectively backstopping the stock markets! So greed flourished unchecked by corrections.

This stock bull went from normal between 2009 to 2012 to literally central-bank conjured from 2013 on. The Fed’s QE3-expansion promises so enthralled traders that the S&P 500 went an astounding 3.6 years without a correction between late 2011 to mid-2015, one of the longest-such spans ever! With the Fed jawboning negating healthy sentiment-rebalancing corrections, psychology grew ever more greedy and complacent.

QE3 was finally wound down in late 2014, leading to this Fed-conjured stock bull stalling out. Without central-bank money printing behind it, the stock-market levitation between 2013 to 2015 never would have happened! Without more QE to keep inflating stocks, the S&P 500 ground sideways and started topping. Corrections resumed in mid-2015 and early 2016 without the promise of more Fed QE to avert them.

In mid-2016 the stock markets were able to break out to new highs, but only because the UK’s surprise pro-Brexit vote fueled hopes of more global central-bank easing. The subsequent extreme Trumphoria rally since the election was an incredible anomaly driven by euphoric hopes for big tax cuts soon from the newly-Republican-controlled government. But Republican infighting is making that look increasingly unlikely.

The critical takeaway of the entire QE era since late 2008 is that stock-market action closely mirrored whatever the Fed was doing. Ex-Trumphoria, all this bull’s massive stock-market gains happened when the Fed was actively injecting trillions of dollars of QE. When the Fed paused its balance-sheet growth, the stock markets either corrected hard or stalled out. These stock markets are extraordinarily QE-dependent.

The Fed’s balance sheet has never materially shrunk since QE was born out of that 2008 stock panic. Now quantitative tightening will start ramping up in just a couple weeks for the first time ever. If QE is responsible for much of this stock bull, and certainly all of the extreme levitation from 2013 to 2015 due to the open-ended QE3, can QT possibly be benign? No freaking way friends! Unwinding QE is this bull’s death knell.

QE was like monetary steroids for stocks, artificially ballooning this bull market to monstrous proportions. Letting bonds run off the Fed’s balance sheet instead of reinvesting effectively destroys that QE-spawned money. QE made this bull the grotesque beast it is, so QT is going to hammer a stake right through its heart. This unprecedented QT is even more dangerous given today’s bubble valuations and rampant euphoria.

Investors and speculators alike should be terrified of $600b per year of quantitative tightening! The way to play it is to pare down overweight stock positions and build cash to prepare for the long-overdue Fed-delayed bear market. Speculators can also buy puts in the leading SPY SPDR S&P 500 ETF. Investors can go long gold via its own flagship GLD SPDR Gold Shares ETF, which tends to move counter to stock markets.

Gold was hit fairly hard after this week’s FOMC decision announcing QT, which makes it look like QT is bearish for gold. Nothing could be farther from the truth. Gold’s post-Fed selloff had nothing at all to do with QT! At every other FOMC meeting, the Fed also releases a summary of top Fed officials’ outlooks for future federal-funds-rate levels. This so-called dot plot was widely expected to be more dovish than June’s.

Yellen herself had given speeches in the quarter since that implied this Fed-rate-hike cycle was closer to its end than beginning. She had said the neutral federal-funds rate was lower than in the past, so gold-futures speculators expected this week’s dot plot to be revised lower. It wasn’t, coming in unchanged from June’s with 3/4ths of FOMC members still expecting another rate hike at the FOMC’s mid-December meeting.

This dot-plot hawkish surprise totally unrelated to QT led to big US-dollar buying. Futures-implied rate-hike odds in December surged from 58% the day before to 73% in the wake of the FOMC’s decision. So gold-futures speculators aggressively dumped contracts, forcing gold lower. That reaction is irrational, as gold has surged dramatically on average in past Fed-rate-hike cycles! QT didn’t play into this week’s gold selloff.

This last chart superimposes gold over that same Fed balance sheet of the QE era. Gold skyrocketed during QE1 and QE2, which makes sense since debt monetizations are pure inflation. But once the open-ended QE3 started miraculously levitating stock markets in early 2013, investors abandoned gold to chase those Fed-conjured stock-market gains. That blasted gold into a massive record-setting bear market.

In a normal world, quantitative easing would always be bullish for gold as more money is injected into the economy. Gold’s monetary value largely derives from the fact its supply grows slowly, under 1% a year. That’s far slower than money supplies grow normally, let alone during QE inflation. Gold’s price rallies as relatively more money is available to compete for relatively less physical gold. QE3 broke that historical relationship.

With the Fed hellbent on ensuring the US stock markets did nothing but rally indefinitely, investors felt no need for prudently diversifying their portfolios with alternative investments. Gold is the anti-stock trade, it tends to move counter to stock markets. So why bother with gold when QE3 was magically levitating the stock markets from 2013 to 2015? That QE3-stock-levitation-driven gold bear finally bottomed in late 2015.

Today’s gold bull was born the very next day after the Fed’s first rate hike in 9.5 years in mid-December 2015. If Fed rate hikes are as bearish for gold as futures speculators assume, why has gold’s 23.7% bull as of this week exceeded the S&P 500’s 22.8% gain over that same span? Not even the Trumphoria rally has enabled stock markets to catch up with gold’s young bull! Fed rate hikes are actually bullish for gold.

The reason is hiking cycles weigh on stock markets, which gets investors interested in owning counter-moving gold to re-diversity their portfolios. That’s also why this new QT era is actually super-bullish for gold despite the coming monetary destruction. As QT gradually crushes these fake QE-inflated stock markets in coming years, gold investment demand is going to soar again. We’ll see a reversal of 2013’s action.

That year alone gold plunged a colossal 27.9% on the extreme 29.6% S&P 500 rally driven by $1107b of fresh quantitative easing from the massive new QE3 campaign! That 2013 gold catastrophe courtesy of the Fed bred the bearish psychology that’s plagued this leading alternative asset ever since. At QT’s $600b planned annual pace, it will take almost a couple years to unwind that epic $1.1t QE seen in 2013 alone.

Interestingly the Wall-Street-expected $1.8t of total QT coming would take the Fed’s balance sheet back down to $2.6t. That’s back to mid-2011 levels, below the $2.8t in late 2012 when QE3 was announced. Gold averaged $1573 per ounce in 2011, and it ought to head much higher if QT indeed spawns the next stock bear. That’s the core bullish-gold thesis of QT, that falling stock prices far outweigh monetary destruction.

Stock bears are normal and necessary to bleed off excessive valuations, but they are devastating to the unprepared. The last two ending in October 2002 and March 2009 ultimately hammered the S&P 500 49.1% and 56.8% lower over 2.6 and 1.4 years! If these lofty QE-levitated stock markets suffer another typical 50% bear during QT, huge gold investment demand will almost certainly catapult it to new record highs.

These QE-inflated stock markets are doomed under QT, there’s no doubt. The Fed giveth and the Fed taketh away. Stock bears gradually unfold over a couple years or so, slowly boiling the bullish frogs. So without a panic-type plunge, the tightening Fed is going to be hard-pressed to throttle back QT without igniting a crisis of confidence. As QT slowly strangles this monstrous stock bull, gold will really return to vogue.

The key to thriving and multiplying your fortune in bull and bear markets alike is staying informed, about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research in our popular newsletters.

Published weekly and monthly, they explain what’s going on in the markets, why, and how to trade them with specific stocks. They are a great way to stay abreast, easy to read and affordable. Walking the contrarian walk is very profitable. As of the end of Q2, we’ve recommended and realized 951 newsletter stock trades since 2001. Their average annualized realized gain including all losers is +21.2%! That’s hard to beat over such a long span. Subscribe today and get invested before QT’s market impacts are felt!

The bottom line is the coming quantitative tightening is incredibly bearish for these stock markets that have been artificially levitated by quantitative easing. QT has never before been attempted, let alone in artificial QE-inflated stock markets trading at bubble valuations and drenched in euphoria. All the stock-bullish tailwinds from years of QE will reverse into fierce headwinds under QT. It truly changes everything.

The main beneficiary of stock-market weakness is gold, as the leading alternative investment that tends to move counter to stock markets. The coming QT-driven overdue stock bear will fuel a big renaissance in gold investment to diversify stock-heavy portfolios. And the Fed can’t risk slowing or stopping QT now that it’s officially triggered. The resulting crisis of confidence would likely exacerbate a major stock-market selloff.

Adam Hamilton, CPA

September 22, 2017

Several weeks ago, I surprised most investors by issuing my “Book Profits Now!” call for the precious metals asset class.
When I did so, head and shoulders top formations immediately formed on gold and GDX, and prices have swooned.
Rumours of a sudden drop in Indian dealer demand appeared to become a concern for commercial traders on the COMEX.
India’s monsoon season has turned out to be a bit of a “bust”, with both flooding and drought. Farmers buy gold with a portion of their crop profits. With only another week or two left in the monsoon season, crop sales may not be very good.
Of further concern to me was the fact that the demand drop was occurring as gold arrived at the $1352 resistance zone. That resistance was created by Modi’s cash call-in that took place in November of 2016.
The upcoming Fed meeting will probably mark the end of the decline related to those concerns, but there could be additional weakness until the next US jobs report is released.
Please click here now. Double-click to enlarge.
For investors, this gold chart tells the entire tactical story. The $1270 – $1260 area is the target of the H&S top pattern.
Investors should use a two-pronged strategy to profit from the coming rally that should take gold back to the “Call-In Day” resistance around $1352.
I’ve outlined the $1315 – $1295 price area as the first key buy zone. Eager accumulators can buy right now.
Janet Yellen’s handling of the imminent launch of quantitative tightening (QT) at this Fed meeting is critical.
It will almost certainly determine whether gold bounces from the $1315 – $1295 buy zone or first proceeds down to the H&S target zone at $1260 -$1270.
If gold moves to that lower zone, investors need to consider taking more aggressive buy-side action.
That’s my personal strategy as well as my recommended one for gold bugs around the world.
Please click here now. Double-click to enlarge this GDX chart.
The technical picture for GDX is very similar to gold. Note the small but positive wedge pattern. I’ve highlighted it with thick black trend lines.
While the target of the H&S top pattern is about $22.50 (similar to the $1260 – $1270 target for gold), the wedge formation could send GDX and most gold stocks higher from current price levels.
Please click here now. Double-click to enlarge this US dollar versus Japanese yen chart. My important 14,7,7 series Stochastics oscillator is now overbought, and that’s happening just ahead of the Fed meeting.
Heavyweight analysts at Japanese bank Nomura are predicting a collapse in the dollar down to the 105 – 100 target zone by the end of the year.
That’s also been my target zone for quite awhile, and it’s because the dollar is trading in a rectangle between 108 and 114.
The technical odds of a breakdown to 100 -105 are about 67%. Also, rallies tend to be week when oscillators become overbought quickly, and that’s what’s happening now.
Please click here now. This chart tells the entire story for the precious metals asset class. It’s dramatically under owned, and there’s a beautiful double bottom pattern in play.
Gold and associated assets are clearly poised for an enormous increase in institutional ownership. I call it “The Golden Wave”. This buying is not event-based. It’s based on portfolio allocation to gold as an asset class, and that means the buying will be sustained.
Gold bugs around the world can use my key prices zones of $1315 – $1295 and $1260 – $1270 now to get tactically positioned in key gold stocks to surf the golden institutional wave!

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Are You Prepared?

Gold has surged dramatically to major breakouts since its usual summer-doldrums lows. That’s naturally rekindled interest in this leading alternative investment, despite the record-high stock markets. Investors are starting to return to gold again to prudently diversify their stock-heavy portfolios. That’s very bullish for gold, as investment capital inflows can persist for months or even years. This shift is most evident in GLD.

The American SPDR Gold Shares is the world’s leading and dominant gold exchange-traded fund. Since its birth way back in November 2004, it has acted as a conduit for the vast pools of stock-market capital to migrate into and out of physical gold bullion. The marginal gold investment demand, and sometimes supply, via GLD can be big and varies wildly. Thus GLD-share trading is often gold’s primary short-term driver.

The definitive arbiter of global gold supply and demand is the venerable World Gold Council. It publishes highly-anticipated quarterly reports called Gold Demand Trends. They offer the best reads available on global gold fundamentals. At first glance, it’s not apparent why gold-ETF demand plays such a massive role in driving gold’s price action. But digging a little deeper makes this crucial-to-understand relationship clearer.

According to the WGC, over the past 5 years from 2012 to 2016 jewelry demand averaged about 54% of overall global gold demand. Total investment demand including physical bars and coins in addition to gold ETFs averaged just 26%. Breaking that category down further into bars and coins separate from ETFs, they weighed in at averages of 28% and -2% of world gold demand respectively over the past 5 years.

The key to ETFs’ outsized impact on gold prices is in the extreme variability of their demand. Across that same span, total gold demand only varied 10% from the midpoint of its worst year to best year. For jewelry that variance ran 27%, as gold’s largest demand category is relatively inelastic to gold’s price. Variability for bar-and-coin investment was higher at 49%. But that’s still nothing compared to ETFs’ wild swings.

Global gold-ETF demand between 2012 to 2016 varied radically from a low of -914.3 metric tons in 2013 to a high of +534.2t in 2016! The percentages don’t work with a negative number, but that 5-year variance of 1448.6t is vast beyond belief. Despite global gold-ETF demand averaging just -2% of total world gold demand over that span compared to 54% for jewelry, in raw-tonnage terms ETFs’ variability ran 2.2x jewelry’s!

Gold prices are set at the margin, and capital inflows and outflows via gold ETFs dwarf changes in every other gold demand category. The extreme volatility in gold investment demand through ETFs from stock traders overpowers everything else. When stock investors are buying gold-ETF shares faster than gold itself is being bought, gold rallies. That investment buying fuels major uplegs and entire bull markets in gold.

The mission of gold ETFs including GLD is to mirror the gold price. But the supply and demand of ETF shares is independent from gold’s own. So when stock investors buy gold-ETF shares faster than gold is being bid higher, those share prices threaten to decouple to the upside. Gold-ETF managers only have one way to prevent this tracking failure. They issue new gold-ETF shares to offset that excess demand.

Selling new gold-ETF shares to stock investors raises capital, which is then plowed into physical gold bullion held in trust for shareholders that very day. This process effectively shunts excess demand for gold-ETF shares into the underlying gold market, bidding gold higher. Gold ETFs including GLD could not track the gold price if this mechanism for equalizing differential capital flows between them didn’t exist.

The opposite happens when gold-ETF shares are sold faster than gold itself is being sold. That forces the shares to disconnect from gold to the downside. Gold ETF managers avert that failure by stepping in to buy back those excess shares offered. They raise the capital necessary to sop up this excess supply by selling some of the gold bullion underlying their ETF. Gold ETFs are a capital conduit between stocks and gold!

Because of the massive size of the US stock markets, GLD capital flows are more important to gold than all of the other gold ETFs around the world combined. GLD’s managers are very transparent, publishing its physical-gold-bullion holdings daily. That offers a far-higher-resolution read on what’s going on in gold investment than the WGC’s quarterly fundamental reports. GLD’s holdings are the key to gold’s fortunes.

When GLD’s holdings are rising, that means American stock-market capital is flowing into the global gold market. When GLD’s holdings are falling, investors are pulling capital back out of gold. There is nothing more important for gold’s overall price trends than these GLD capital flows. From extremes gold-futures speculators can overpower GLD’s influence on gold from time to time, but these eclipsing bouts don’t last long.

I’ve actively studied GLD’s dominating influence on gold prices for many years now. The hard data on this is crystal-clear, as we’ll discuss shortly. But unfortunately many if not most speculators and investors in gold, silver, and their miners’ stocks still don’t understand this. You can’t really grasp what’s going on in gold, and therefore the entire precious-metals complex, if you don’t closely follow GLD’s holdings daily.

This week’s chart looks at GLD’s physical gold bullion held in trust for its shareholders superimposed over the gold price since 2015. When American stock-market capital is flowing into gold via differential GLD-share buying, gold rallies. When that capital heads back out, gold falls. These gold-investment trends often take many months to play out, and a major new GLD-share buying spree is just getting underway.

Like always in the markets, understanding what’s going on today requires perspective. If you don’t know where we’ve been and why, you’re not going to be right on where we’re going. I broke the performances in gold and GLD’s holdings into calendar quarters here for easier analysis. Back in late 2015, gold was pounded lower heading into the Fed’s first rate hike in nearly a decade in the terminal phase of a brutal bear.

In Q3’15, gold fell 4.8% on a 3.4% or 24.0t GLD draw. American stock investors continued jettisoning gold via GLD shares in Q4’15. In that bear-trough quarter, gold fell 4.9% on a 6.6% or 45.1t GLD draw driven by heavy differential selling of GLD shares. The resulting 7.3-year secular low in GLD’s physical-gold-bullion holdings held in trust for shareholders drove gold to a parallel 6.1-year low on the very same day.

Overall between late-January 2015 and mid-December 2015, gold plunged 19.3% on a 14.9% or 110.3t GLD draw. When American stock traders are paring their gold exposure by dumping GLD shares faster than gold itself is being sold, gold is going to head lower. Per the WGC, total 2015 gold demand slumped just 0.8% or 35.6t year-over-year. That was entirely due to total ETF demand falling 128.3t, led by GLD’s 66.6t drop.

But everything changed dramatically in early 2016 because the lofty US stock markets plunged sharply in their biggest correction since mid-2011. Stock investors generally ignore gold until stock markets start to sell off materially. Then they rush to redeploy in this ultimate alternative investment. Gold is effectively the anti-stock trade, a rare asset that moves counter to stock markets. So investment demand soars in selloffs.

After being universally despised in hyper-bearishness just a couple weeks earlier, gold demand started to return in January 2016. The leading S&P 500 stock index suffered a series of dramatic down days, including separate 1.5%, 2.4%, 2.5%, 2.2%, and 1.6% losses within weeks. So scared stock investors remembered gold, and started to flood back into GLD shares far faster than gold itself was being bid higher.

Their differential GLD-share buying single-handedly ignited a new gold bull! In Q1’16, gold rocketed up 16.1% on an epic 27.5% or 176.9t GLD build. According to the latest WGC Q2’17 GDT, total global gold demand in Q1’16 only rose 179.2t YoY. That means American stock investors’ heavy GLD-share buying alone was responsible for a staggering 98.7% of global gold demand growth! GLD’s gold-price influence is huge.

Q2’16 was similar, with gold powering another 7.4% higher on another big 16.0% or 130.8t GLD build. The WGC reports that worldwide gold demand only grew 134.7t YoY that quarter, so the GLD holdings build driven by stock investors’ differential share buying accounted for 97.1%! Love or hate GLD, the hard truth is gold’s new bull market never would’ve existed if stock investors hadn’t rushed into gold via that ETF.

In essentially the first half of 2016, gold had powered 29.9% higher on a stunning 55.7% or 351.1t GLD-holdings build. That gold surge naturally fueled much more investment buying, both in physical bars and coins and other gold ETFs around the world. But without that American stock-market capital flowing into gold through the GLD conduit, odds are little of that parallel buying would’ve happened. GLD is the key to gold.

Gold then stalled out in Q3’16 because new record stock-market highs slammed the door on GLD capital inflows. Stock investors generally want nothing to do with gold when stocks are soaring. And they did in the wake of the Brexit surprise on hopes for more central-bank easing. So gold just consolidated high that quarter, slipping 0.4% on a 0.2% or 2.1t GLD draw. Gold’s bull halted the moment differential GLD buying did!

GLD’s dominance reasserted itself in Q4’16, but going the other way. Opening up a direct gold conduit for the vast pools of stock-market capital is a double-edged sword. GLD’s holdings started plummeting in the wake of Trump’s surprise election victory. The resulting Trumphoria on hopes for big tax cuts soon fueled surging record stock markets. So investors once again felt no need to prudently diversify with gold.

That quarter gold plunged 12.7% on a 13.3% or 125.8t GLD draw. The WGC’s latest data shows global gold demand fell 117.3t YoY in that quarter. So the heavy differential GLD-share selling was responsible for more than all of it! For better or for worse, the rise of ETF investing to market dominance has made GLD the overpowering driver of gold’s fortunes. Nothing else has wielded such huge price influence in recent years.

Unfortunately many traditional gold investors and speculators still ignore GLD’s holdings. Many don’t like GLD because it’s paper gold, inferior to physical bars and coins held in your own immediate possession. I certainly empathize with that. I’ve been continuously recommending physical gold coins to all investors since May 2001 when gold was at $264. I’ve never recommended GLD shares to our subscribers as investments.

But regardless of whether you think GLD is an anti-gold conspiracy or a great new way to entice stock-market capital into gold, this behemoth can’t be ignored. Following GLD’s vast impact on gold prices has nothing to do with making a statement on its fitness. To be successful traders, we have to set our own emotions and opinions aside. All that matters is what’s driving the markets and why, not whether we approve.

Between gold’s early-July-2016 initial bull peak and its mid-December-2016 trough, gold plunged 17.3% on a 14.2% or 138.9t GLD draw. While that was a massive correction, it technically wasn’t a bear market because it didn’t cross that -20% threshold. This means gold has remained continuously in a young bull market since early 2016. And that bull has reasserted itself this year just as I predicted at its post-election bottom.

In Q1’17 gold indeed powered 8.5% higher out of those deep Trumphoria lows. But interestingly GLD capital flows weren’t a material factor, as this ETF only experienced a minor 1.2% or 10.2t build. Asians had stepped in to buy gold aggressively, usurping the gold-driving helm from American stock investors. It was remarkable gold climbed so much, as overall global demand fell 212.7t YoY. Q1 was something of an anomaly.

Some of that was unwound in Q2’17, the last quarter for which comprehensive gold fundamental data is now available. Gold slid 0.5% despite a 2.4% or 20.2t GLD build. That compared to overall world gold demand falling 102.3t YoY. Despite the record US stock-market highs driven by Trumphoria, American stock investors were bucking the global trend of selling gold-ETF shares. Overall ETF demand dropped 181.4t YoY.

But despite GLD apparently exiting gold’s driver seat, the red gold-price line above continued to generally mirror GLD’s holdings. The only reason GLD’s influence faded in the first half of this year is there wasn’t much differential buying or selling of GLD shares by American stock investors. The major Trumphoria stock rally left them largely indifferent to gold. That made room for other gold drivers to temporarily eclipse GLD.

Last year the absolute value of GLD’s quarterly holdings changes averaged 108.9t. But so far in the first couple quarters of 2017, that has collapsed 86% to a mere 15.2t average! Realize when stock investors start buying or selling GLD shares much faster than gold itself again, GLD’s dominance of gold’s price will come roaring back with a vengeance. Its extreme volatility overwhelmingly drives gold at the margin.

And that brings us to the current quarter where things are really getting interesting. Following that huge post-election draw, GLD’s holdings finally bottomed at 799.1 metric tons in late January. That low held until late July, when they started falling to a new post-election low of 786.9t by early August. That was the result of very-bearish sentiment fueled by gold’s usual summer-doldrums lows, its weakest time of the year.

Despite this summer seasonal lull being well-known, it inevitably freaks out traders. So they succumb to their fears and sell low at exactly the wrong time, right before gold’s major autumn rally. That started to power higher out of the early-July low right on schedule. But stock investors didn’t take notice until gold had already surged 6.4% higher to $1290 in just 5 weeks. Then they finally started buying GLD shares again.

GLD’s holdings initially bottomed on August 7th before stalling there for an entire week. The day after gold challenged $1290, August 14th, stock investors started to return. Their differential buying drove a 0.5% holdings build that day, the first in 7 weeks. That GLD-share buying pressure really accelerated in late August and early September, where separate major build days of 1.1%, 1.8%, and 1.1% were witnessed.

By September 5th, GLD’s holdings had powered 6.8% or 53.2t higher in less than a month! That helped drive a parallel 6.5% gold rally, catapulting it from $1257 to $1339 over that short span. These new gold capital inflows from stock investors via GLD are very exciting. This is the biggest and sharpest GLD build seen since well before the election, since back in Q2’16. Something big and very bullish is afoot in gold investment.

American stock investors are starting to return to gold despite the stock markets remaining near or at all-time record highs. There’s certainly been no correction or even series of major down days. Investors are returning to gold without that typical stock-selloff catalyst. And once swelling gold investment demand starts driving gold higher, its rally tends to become self-feeding and run for months on end before petering out.

Investors love chasing winners, nothing drives buying like higher prices. The more investors bid up gold through differential GLD-share buying, the more its price rallies. The more gold rallies, the more other investors want to join in to ride the momentum. Buying begets buying. To see this starting to happen in these euphoric stock markets is extraordinary. The inevitable overdue major selloff will supercharge gold buying.

These lofty Fed-goosed stock markets are long overdue for a major correction or more likely a new bear market. Once they roll over sooner or later here, gold investment demand is going to explode just like it did back in early 2016 during the last correction. That stock selling could start soon, as next week the Fed is widely expected to unveil quantitative tightening. That’s every bit as bearish for stocks as QE was bullish!

Resurgent gold investment demand will once again almost certainly propel gold dramatically higher, as it did in the first half of 2016. This bull market’s latest growing upleg can be played with GLD, but that will only pace gold’s gains. Far greater upside can be found in the gold miners’ stocks, where profits amplify gold’s gains. The gold stocks recently enjoyed major breakouts, but remain deeply undervalued relative to gold.

Published weekly and monthly, they explain what’s going on in the markets, why, and how to trade them with specific stocks. They are a great way to stay abreast, easy to read and affordable. Walking the contrarian walk is very profitable. As of the end of Q2, we’ve recommended and realized 951 newsletter stock trades since 2001. Their average annualized realized gain including all losers is +21.2%! That’s hard to beat over such a long span. Subscribe today and get invested before gold stocks really start running!

The bottom line is gold investment demand is resuming after its massive post-election slump. Differential GLD-share buying, the dominant driver of gold’s young bull, just enjoyed its biggest and fastest surge in over a year. American stock investors are starting to prudently diversify back into gold, despite the stock markets still near record highs. Worries are mounting that the long-delayed major stock selloff is looming.

When that fateful event inevitably arrives, gold investment demand is going to explode again just like it did in early 2016. That will catapult gold, silver, and their miners’ stocks dramatically higher. Seeing gold investment demand surge recently even without a stock-selloff catalyst highlights the big latent interest in gold. Usually moving counter to stocks, it remains the ultimate portfolio diversifier every investor needs to own.

Adam Hamilton, CPA

September 15, 2017

It’s not easy to build wealth in any asset class. It’s even more difficult to retain it.
On that golden note, please click here now. Double-click to enlarge this short term gold chart.
Over the past week or two, my wealth building mantra has been, “Book profit now”. From a technical standpoint, the world’s mightiest metal has begun to show signs of “head and shouldering”.
Head and shoulders top patterns are negative for the price, and it’s normal for them to appear when gold reaches strong resistance.
Strong resistance is not created out of thin air. It’s created by major fundamental events.
To view the ramifications of one of those events, please click here now. Double-click to enlarge.
In November of 2016, many gold market players were buying gold aggressively as it became obvious that gold enthusiast Donald Trump had won the US election.
The gold price spiked higher as Trump won, and then imploded when the Indian government’s shocking demonetization announcement ruined the party. Conspiracy buffs will find it very suspicious that the Indian demonetization announcement seemed to happen just minutes after Trump had won.
Regardless, the Trump victory became bitter-sweet for Western gold bugs as they watched the gold price crash.
From a technical perspective, the tremendous volume that occurred on demonetization night has turned the $1350 price zone into powerful resistance.
The good news is that compared to the violence of the November sell-off, the current decline is very mild. I’m a light buyer now, and a much bigger buyer at $1308 and $1280, basis December futures.
It’s important that investors wait for emotional discomfort before rebuying with size. The bottom line is that to build gold market wealth that is sustained, significant patience is required.
Please click here now. Double-click to enlarge this dollar versus yen chart. The 108 area is the “line in the sand” for the dollar.
That line in the sand has been severely tested, but so far it has held. When it fails, I expect gold to make a serious charge at major resistance in the $1377 – $1392 price zone.
The SPDR fund (GLD-nyse) gold holdings have climbed to the 834 tonnes area during this gold price rally. I have suggested that the rise in tonnage is related to a“gold market game changer” mentality amongst a growing number of institutional money managers.
They are not buying gold because of any particular market event (low real rates, Korea, the dollar index, etc), but because of a newfound respect for the precious metals as an investment asset class.
Jeff Currie of Goldman Sachs recently suggested that physical gold ownership is a good idea and a key diversifier for equity market investors.
Please click here now. Bank America is now quoted by Kitco News suggesting that a holding of slightly under 5% is beneficial for an equity portfolio.
The big picture for gold is fabulous. In the past, a rising equity market was negative for gold. Now, a rising equity market forces money managers to buy more gold to maintain their fixed allocation percentage to it.
Chinese and Indian money managers recommend higher portfolio allocations to gold than their Western counterparts. As they begin to dominate the market, I predict that the larger Chindian allocations will become “the new normal”.
Also, Merrill notes that Chinese jewellery demand is soft. That’s normal at this time of year, and my Chinese jewellery stocks are making multi-year highs. These stocks are key lead indicators for Western gold/silver mining stocks, and they are flashing big green lights.
Please click here now. GDX has had a fabulous summer rally. Given the $1350 gold market resistance and the arrival of GDX itself at my $25 – $26 target zone, a pause in the action is normal.
Once the consolidation ends, I expect GDX to charge towards $28 – $29. I’m also predicting that the next stage of the rally will be much broader, with many of the more speculative junior stocks joining the upside fun in a much bigger way than they have so far.
Please click here now. Double-click to enlarge. Silver is also poised for a very big move higher. It’s carving out a beautiful inverse head and shoulders bottom pattern, and an upside breakout should coincide with gold surging above $1392!

Stewart Thomson

Graceland Updates

www.guswinger.com

Email:

stewart@gracelandjuniors.com

stewart@guswinger.com

Risks, Disclaimers, Legal

Are You Prepared?

The gold stocks are off to the races again, with big gains mounting. They just staged major breakouts, shattering a vexing consolidation that had trapped them for an entire year. Such momentum early in gold’s strong season is a very-bullish portent. As higher prices improve both technicals and sentiment, buying begets more buying. With gold-stock prices still quite low in secular terms, their upside remains huge.

Gold stocks are a small contrarian sector without a wide following. So their latest surge has surprised many investors and speculators. But it shouldn’t have. In the markets knowledge is profits, so staying informed about gold stocks’ fundamentals, technicals, and sentiment is crucial. The traders who did their homework this summer and bought in low when few others were willing are now sitting on fat unrealized gains.

Nearly every summer like clockwork, gold stocks slump to a summer-doldrums low. Gold miners’ profits and hence ultimately stock prices are driven by prevailing gold prices. And gold investment demand has always tended to slump seasonally in summers. On July 7th, the flagship HUI NYSE Arca Gold BUGS Index, which is closely mirrored by the leading GDX VanEck Vectors Gold Miners ETF, hit a demoralizing low of 178.9.

The gold-stock sector was down 1.9% YTD in a year where gold had rallied 5.4% over that span. That very day, I published an essay titled Gold Stocks’ Summer Bottom. I explained why summer gold-stock weakness is a great buying opportunity, concluding “So smart contrarians willing to fight the herd to deploy when it’s unpopular are subsequently richly rewarded when gold stocks’ seasonal rallies march much higher.”

From that typical summer-doldrums low, the HUI has already surged 21.7% higher as of this week! But sadly not many traders rode that whole rally, as most people hate buying low. In early August when just a third of gold stocks’ recent rally had happened, I wrote another essay explaining gold stocks’ bullish autumn seasonals. This sector has always tended to rally sharply with gold from summer lows into late September.

A week later when less than half of gold stocks’ latest surge was accomplished, I dug into their technicals to illustrate why this sector was a coiled spring. The gold stocks had just peeked their heads above their key 200-day moving average, and major breakouts were imminent. Now a month later they have indeed come to pass just as expected. These big breakouts were highly probable, leading to big profits for the informed.

Now it’s important for all investors and speculators to understand these major breakouts’ significance and implications going forward. Such events are very bullish, happening early in major new uplegs. This first chart looks at HUI technicals since early 2016, when a new bull market in gold stocks was birthed out of extreme secular lows. Today’s breakouts are the biggest and most important since February 2016, super-bullish.

Back in mid-January 2016, the gold stocks were universally despised and bearishness was off the charts. They were battered to fundamentally-absurd 13.5-year secular lows, trading at levels last seen when gold was near $305. Yet it was actually 3.6x higher at $1087! Gold-stock prices couldn’t stay radically disconnected from their underlying earnings fundamentals forever, thus that incredible anomaly couldn’t last.

So gold stocks reversed hard and took off like rockets, blasting the HUI 182.2% higher in just 6.5 months! That certainly left them very overbought last summer, which I warned about at the time. So they started correcting, which is perfectly normal in all bull markets. But that healthy correction snowballed to truly monstrous proportions thanks to another epic anomaly. Trump’s surprise election victory indirectly crushed gold.

Gold investment is so important in all portfolios because gold tends to move counter to stock markets, which is rare. Gold is effectively the anti-stock trade, the ultimate portfolio diversifier. So the incredible Trumphoria stock-market surge in the election’s wake decimated gold investment demand. That dragged the gold stocks far lower than they deserved to be fundamentally. The HUI plunged 42.5% in 4.4 months.

That left this small sector seriously out of favor as 2016 wrapped up, which was ridiculous. Despite an ugly Q4, the HUI still blasted 64.0% higher last year! Gold stocks were the best-performing sector in all the stock markets, yet traders foolishly shunned them. That irrational hyper-bearish sentiment in the wake of the post-election gold rout bled into 2017. That trapped the gold stocks in a vexing consolidation.

It is readily evident in this chart, the triangle pattern running for an entire year until recent weeks. The gold stocks enjoyed some big rallies with gold, but they sequentially failed at lower highs. That really spooked technically-oriented traders. But the action wasn’t wholesale bearish, as the gold stocks per the HUI were generally carving higher lows as well. The result was this massive triangle consolidation pattern.

Unfortunately there wasn’t much hope of a breakout during the summer. Gold’s summer doldrums lead to parallel sideways action in gold stocks in most summers. For gold-stock investors, summers are just something to be endured. They usually end up being barren sentiment wastelands where traders give up on this sector entirely. So material gold-stock gains in summers are rare, they can’t be expected in any year.

The HUI drifted 3.5% lower in June, really damaging sentiment. This was much weaker than normal in early summers, as the HUI saw average gains of 1.2% in Junes in the modern bull-market years of 2001 to 2012 and 2016. Even the HUI’s 5.6% rebound in July, far better than its 0.7% average losses, wasn’t enough to restore sentiment. So the gold stocks generally drifted lower this summer within that same triangle.

Interestingly the upper resistance line of that big chart pattern closely paralleled the HUI’s important 200-day moving average. Chart patterns like this triangle consolidation are subjective, they can be drawn in different ways. So while the general resistance line was evident to all technically-oriented traders, the timing on a breakout wouldn’t be universally recognized. But 200dmas are hard mathematical constructs.

200dmas are the most-important and widely-followed technical lines in all the markets. They smooth out the daily volatility to highlight long-term trends. Prices below their 200dmas are often considered to be in bear markets, leaving traders expecting further weakness. But once prices forge decisively above their 200dmas, traders assume they are reentering bulls. That generates bullish psychology which fuels buying.

The HUI first started flirting with its 200dma again in late July. But it wasn’t until mid-August when it started to break out decisively, closing more than 1% above that key level. And those gains weren’t solidified until late August, when traders started to realize this 200dma breakout was the real deal and not a head fake. That 200dma breakout in recent weeks is the most important of the new major gold-stock breakouts.

But because the upper resistance line of that vexing triangle consolidation paralleled the HUI’s 200dma, a simultaneous breakout from that chart pattern happened. Gold stocks have not rocketed above their bull-bear-psychology-dividing 200dma, or broken a major downtrend resistance line like this, since February 2016. And that was early in a monster upleg where this sector would nearly triple in just over a half-year!

Major breakouts are so darned bullish because they soon become self-feeding. The great majority of investors and speculators aren’t contrarians, they lack the discipline and toughness to fight popular fear and buy low. Instead most prefer chasing momentum, buying where gains are already happening. So breakouts quickly shift sentiment to bullish which drives a lot more buying. And that buying expands the breakouts.

In all markets, buying begets buying. The faster prices rise, the more traders want to buy in to ride the momentum. The more traders buy in, the faster prices rise. Major breakouts kindle this virtuous circle of buying, leading to big and growing capital inflows. Everyone loves winners, and these major gold-stock breakouts are leading to the best gains in the entire stock markets. Traders are increasingly taking notice.

All this gold-stock buying in recent weeks is just now triggering the most-important technical buy signal of all, the fabled Golden Cross! Golden Crosses are one of the most-powerful and most-widely-followed signals of new bull markets. They happen coming out of lows as a 50dma crosses back above a 200dma. As the white and black lines in this chart show, the first Golden Cross since early 2016 is triggering right now.

That last Golden Cross in February 2016 led to months on end of big capital inflows into the beaten-down gold stocks. This week’s second Golden Cross ought to lead to a similar outcome. Recent weeks’ major breakouts have just flashed an irresistible major buy signal to technically-oriented traders. Whether this is the second major upleg of last year’s bull or an entirely new bull, gold stocks are early in a major rally higher.

Their upside from here remains huge. That short-term chart above makes it appear like gold-stock prices are getting to the high side, but nothing could be farther from the truth. This next chart zooms out to the massive gold-stock bear that started in late 2011. The small shaded zone in the lower right is the entire area of the first chart. After a brutal secular bear persisting for years, gold stocks’ bull remains little and young.

Between September 2011 and January 2016, the gold stocks as measured by their flagship HUI index plunged a breathtaking 84.1% in 4.4 years! That colossal bear was driven by an extreme anomaly. The Fed’s radically-unprecedented open-ended QE3 campaign levitated the US stock markets, slaughtering demand for alternative investments led by gold. The gold stocks plummeted on massive gold dumping.

They finally bottomed in epic despair early last year, heralding a new bull market. It soon staged major breakouts from two separate bear-market resistance lines, which are rendered here. That young gold-stock bull rocketed higher, leading to that near-triple in about a half-year. But despite those wicked-fast gains, the gold stocks merely hit a 3.2-year high. At best they were only back to mid-2013 deep-bear levels.

Even after these major breakouts of recent weeks, the gold-stock sector is still languishing way down at late-bear levels from late 2014. Bull markets after exceptional bears usually see prices at least revisit the previous bull’s top, which was 635.0 on the HUI in September 2011. That implies huge upside of 196% remains from even this week’s levels. What other sector in these overvalued stock markets has tripling potential?

But if fundamentals are strong enough after exceptional bears to support symmetrical bull markets, those tend to ultimately drive prices to new all-time record highs. I strongly suspect gold stocks’ current bull will run for years, eventually pushing the HUI above its previous peak. That would take a total gold-stock bull of just 531% from gold stocks’ deep 13.5-year secular low in January 2016. That’s nothing by this sector’s standards.

During gold stocks’ last secular bull from November 2000 to September 2011, the HUI skyrocketed an epic 1664% higher! That made early contrarian investors including our subscribers rich. We only need to see a bull a third as large to propel the HUI back to new all-time record highs. And the gold miners’ fundamentals already support secular-bull-level gains, as evidenced by their latest quarterly results just reported.

Gold-mining profitability is simply the difference between prevailing gold prices and operating costs. In Q2’17, the elite gold miners of that leading GDX gold-stock ETF reported average all-in sustaining costs of just $867 per ounce. That was already $391 below Q2’s average gold price, pure profit. And at this week’s higher $1339 gold levels, those major-gold-mining profits have already ballooned to a hefty $472!

The smaller mid-tier gold miners of the related GDXJ junior-gold-stock ETF looked nearly as good in Q2, with average AISC of $879. That implies big profitability of $460 per ounce at this week’s gold prices. These fat margins coupled with the low gold-stock prices have left many gold miners trading at low price-to-earnings ratios today. This sector is wildly undervalued fundamentally, supporting a new secular bull market.

Thus odds are the major gold-stock breakouts in recent weeks are merely the beginning of a massive new gold-stock upleg. As gold stocks keep powering higher, more and more investors and speculators will want to buy in to chase those gains. Their capital inflows will push this small sector higher still, widening its circle of appeal to even more traders. Once gold stocks finally get moving, they tend to run for a long time.

Since most traders inexplicably choose to be uninformed, the bullish implications of these major gold-stock breakouts still aren’t widely known. So it’s certainly not too late to buy in, even though big gains have already been won since summer. Gold stocks’ strong season tends to run from now until next spring, driven by gold’s own strong season. The gold stocks will likely be considerably higher by year-end.

This young new upleg should get supercharged as gold investment demand surges when the stock markets inevitably roll over. With the Fed on the verge of starting to reverse its quantitative easing that levitated stock markets for years with ominous quantitative tightening, that long-overdue major stock-market selloff is likely sooner rather than later. As gold is bid higher on weaker stocks, gold stocks will soar.

The greatest gains in this young gold-stock upleg won’t be won in the popular ETFs like GDX and GDXJ, as they are far-overdiversified and burdened with way too many under-performing gold miners. So it’s much more prudent to deploy capital in the best individual gold miners with superior fundamentals. Their gains will handily trounce the ETFs, further amplifying the already-huge upside potential of this sector as a whole.

The key to riding any gold-stock bull to multiplying your fortune is staying informed, both about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research in our popular newsletters.

Published weekly and monthly, they explain what’s going on in the markets, why, and how to trade them with specific stocks. They are a great way to stay abreast, inexpensive and easy to read. Walking the contrarian walk is very profitable. As of the end of Q2, we’ve recommended and realized 951 newsletter stock trades since 2001. Their average annualized realized gains including all losers is +21.2%! That’s hard to beat over such a long span. We currently have unrealized gains on our trading books as high as +159%. Subscribe today and get invested before gold stocks really start running!

The bottom line is gold stocks just enjoyed two parallel major breakouts in recent weeks. They shattered a vexing consolidation that’s trapped them for a year, and more importantly burst back above their critical 200dma. The resulting quickly-improving technicals are rapidly shifting sentiment back to bullish, driving more buying as traders return. Since buying begets buying, major gold-stock uplegs soon become self-feeding.

But since this small contrarian sector is largely ignored, most investors and speculators don’t yet realize how bullish these major breakouts are. Despite their big gains since early 2016, the gold stocks remain very low and their young bull is still little in secular context. So it’s not too late to get deployed. With gold itself likely to rally far higher as these lofty stock markets roll over, gold stocks’ upside potential is huge.

Adam Hamilton, CPA

September 8, 2017

Velocity Minerals (TSX-V: VLC) is a gold (“Au“) exploration and development junior focused on eastern Europe. Others in the region include Eldorado Gold, Nevsun, Freeport McMoran, Rio Tinto, First Quantum, Teck and Lundin Mining. In July, the TSX Venture exchange approved a transformational deal in which the Company acquired options on 2 highly prospective properties in southeastern Bulgaria. In conjunction with these new assets, a talented new management team and Board is in place.

Velocity is aligned with private Bulgarian gold miner Gorubso Kardzhali (owner of the optioned projects and the only company in Bulgaria with a permit for cyanide-related processing of gold ores). Gorubso has been producing from its high-grade underground Chala gold mine for over 10 years and owns / operates a newly built (2011) Carbon-In-Leach (“CIL“) processing plant that has excess capacity. Close ties with Gorubso is helps in interactions with local communities and governmental bodies. (See Corporate Presentation)

Rozino Gold Project – 70% Earn-in Option

Velocity holds an option, exercisable for 6 years, to acquire an undivided 70% Interest in the Tintyava property, granted by Gorubso Kardzhali A.D. (“Gorubso”). The Rozino project, the subject of a recently filed Technical Report, is located within the Tintyava property, which has an area of 163 sq. km. To exercise the option, the Company must deliver a NI 43-101 compliant PEA.

The Rozino project is located 20 kilometres east of the Ada Tepe gold deposit being developed by Dundee Precious Metals, 50 km southeast of Kardzhali, host to tailings and gold processing facilities operated by Gorubso, and 350 km east-southeast of the capital of Sofia.

On August 21st, results of the first 2 drill holes at the Company’s Rozino gold project were released. Additional drill results are expected in the first half of September. Regarding the first 2 holes, Keith Henderson, Velocity’s President and CEO commented…

“These results are among the best grades ever returned from the project and the drill holes clearly demonstrate the potential for thick, high-grade gold mineralization between historical drill fences.”

Notice that I added boldface in the above quote, “between historical drill fences.” To a large degree, the success of Velocity Minerals’ main project revolves around that sentence. In the 1980s, a Bulgarian State-run company explored Rozino under the erroneous assumption of a flat-lying exploration target (which called for routine vertical drilling). However, as Gwen Preston editor of, “Resource Maven” explained in her recent report on Velocity,

“….the gold was not in a flat lying body but in steeply dipping structures that the vertical holes missed completely. In most cases, each vertical hole cut between two steep structures and therefore only cut through the disseminated mineralization in between. The next round of exploration from 2001 to 2005 involved angled holes, but the geologic concept was still flawed – this group drilled angled holes, but to the northwest. As a result, they too drilled parallel to and between the mineralized structures at Rozino, which run northwest and dip very steeply.” — Gwen Preston, editor of Resource Maven, a weekly newsletter on investing in the metals space

Therefore, the news of the first 2 drill holes, including a near-surface interval of 39 m of 4.11 g/t Au goes a long way towards supporting the thesis that decades worth of historical drilling provided some useful information, but was largely ineffective. These results come on top of the only other angled drill hole, drilled in the right direction…. #R-245 in 2006 by Asia Gold, returned 68 m @ 3.15 g/t Au, including 11.39 m @ 8.09 g/t Au. If management is on to reasonably thick, near-surface intervals of 2-4+ g/t gold, (the Company will be drilling for several more months) then other key aspects of the Rozino project will take on new meaning.

By that I mean, for example, there are very promising historical trench samples including,

17 m @ 3.39 g/t Au, 4.53 g/t Ag and 14 m @ 4.29 g/t Au, 2.58 g/t Ag

But these samples were never followed up on, perhaps because ongoing drill results (drilled in the wrong orientation) were not as exciting as what Velocity might find. Still, according to the technical report, the potential for additional sub-parallel vein zones to the main deposit is thought to be good and the targets there are essentially untested by drilling.

And that’s not all, in addition to strong trench samples, note what the technical report had to say about preliminary metallurgical test work (– page 20),

“Preliminary metallurgical test work carried out by Geoengineering, Lakefields, Caracal and Wardell Armstrong suggests that recoveries by cyanide leaching are above 90%, with no deleterious elements and the deposit should be amenable to simple low cost processing. This is consistent with LSE deposits elsewhere in the world, where similar grade mineralisation is mined.”

There has been a substantial amount of work done on the property by at least 4 groups. According to the technical report, work included; 1:2,000 scale geological mapping (8 sq. km), soil sampling (2,079 stations), trenching (clearing of existing state trenches and new trenches) for 3,978 m, channel sampling from trenches (2,411 samples), 55 diamond drilling core holes for 7,409 m, assay results of drill core (4,918 samples), 12.2 line km of ground magnetic surveying and 1.5 line km of Induced Polarization geophysical profiling.

Key Management Team and Board Members

The newly assembled management / technical team and Board really stands out for a company with a market cap of just ~C$ 18 M. In addition to Bulgaria, team members have worked in eastern and southern Africa-Eurasia, central Asia, central-south America, Australia, Peru, Canada, Mexico, the U.S., Namibia, Burkina Faso, Turkey, Yemen, Argentina, Chile, Iran, Ireland, China, Siberia, DRC, Russia, Serbia and India.

Team members have worked at major miners including Anglo American, Rio Tinto, Kinross, Lundin Mining, Teck Resources and Glencore. Director Mark Cruise has Founded 2 highly successful juniors; zinc miner Trevali Mining and gold explorer International Tower Hill Mines. CEO/Director Keith Henderson has decades of deal making/deal structuring and capital raising expertise.

Velocity Minerals scores very high in terms of boots on the ground. In addition to the close working relationship with Gorubso, 2 of Velocity’s top 5 executives are Bulgarian Nationals and VP of Exploration Stuart Mills is working full-time in Bulgaria.

Chala Gold Mine Option Agreement

Management has signed an exclusive 12-month option agreement with Gorubso to contemplate a joint venture to enhance/expand Gorubso’s Chala gold mine and, if warranted, the CIL plant. That arrangement could possibly include feeding the plant with ore from one or both of Velocity’s projects. If a win-win agreement can be reached, Velocity could effectively be in production (in partnership with Gorubso) as soon as next year.

Velocity is organizing and digitizing Gorubso’s 10+ years of mining data at the Chala gold mine to understand the likelihood of significantly more (tonnage and/or higher grade) gold mineralization being identified. Although I hesitate to enlist the overused phrase, “huge blue-sky potential,” a JV with Gorubso could be a really big deal. If structured right, it would greatly de-risk the development of Velocity’s 2 projects, slash upfront cap-ex requirements, facilitate / reduce permitting costs & time lines and simplify operational flow sheet design (especially if Gorubso’s CIL plant were to be utilized).

Near-term Catalysts – Drill Results

Management is laser focused on resource drilling to produce an open-pittable resource estimate. Importantly, since previous resource estimates were limited by mistakes in the orientation of drilling, the final resource reported to the Bulgarian government was severely restricted, it had no resource blocks between drill fences. Management believes that substantial infill potential around the main deposit exists between drill fences, and mineralization remains open to the southeast and northwest.

A total of 9 diamond drill holes (approximately 2,000 m) are planned for Phase I, of which the first 2 holes have been reported. The program is part of a larger campaign of up to 65 drill holes (~12,000 m), planned to be ongoing through the remainder of 2017 and into early 2018. Additional drill results are expected in the first half of September.

Ekuzyata Gold Project, Southeastern Bulgaria

I only briefly mention Velocity’s 2nd project, Ekuzyata, a 50% Earn-in opportunity, (or revert to 5% GSR) because the main focus is Rozino.

Any discovery could be within reach of existing Chala mine infrastructure, so there would be limited need for additional capital if Gorubso and Velocity were partnered. Ekuzyata is located within Gorubso’s mine concession, no additional permitting would be required.

CONCLUSION

Drill results in September/October will carry a lot of weight, if they continue to be as good or better than the first 2 assays, the Rozino project will have (both) less risk of there being no meaningful resource, and more upside potential from near-surface, high-grade zone(s) of Au mineralization.

Success at Rozino should increase the likelihood of a JV with Gorubso, which would be a win-win for both companies and a win for local communities.

To recap, Velocity Minerals (TSX-V: VLC) is funded to explore an overlooked property that could be fast-tracked into development (if warranted by further drilling), potentially in partnership with existing producer Gorubso. A prospective JV could save Velocity Minerals a tremendous amount of development capital, allowing the Company to minimize equity dilution. Currently there are 57 M shares outstanding, (66 M fully-diluted), no debt or preferred shares. The market cap is ~C$ 18 M. (See Corp. Presentation)

To the extent that permitting and other key development & construction activities could be facilitated by Gorubso’s experience and connections, that too could expedite Rozino’s and/or Ekuzata’s path to potential production. Combined, Gorubso with its operating mine and CIL plant and Velocity with Rozino, Ekuzata and its strong geological, exploration & technical team, could become a regional powerhouse capable of accretive acquisitions of nearby mining assets.

–

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Velocity Minerals, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Velocity Minerals are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this interview was posted, Peter Epstein owned shares and/or stock options in Velocity Minerals and the Company was an advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

When gold began to rally in late 2015, investors breathed a sigh of relief. The longest resource bear market was finally over, and capital slowly began finding its way back into the mining sector.

During the beginning of gold’s rally, gold stocks actually declined as investors could not get a true pulse on the market. However, when the recovery was apparent, gold stocks soared, eventually yielding over 150% returns in less than a year.

Unfortunately, with such rapid gains a pull-back was inevitable and healthy. From its peak, gold decreased -17% while gold stocks gave back up to -38% in aggregate.

It appears the pull-back is now over, and gold is once again on the mends.

Since late 2016 gold has recovered 16%, but the Junior Gold Miners ETF (GDXJ) and the Arca Gold BUGS Index (HUI) are only up 21% and 29%, respectively. Just like when gold was first recovering, investors are reluctant to begin deploying capital. However, once this recovery is apparent, we expect gold stocks to once again continue its precipitous ascent.

Gold has staged a fabulous rally from about $1220 to $1245. Using the December futures price chart, I’ve defined the $1300 – $1350 area as a spectacular profit booking opportunity for investors.
Please click here now. Double-click to enlarge this gold chart.
I’m an eager gold bullion seller now, but I’m less eager to sell gold stocks or silver bullion. That’s because they have not taken out their February highs while “Queen Gold” has done so easily.
Gold has clearly been the leader. It’s been a great upside ride, and now it’s time for investors to book solid profits with a big smile.
I’ve been adamant that gold is on the cusp of a two hundred year “bull era”. It’s themed around the love trade in China and India. For that reason, core positions should not be sold, but short term positions bought in the $1200 – $1250 area should definitely be sold aggressively now.
Investors who are nervous that they will miss out on more upside action should buy call options while selling some bullion. Call options are like lottery tickets; if gold surges above $1350 and runs to $1400, the call options will rise in value quite significantly.
On the other hand, if gold declines to either of my $1308 or $1280 key buy zones, the loss on the options is small, and the investor has plenty of dry powder to buy more gold bullion, ETFs, and futures.
Please click here now. Clearly, the deep-pocketed commercial traders are aggressive sellers now.
This COT report covers the action through last Tuesday. In my professional opinion, the commercial traders have probably shorted another 50,000 to 100,000 COMEX contracts since that report came out, and sold a significant number of long positions.
Amateur gold investors don’t need to sell as aggressively as the commercial traders do, but history suggests that investors who book modest gold market profits when the commercial traders are aggressive sellers tend to be making a wise tactical decision.
Please click here now. Double-click to enlarge this interesting bitcoin chart.
I cover the entire blockchain asset class at www.gublockchain.com but gold bullion enthusiasts should take note of the fact that bitcoin price sales can sometimes be a leading indicator for gold price sales.
Please click here now. Double-click to enlarge. That’s another look at the gold chart. Note the huge volume that occurred at the November highs in the $1338 area. Commercial traders were aggressive sellers into that price zone, as they are now.
The rally was caused by the election of Donald Trump. It was destroyed by Modi’s demonetization announcement, and there are rumours that he may be planning “Demonetization 2.0”
In the big picture, demonetization is increasing Indian gold demand. Indians have always been more distrustful of government than most of the world’s citizens (and rightly so), which is partly why they buy so much gold.
Demonetization has only increased that distrust. Another round of demonetization would create a significant long term increase in demand for gold bullion. In the short term, demonetization is negative for demand, and for the price.
Do commercial traders believe more demonetization is imminent? Is that why they are such aggressive sellers into this rally? That’s possible, but I think their selling is related more to the simple fact that there has been no serious pullback since the rally began, and a pullback is overdue from a technical standpoint.
Please click here now. Double-click to enlarge. I’ve noted that I’m a seller of gold but not of silver. Silver is likely to pull back when gold does, but when that pull back is over I expect silver to stage a stunning advance.
Silver should easily outperform gold during this next stage of what I call the “bull era”. As gold rises above $1392 and begins an aggressive rally towards my $1432, $1470, and $1530 target price zones, I think silver could shock investors and rally towards its $50 area highs.
My personal plan of action is to buy silver and gold stocks with the proceeds of my recent gold bullion sales. I encourage the entire Western gold community to consider partaking in that plan, to some degree.
Please click here now. Double-click to enlarge this fabulous GDX chart. A lot of gold stocks have arrived at my first upside target zone ($25 – $26 basis GDX), but I urge investors to keep profit booking very light and focus on building substantial gold stock core positions on all price weakness.
For GDX, it appears that the long consolidation zone between $26 – $21 that started in February is ending. As noted, I’ll be using any price weakness to allocate my gold bullion profits to silver and gold stocks.
Many senior and intermediate mining companies have significantly restructured, and a gold price of $1300 or higher is turning them into “cash cows”. I’ve declared the 20 year bear market of gold stocks versus gold to be over. Gold doesn’t need to rally to thousands of dollars an ounce to send gold stocks to new highs, given this restructuring and low oil prices.
A gold price of just $1500, if it is sustained (and I think it will be) could send GDX to a new high, as institutional investors race to get in on the “restructured mining companies” action!

Stewart Thomson

Graceland Updates

www.guswinger.com

Email:

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Are You Prepared?

Gold cleared $1300 early in the week and padded its gains on Friday even amid a bullish weekly reversal in the US Dollar. Gold’s breakout was validated by a strong monthly close on Thursday and then a strong weekly close Friday. As predicted, the miners perked up with the breakout in Gold. GDX and GDXJ gained nearly 6% and 7% respectively for the week. Look for the miners to continue to trend higher as Gold attempts to retest its 2016 highs around $1375/oz.

The miners (GDX and GDXJ) have more immediate upside potential. The daily line charts show two levels of resistance. The first level is around $26 for GDX and $38 for GDXJ while the second level is $28 for GDX and $40-$41 for GDXJ.

While Gold closed well above $1300 at $1330/oz, it faces resistance at the 2016 highs around $1375/oz. The net speculative position has reached 248K contracts or 46% of open interest. As the chart below shows, the 2016, 2012 and 2011 peaks in Gold all coincided with a net speculative position of 55% of open interest. If current trends continue, the net speculative position could reach 55% as Gold tests $1375/oz.

Circling back to the stocks, we see that our mini-GDXJ index, which consists of 26 stocks and has a median market cap of ~$100 Million closed the week at a +6 month high. The exploration juniors have led the entire sector this year and we expect that to continue. The price action is healthy as the index is trading above its 50-day, 200-day and 400-day moving averages which are all sloping higher. The index closed at 206 and should reach resistance at 215-220. A correction from there (perhaps in October) could setup a push to the 2016 high.

The breakout in Gold through $1300/oz has sparked the miners and juniors and we expect additional gains in the short-term as Gold has room to run. That being said, do note that the net speculative position in Gold is fairly high. It could reach an extreme level if Gold tests major resistance around $1375/oz. To find out the best buys right now and our favorite juniors for 2018 consider learning more about our premium service.

Jordan Roy-Byrne CMT, MFTA

Jordan@TheDailyGold.com

Yesterday morning, NewCastle Gold Ltd. (TSX: NCA) reported additional drill results from the southern portion of the Oro Belle Trend within the region of the JSLA pit on its Castle Mountain Gold Project in California.

Highlights from the release include Hole 167 which intersected 148m of 0.89 g/t from 73m, including 31m of 2.45 g/t, and a further 171m of 0.42 g/t from 236m. CMM-161A intersected 180m of 1.01 g/t from 152m, including 20m of 5.79 g/t. Hole CMM-161A was completed as a supplement to hole CMM-161, where 52 samples were previously assigned a zero grade.

Based on recent results, the company will be starting a 10-km follow-up drill program in September. The company plans to complete its pre-feasibility study by the end of the year.

The 2015 resource includes a measured resource of 17.4 million tonnes at 0.86g/t gold for 0.48 million ounces and an indicated 202.5Mt at 0.57g/t gold for 3.71 million ounces.

NewCastle finished June with $3.12 million in cash and equivalents, before closing a bought deal offering on July 13, at $0.95 per share for total proceeds of ~$15 million. The company needs to raise money for preparation work and according to TD Securities, is looking at debt financing, or better alternatives if presented.

According to data collected by the Financial Times, as of last year, six analysts rated NewCastle outperform with one analyst recommending to buy the stock. As of Aug 25, 2017, the consensus forecast improved amongst 11 polled investment analysts covering NewCastle advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Apr 22, 2014.

TD Securities rated the shares in the company with a speculative buy, a speculative risk, and a 12-month price target of $2.00. TD assessed the news to have an positive impact on the company’s share price. By TD’s count, there are still results pending from this program.

News of the results pushed the stock up 1 cent to 96 cents on 497,900 shares on August 29.

SPDR fund tonnage (GLD-NYSE) has recaptured the 800 ton mark, and rose to 814 yesterday. This is happening as a steady wave of institutional money managers embrace gold as an important portfolio component.
It’s also occurring as Indian dealers begin buying for Diwali. The result of this overall ramp-up in demand is a beautiful surge higher in the gold price!
Please click here now. Double-click to enlarge this important gold chart. I call this my “Road To $1392” chart.
When the price of an asset arrives at major resistance in a huge chart pattern, a real upside breakout and sustained move higher can only occur if market fundamentals are aligned with the technical set-up.
The good news is that for gold, this appears to be the case. Please click here now. Double-click to enlarge this monthly gold chart. The $1377 – $1392 price range is the resistance zone of a huge inverse head and shoulders bottom pattern. It is the neckline of the pattern.
Note the tremendous rise in volume that is occurring as gold makes a beeline to that neckline. The Indian gold market has completed its restructuring, and Western money managers are lining up to add gold to their portfolios.
The managers are not just making a one-time purchase. They are adding gold as apercentage allocation. That allocation seems to be averaging around 5%. As the funds gather new assets, they buy more gold to maintain that 5% allocation.
Asian fund managers typically give gold an even higher allocation to gold in their funds than Western managers. As China and India become the main economic empires, Western money managers will tend to play “follow the Chindian leader”.
That means the current Western money manager allocation to gold that is about 5% could easily rise to 10% or 15% in the coming years. Clearly, all liquidity flow lights for gold…are green!
My weekly chart roadmap suggests that gold will rise not just to $1392, but to $1526, and $1800. Importantly, the rise will be accompanied by substantial growth in respect for gold as an asset class.
There’s a huge difference in a rally based on an event like QE and a rally based on a permanent portfolio commitment to the asset class. The latter produces price gains that are sustained.
Please click here now. Double-click to enlarge this important dollar versus yen chart. The 108 “line in the sand” seems ready to fail. A tumble towards 100 would almost guarantee that gold surges to $1392 and begins the move towards $1526.
The yen and gold are the two most important risk-off assets for heavyweight FOREX traders. The dollar entered a long-term bear market against the yen in 2016. That defined risk itself as entering a major bear market.
Please click here now. Double-click to enlarge. That’s a daily chart of the dollar versus the yen. It looks like a train wreck.
US taxes have not been cut. There’s not even any intention to cut the capital gains rate, let alone abolish it. That makes it almost impossible to attract serious long term investment capital into demographically-disastrous America.
Trump had a chance to turn the country into a bigger and better version of Switzerland, and oversee a tax-free empire where the citizens age with grace. Instead, a 1929 type of situation now seems imminent.
An inflationary depression is likely to follow the US government’s launch of what I call Trump’s “Tariffs to Infinity” program. He’s launching a mirror image of Herb Hoover’s tariffs program, and doing it with stocks, bonds, and real estate all in a precarious position.
That’s truly great news for gold stock investors! Please click here now. Double-click to enlarge this fabulous GDX chart. I’ve told gold bugs to watch for a big volume day to send GDX rocketing towards my $26 target, after buying every ten cents decline in the $23 – $18 price zone.
That volume surge occurred yesterday. Please click here now. Double-click to enlarge. On this two-year chart for GDX, my new $31 target is clear. That’s a key number, because it’s the equivalent of $1392 for gold.
The 2014 – 2017 period is the most important accumulation zone for gold stock enthusiasts in the history of the gold market, and perhaps in the history of all markets.
That’s because a reversal in US money velocity is imminent, and the gold stocks versus gold bullion bear market that began in 1995 has ended.
Tactics? Well, I realize that many gold bugs may have sold their gold stocks in 2014 – 2016 instead of launching the major accumulation program that I adamantly recommended. Some investors bought penny stocks in the general US equity market to try to make back the losses they booked with gold stocks.
That was obviously a mistake, and those stocks are vulnerable now to a 1929 type of crash. The bottom line is that the current situation of many gold bugs is unfortunate, but just as a car can be repaired, so can a portfolio be repaired.
Yesterday’s volume bar in GDX is a game changer. So is the growing allocation to gold by institutional money managers, and so is the completed restructuring of the Indian gold market. It’s time for investors to forget the past, move their portfolio cars into the gas station, and fuel up on gold and silver stocks!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Precious Metal Stocks Or ETFs” report. I highlight the advantages and disadvantages of owning individual stocks versus owning ETFs, with key buy and sell points for four ETFs and six great stocks!

Thanks! Cheers

Stewart Thomson, Graceland Updates

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Consider learning more about our premium service including our favorite junior exploration companies.

Risks, Disclaimers, Legal

Are You Prepared?

Welcome to the dog days of summer. The low volatility in precious metals continues. Janet Yellen or some other Fed heads said something Friday. Precious Metals sold off but quickly recovered. It appears that not much has transpired in recent weeks as precious metals have grinded higher, albeit slowly. However, while it may be a fledgling development, the miners appear to be leading Gold now.

In the chart below we plot a number of markets including Gold, GDX, GDXJ, our 55-stock junior index and our optionality index. We marked three points that help inform our analysis.

From point 1 to point 3, the gold stocks went from underperforming Gold to slightly leading Gold. The gold stocks began to underperform in late winter. They peaked in February and did not even come close to reaching those highs in March while Gold made a higher high. Gold retested that high at point 2 in June while miners made another lower high. However, there has been a change from then to point 3. Gold is at the same level at point 3 as point 2 but so are the miners! Furthermore, in recent days (since point 3) the gold stocks have made higher highs while Gold has not.

The most important recent development in precious metals could be the renewed relative strength in the gold stocks. Volatility has been very low and Gold has yet to break $1300/oz but the gold stocks have managed to reverse their previous underperformance. They were lagging badly from late winter through spring. Ratio charts (not shown) show that the underperformance ended in May and the outperformance began only days ago. If that holds up into September and Gold breaks above $1300/oz then the gold stocks could enjoy strong gains over the weeks ahead.

Jordan Roy-Byrne CMT, MFTA

Jordan@TheDailyGold.com

The junior gold miners’ stocks have spent months grinding sideways near lows, sapping confidence and breeding widespread bearishness. The entire precious-metals sector has been left for dead, eclipsed by the dazzling Trumphoria stock-market rally. But traders need to keep their eyes on the fundamental ball so herd sentiment doesn’t mislead them. The juniors recently reported Q2 earnings, and enjoyed strong results.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, some companies still partially report quarterly.

The definitive list of elite junior gold stocks to analyze used to come from the world’s most-popular junior-gold-stock investment vehicle. This week the GDXJ VanEck Vectors Junior Gold Miners ETF reported $4.0b in net assets. Among all gold-stock ETFs, that was only second to GDX’s $7.5b. That is GDXJ’s big-brother ETF that includes larger major gold miners. GDXJ’s popularity testifies to the great allure of juniors.

Unfortunately this fame has recently created major problems severely hobbling the usefulness of GDXJ. This sector ETF has shifted from being beneficial for junior gold miners to outright harming them. GDXJ is literally advertised as a “Junior Gold Miners ETF”. Investors only buy GDXJ shares because they think this ETF gives them direct exposure to junior gold miners’ stocks. But unfortunately that’s no longer true!

GDXJ is quite literally the victim of its own success. This ETF grew so large in the first half of 2016 as gold stocks soared in a massive upleg that it risked running afoul of Canadian securities law. Most of the world’s junior gold miners and explorers trade in Canada. In that country once any investor including an ETF goes over 20% ownership in any stock, it is deemed a takeover offer that must be extended to all shareholders!

Understanding what happened in GDXJ is exceedingly important for junior-gold-stock investors, and I explained it in depth in my last essay on juniors’ Q1’17 results. GDXJ’s managers were forced to reduce their stakes in leading Canadian juniors. So last year capital that GDXJ investors intended to deploy in junior gold miners was instead diverted into much-larger gold miners. GDXJ’s effective mission stealthily changed.

Not many are more deeply immersed in the gold-stock sector than me, as I’ve spent decades studying, trading, and writing about this contrarian realm. These huge GDXJ changes weren’t advertised, and it took even me months to put the pieces together to understand what was happening. GDXJ’s managers may have had little choice, but their major direction change has been devastating to the junior gold miners.

Investors naturally poured capital into GDXJ, the “Junior Gold Miners ETF”, expecting to own junior gold miners. But instead of buying junior gold miners’ shares and bidding up their prices, GDXJ was instead shunting those critical inflows to the much-larger mid-tier and even major gold miners. That left the junior gold miners starved of capital, as their share prices they rely heavily upon for financing languished in neglect.

GDXJ’s managers should’ve lobbied Canadian regulators and lawmakers to exempt ETFs from that 20% takeover rule. Hundreds of thousands of investors buying an ETF obviously have no intention of taking over gold-mining companies! And higher junior-gold-stock prices boost the Canadian economy, helping these miners create valuable high-paying jobs. But GDXJ’s managers instead skated perilously close to fraud.

This year they rejiggered their own index underlying GDXJ, greatly demoting most of the junior gold miners! Investors buying GDXJ today are getting very-low junior-gold-miner exposure, which makes the name of this ETF a deliberate deception. I’ve championed GDXJ for years, it is a great idea. But in its current sorry state, I wouldn’t touch it with a ten-foot pole. It is no longer anything close to a junior-gold-miners ETF.

There’s no formal definition of a junior gold miner, which gives cover to GDXJ’s managers pushing the limits. Major gold miners are generally those that produce over 1m ounces of gold annually. For years juniors were considered to be sub-200k-ounce producers. 300k ounces per year is a very generous threshold. Anything between 300k to 1m ounces annually is in the mid-tier realm, where GDXJ now traffics.

That high 300k-ounce-per-year junior cutoff translates into 75k ounces per quarter. Following the end of the gold miners’ Q2 earnings season in mid-August, I dug into the top 34 GDXJ components. That is just an arbitrary number that fits neatly into the tables below. While GDXJ had a whopping 73 component stocks in mid-August, the top 34 accounted for 81.5% of its total weighting. That’s a commanding sample.

Out of these top 34 GDXJ companies, only 4 primary gold miners met that sub-75k-ounces-per-quarter qualification to be a junior gold miner! Their quarterly production is highlighted in blue below, and they collectively accounted for just 7.1% of GDXJ’s total weighting. And that isn’t righteous, as these include a 126-year-old silver miner, a mid-tier miner with temporary production declines, and a ramping mid-tier producer.

GDXJ is inarguably now a pure mid-tier gold-miner ETF. That’s great if GDXJ is advertised as such, but terrible if capital investors explicitly intend for junior gold miners is instead being diverted into mid-tiers without their knowledge or consent. The vast majority of GDXJ shareholders have no idea how radically this ETF has changed since early 2016. It is all but unrecognizable, straying greatly from its original mission.

I’ve been doing these deep quarterly dives into GDXJ’s top components for years now. In Q2’17, fully 29 of the top 34 GDXJ components were also GDX components. These ETFs are separate, a “Gold Miners ETF” and a “Junior Gold Miners ETF”. So why on earth should they own many of the same companies? In the tables below I highlighted GDXJ components also in GDX in yellow in the column showing GDXJ weightings.

These 29 GDX components accounted for 74.6% of GDXJ’s total weighting, not just its top 34. They also represented 30.1% of GDX’s total weighting. So three-quarters of the junior gold miners’ ETF is made up of nearly a third of the major gold miners’ ETF! I’ve talked with many GDXJ investors over the years, and have never heard one wish their capital allocated specifically to junior golds would instead go to much-larger miners.

Fully 12 of GDXJ’s top 17 components weren’t even in this ETF a year ago in Q2’16. They alone now account for 40.6% of its total weighting. 15 of the top 34 are new, or 45.3% of the total. In the tables below, I highlighted the symbols of companies actually in GDXJ a year ago in light blue. Today’s GDXJ is a radical departure from a year ago. Analyzing Q2’17 results largely devoid of real juniors was frustrating.

Nevertheless, GDXJ remains the leading “junior-gold” benchmark. So every quarter I wade through tons of data from its top components’ 10-Qs, and dump it into a big spreadsheet for analysis. The highlights made it into these tables. A blank field means a company didn’t report that data for Q2’17 as of that mid-August 10-Q deadline. Companies have wide variations in reporting styles, data presented, and report timing.

In these tables the first couple columns show each GDXJ component’s symbol and weighting within this ETF as of mid-August. While most of these gold stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q2’17 gold production in ounces, which is mostly reported in pure-gold terms.

Many gold miners also produce byproduct metals like silver and copper. These are valuable, as they are sold to offset some of the considerable costs of gold mining. Some companies report their quarterly gold production including silver, a construct called gold-equivalent ounces. I only included GEOs if no pure-gold numbers were reported. That’s followed by production’s absolute year-over-year change from Q2’16.

Next comes the most-important fundamental data for gold miners, cash costs and all-in sustaining costs per ounce mined. The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally the YoY changes in cash flows generated from operations, GAAP profits, revenues, and cash on balance sheets are listed. There’s one key exception to these YoY changes.

Percentage changes aren’t relevant or meaningful if data shifted from negative to positive or vice versa. Plenty of major gold miners earning profits in Q2’17 suffered net losses in Q2’16. So in cases where data crossed that zero line, I included the raw numbers instead. This whole dataset offers a fantastic high-level fundamental read on how the mid-tier gold miners are faring today. They’re looking quite impressive.

After spending days digesting these GDXJ gold miners’ latest quarterly reports, it’s fully apparent their vexing consolidation this year isn’t fundamentally righteous at all! Traders have abandoned this sector since the election because the allure of the levitating general stock markets has eclipsed gold. That has left gold stocks exceedingly undervalued, truly the best fundamental bargains out there in all the stock markets!

Once again the light-blue-highlighted symbols are GDXJ components that were there a year ago. The white-backgrounded ones are new additions. And the yellow-highlighted GDXJ weightings are stocks that were also GDX components in mid-August. GDXJ is increasingly a GDX clone that offers little if any real exposure to true gold juniors’ epic upside potential during gold bulls. GDXJ is but a shadow of its former self.

VanEck owns and manages GDX, GDXJ, and the MVIS indexing company that decides exactly which gold stocks are included in each. With one company in total control, GDX and GDXJ should have zero overlap in underlying companies! GDX or GDXJ inclusion should be mutually-exclusive based on the size of individual miners. That would make both GDX and GDXJ much more targeted and useful for investors.

GDXJ’s highest-ranked component choices made by its managers are mystifying. This “Junior Gold Miners ETF” has a major primary silver miner as its largest component. Over half of PAAS’s sales in Q2 came from silver. And the next two biggest are large South African gold miners. That country has one of the most anti-shareholder governments in the world now, forcing unconscionable racial quotas on owners.

Since gold miners are in the business of wresting gold from the bowels of the Earth, production is the best place to start. These top 34 GDXJ gold miners collectively produced 3,583k ounces in Q2’17. That rocketed 74% higher YoY, but that comparison is meaningless given the extreme changes in this ETF’s composition since mid-2016. On the bright side, GDXJ’s miners do remain significantly smaller than GDX’s.

GDX’s top 34 components, fully 20 of which are also top-34 GDXJ components, collectively produced 9854k ounces of gold in Q2. So GDXJ components’ average quarterly gold production of 119k ounces excluding explorers was 61% lower than GDX components’ 308k average. So even if GDXJ’s “Junior” name is very misleading, it definitely has smaller gold miners even if they’re well above that 75k junior threshold.

Despite GDXJ’s top 34 components looking way different from a year ago, these current gold miners are faring well on the crucial production front. Fully 19 of these mid-tier gold miners enjoyed big average YoY production growth of 26%! Overall average growth excluding explorers was 12% YoY, which is nothing to sneeze at given gold’s rough year since mid-2016. These elite GDXJ gold “juniors” are really thriving.

These mills are essentially giant rock grinders that break ore into smaller pieces, vastly increasing its surface area for chemicals to later leach out the gold. Mill capacity is fixed, with limits on ore tonnage throughput. So when miners are blasting and hauling lower-grade ore, fewer ounces are produced. As they transition into higher-grade zones, the same amount of rock naturally yields more payable ounces.

Regardless of the ore grades being blasted and milled, the overall quarterly costs of mining don’t change much. Operations require the same levels of employees, fuel, maintenance, and electricity no matter how rich the rock being processed. So higher gold production directly leads to lower per-ounce mining costs. The big fixed costs of gold mining are spread across more ounces, making this business more profitable.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’17, these top 34 GDXJ-component gold miners that reported cash costs averaged just $628 per ounce. That was indeed down a sizable 1.3% YoY from Q2’16, and 3.0% QoQ from Q1’17.

This was really quite impressive, as the mid-tier gold miners’ cash costs were only a little higher than the GDX majors’ $605. That’s despite the mid-tiers each operating fewer gold mines and thus having fewer opportunities to realize cost efficiencies. Traders must recognize these smaller gold miners are in zero fundamental peril as long as prevailing gold prices remain well above cash costs. And $628 gold ain’t happening!

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a gold mine as an ongoing concern. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

In Q2’17, these top 34 GDXJ components reporting AISC averaged just $879 per ounce. That’s down 0.9% YoY and 4.9% QoQ. That also compares very favorably with the GDX majors, which saw average AISC nearly identical at $867 in Q2. The mid-tier gold miners’ low costs show they are faring far better fundamentally today than everyone thinks based on this year’s largely-disappointing technical stock-price action.

All-in sustaining costs are effectively this industry’s breakeven level. As long as gold stays above $879 per ounce, it remains profitable to mine. At Q2’s average gold price of $1258, these top GDXJ gold miners were earning big average profits of $379 per ounce last quarter! That equates to hefty profit margins of 30%, levels most industries would kill for. The mid-tier gold miners aren’t getting credit for that today.

Unfortunately given its largely-junior-less composition, GDXJ remains the leading benchmark for junior gold miners. In Q2’17, GDXJ averaged $33.30 per share. That was down a sharp 11% from Q1’s average of $37.46. Investors have largely abandoned gold miners because they are captivated by the extreme Trumphoria stock-market rally since the election. Yet gold-mining profits surged in that span.

At Q1’s average gold price of $1220 and Q1’s average top GDXJ components’ AISC of $924, these elite mid-tier miners were earning $296 per ounce on average. That’s already quite healthy. But quarter-on-quarter from Q1 to Q2, these top 34 GDXJ components’ operating profits rocketed 28% higher to $379 per ounce. There’s absolutely no doubt the sharp decline in gold-stock prices in Q2 had nothing to do with fundamentals!

Gold stocks are in the dumps technically because these lofty stock markets keep powering higher. Even though they are in dangerous bubble territory and the Fed is on the verge of starting to suck capital out of the markets via super-bearish quantitative tightening. These record stock markets have really retarded investment demand for gold, which tends to move counter to stock markets. So gold stocks are deeply out of favor.

Gold-stock price levels and psychology are totally dependent on gold, the dominant driver of miners’ profits. Gold stocks enjoy major profits leverage to gold, which gives their stocks big upside potential when gold rallies. Gold-mining costs are essentially fixed during mine-planning stages. Generally the same numbers of employees and equipment are used quarter after quarter regardless of the gold price.

So higher gold prices flow right through to the bottom line, costs don’t rise with them. If gold rallies just another 3.4% from Q2’s average prices to average $1300 in a coming quarter, profits will surge another 11.1% at Q2’s all-in sustaining costs. In a $1400-average-gold quarter, merely 11.3% higher from Q2’s levels, gold-mining profits would soar 37.5% higher. At $1500, those gains surge to 19.3% and 63.9%!

And a 20% gold rally from Q2’s levels is nothing special. Back in roughly the first half of last year after a sharp stock-market correction, gold powered 29.9% higher in just 6.7 months! So if you believe gold is heading higher in coming quarters as these crazy stock markets falter, the gold stocks are screaming buys today fundamentally. Their already-strong profitability will soar, amplifying gold’s mean-reversion upleg.

Since today’s bastardized GDXJ largely devoid of juniors changed so radically since last year, the normal year-over-year comparisons in key financial results aren’t comparable. But here they are for reference. These top-34 GDXJ companies’ cashflows generated from operations soared 57% YoY to $1458m. That was driven by sales up 59% YoY to $3840m. That left their collective cash balances $34% higher YoY at $6140m.

And top-34-GDXJ-component profits skyrocketed 385% YoY to $751m. Again don’t read too much into this since it’s an apples-to-oranges comparison. If GDXJ’s component list and weightings finally stabilize after such extreme tumult, we’ll have clean comps again next year. We can still look at operating cash flows and GAAP profits among this year’s list of top-34 components, which offers some additional insights.

On the OCF front, 10 of these 34 miners reported average YoY gains of 54%, while 13 of them reported average declines of 33%. Together all 23 averaged operating-cash-flows growth of 5%. That isn’t much, but it’s positive. And it’s not bad considering Q2’17’s average gold price was dead flat from Q2’16’s. These mid-tier gold miners are doing far better operationally than their neglected super-low stock prices imply.

On the GAAP-earnings front, the 10 miners that earned profits in both Q2s averaged huge growth of 110% YoY! And out of 14 more miners that saw profits cross zero in the past year, 8 swung from losses to gains. Total annual earnings growth among those zero-crossing swingers exceeded $536m. Make no mistake, these “junior” gold miners are thriving fundamentally even at Q2’s relatively-low $1258 average gold.

So overall the mid-tier gold miners’ fundamentals looked quite impressive in Q2’17, a stark contrast to the miserable sentiment plaguing this sector. Gold stocks’ vexing consolidation this year wasn’t the result of operational struggles, but purely bearish psychology. That will soon shift as stock markets roll over and gold surges, making the beaten-down gold stocks a coiled spring today. They are overdue to soar again!

Though this contrarian sector is despised, it was the best-performing in all the stock markets last year despite a sharp Q4 post-election selloff. The leading HUI gold-stock index blasted 64.0% higher in 2016, trouncing the S&P 500’s 9.5% gain! Similar huge 50%+ gold-stock gains are possible again this year, as gold mean reverts higher as stock markets sell off. The gold miners’ strong Q2 fundamentals prove this.

Given GDXJ’s serious problems, leading to diverting most of its capital inflows into larger gold miners that definitely aren’t juniors, you won’t find sufficient junior-gold exposure in this troubled ETF. Instead traders should prudently deploy capital in the better individual junior gold miners’ stocks with superior fundamentals. Their upside is vast, and would trounce GDXJ’s even if it was still working as advertised.

At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when. As of the end of Q2, this has resulted in 951 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +21.2%!

The key to this success is staying informed and being contrarian. That means buying low when others are scared, like late in this year’s vexing consolidation. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on our vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. For only $10 per issue, you can learn to think, trade, and thrive like contrarians. Subscribe today, and get deployed in the great gold stocks on our trading books before they surge far higher!

The bottom line is the mid-tier gold miners that now dominate GDXJ enjoyed strong fundamentals in their recently-reported Q2 results. Despite a flat comp-quarter gold price, they collectively mined more gold at lower costs. That naturally fueled better operating cash flows and profits. Today’s low gold-stock prices and popular bearishness are wildly unjustified fundamentally, an anomaly that doesn’t reflect operations.

As gold itself continues mean reverting higher, these mid-tier gold miners will see their profits soar due to their big inherent leverage to gold. GDXJ now offers excellent exposure to mid-tier gold miners, which will see gains well outpacing the majors. But if you are looking for the extreme upside likely in true junior gold miners, avoid today’s GDXJ and buy individual stocks. GDXJ is no longer a “Junior Gold Miners ETF”!

Adam Hamilton, CPA

August 25, 2017

1. After rallying almost $100 an ounce from the July lows of about $1210 (basis December futures), gold is consolidating its gains.

2. Fundamentally, there isn’t much immediate time frame news from either the fear trade or the love trade. That’s the root cause of this sideways price action, and its healthy.

3. To get some technical perspective on the consolidation, please click here now. Double-click to enlarge this short term gold chart.

4. A small head and shoulders top pattern has appeared, and it suggests more consolidation will occur before the upside action resumes. This scenario would see gold move down towards $1272,
and then rally towards $1330.

5. Please click here now. Double-click to enlarge. On this chart, a slightly bigger head and shoulders pattern is apparent. It suggests a deeper correction to about $1250 may occur.

6. I’ve outlined the $1300 – $1330 price zone as a good place to book some light profits on positions bought into my $1220 – $1200 buy zone. From here, investors should be viewing the $1275 – $1245 price zone as a fresh buy zone.

7. Please click here now. Double-click to enlarge this important dollar versus yen chart.

8. The world’s biggest liquidity movers are major bank FOREX departments, and they tend to aggressively buy the dollar versus the yen when global risk is declining.

9. When global risk rises, they will aggressively sell the dollar against the yen.

10. Both gold and the yen are viewed by these liquidity flow monsters as the world’s most important safe havens. The 108 dollar versus yen price is a very similar “line in the sand” to the $1300 line in the sand for gold.

11. The dollar is consolidating its recent decline in the 108 area as gold consolidates in the $1300 zone. Fundamentals make charts, and earth shaking news in September and October could see the dollar tumble under 108 and gold blast through $1300.

12. The debt ceiling (which I call a floor) debate is one event that could create a major panic in risk-on markets in this critical September-October time frame.

13. That fear trade rubber is going to meet the road just as Indian dealers begin buying gold aggressively for Diwali. They appear to be in pause mode now, which is logical since they don’t tend to chase the price after it has rallied almost $100 an ounce.

14. As I’ve mentioned, all gold bug eyes need to be focused on the $1275 – $1245 buy zone. Perhaps even more importantly, all gold bug hands need to be ready to press the buy button for their favourite gold stocks if gold moves into that key buy zone.

15. On that note, please click here now. Double-click to enlarge this GDX chart. The $26 area for GDX corresponds with $1300 for gold. Gold has traded at the $1300 area numerous times since February, but GDX rallies have not taken it to $26.

16. I understand that most gold bugs are heavily invested in gold stocks. The inability of these stocks to consistently outperform bullion is frustrating, but there is light in that tunnel.

17. To begin to view the light, please click here now. Double-click to enlarge this long term gold chart. Bull markets have rising volume and bear markets have rising volume. Corrective action, up or down, is accompanied by falling volume.

18. Gold has been in a bull cycle since 2002. Volume has risen on major price advances, and dwindled on declines.

19. Please click here now. Double-click to enlarge. Gold stocks were in a bear cycle against gold from 1995 – 2016.

20. That happened because the Fed lowered rates to make small inexperienced investors move their money out of bank accounts and into risky investments focused on capital gain.

21. The 1995 – 2016 bear market in gold stocks against gold is over. Just as gold based against the dollar in the 1999 – 2001 period before blasting higher on big volume, gold stocks are doing the same thing against gold now.

22. Quantitative tightening in America, Japan, and Europe is coming. Higher rates are in play. This is going to (slowly at first) move money out of global stock markets and government bonds and into the fractional reserve banking system. That will reverse the money velocity bear cycle that corresponded with the gold stocks bear market.

23. It’s a steady process, but it requires investors to be realistic about the time required to create a money velocity bull market… and thus a gold stocks bull market against gold. The bottom line is this:

24. Good gold stock times are not quite here, but they are near!

Thanks!
Cheers

Stewart Thomson
Graceland Updates
Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.

https://www.gracelandupdates.com
Email: stewart@gracelandupdates.com

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Three weeks ago we discussed how Gold needed to perform considering the US$ index was likely to bounce due to an oversold condition and extreme bearish sentiment.

We wrote: “Simply put, Gold will have to prove itself in real terms if it is going to hold its ground or breakout as the US$ begins a likely bounce.”

The US$ index has enjoyed only a slight rebound but Gold has maintained its 2017 US$ weakness induced gains because of its strong relative performance. Below we plot the daily line chart of Gold and a number of ratios: Gold against foreign currencies (Gold/FC), Gold against Equities and Gold against Bonds. Since the July low, Gold has showed good nominal and relative performance.

The key has been the strong rebound in Gold/FC and the breakout in Gold/Equities. Gold/FC has broken above two trendlines and is now testing its 200-day moving average. Meanwhile, Gold/Equities has broken above one trendline and has regained its 200-day moving average. It would be very bullish for Gold if Gold/FC pushed through its 200-day moving average while Gold/Equities pushed above trendline 2. Those moves would likely accompany a Gold breakout through $1300/oz but more importantly, they would put Gold in a position of trading above its 200-day moving average in nominal terms and against the major asset classes (stocks, bonds, currencies).

Although Gold failed to break above $1300/oz today (Friday), it remains in position to do so because of its renewed strength in real terms. As long as the US$ index does not rally hard, we expect Gold to break above $1300 and reach $1375. The gold stocks as a group have been lagging recently but in the event of a Gold breakout, we foresee significant upside potential as the group could play catch up. Consider learning more about our premium service including our favorite junior exploration companies.

Jordan Roy-Byrne CMT, MFTA
Jordan@TheDailyGold.com

The gold miners’ stocks have spent months adrift, cast off in the long shadow of the Trumphoria stock-market rally. This vexing consolidation has left a wasteland of popular bearishness. But once a quarter earnings season arrives, bright fundamental sunlight dispelling the obscuring sentiment fogs. The major gold miners’ just-reported Q2’17 results prove this sector remains strong fundamentally, and super-undervalued.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, some companies still partially report quarterly.

The world’s major gold miners just wrapped up their second-quarter earnings season. After spending decades intensely studying and actively trading this contrarian sector, there’s no gold-stock data I look forward to more than the miners’ quarterly financial and operational reports. They offer a true and clear snapshot of what’s really going on, shattering the misconceptions bred by evershifting winds of sentiment.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Its composition and performance are similar to the benchmark HUI gold-stock index. GDX utterly dominates this sector, with no meaningful competition. This week GDX’s net assets are 19.9x larger than the next-biggest 1x-long major-gold-miners ETF!

Being included in GDX is the gold standard for gold miners, requiring deep analysis and vetting by elite analysts. And due to ETF investing eclipsing individual-stock investing, major-ETF inclusion is one of the most-important considerations for picking great gold stocks. As the vast pools of fund capital flow into leading ETFs, these ETFs in turn buy shares in their underlying companies bidding their stock prices higher.

This week GDX included a whopping 50 component “Gold Miners”. That term is used somewhat loosely, as this ETF also contains major silver miners, silver streamers, and gold royalty companies. Still, all the world’s great gold miners are GDX components. Due to time constraints, I limited my deep individual-company research to this ETF’s top 34 components, an arbitrary number that fits neatly into the tables below.

Collectively GDX’s 34 largest components now account for 92.1% of its total weighting, a commanding sample. While the vast majority of gold miners’ Q2’17 results have been released, a few are still coming due to later reporting. GDX includes major foreign gold miners trading in Australia, the UK, and South Africa. These companies report in half-year increments instead of quarterly, so their Q2 data is limited.

The importance of these top-GDX-component gold miners can’t be overstated. In Q2 they collectively produced nearly 9.9m ounces of gold, or 306.5 metric tons. The World Gold Council’s recently-released Q2 Gold Demand Trends report, the definitive source on worldwide supply-and-demand fundamentals, pegged total global mine production at 791.2t in Q2. GDX’s top 34 miners alone accounted for nearly 4/10ths!

Every quarter I wade through a ton of data from these elite gold miners’ 10-Qs, and dump it into a big spreadsheet for analysis. The highlights made it into these tables. If a field is left blank, that means a company didn’t report that data for Q2’17 as of this Wednesday. Companies always try to present their quarterly results in the best-possible light, which leads to wide variations in reporting styles and data offered.

In these tables the first couple columns show each GDX component’s symbol and weighting within this ETF as of this week. While most of these gold stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q2’17 gold production in ounces, which is mostly reported in pure-gold terms.

Most gold miners also produce byproduct metals like silver and copper. These are valuable, as they are sold to offset some of the considerable costs of gold mining. Some companies report their quarterly gold production including silver, a construct called gold-equivalent ounces. I only included GEOs if no pure-gold numbers were reported. That’s followed by production’s absolute year-over-year change from Q2’16.

Percentage changes aren’t relevant or meaningful if data shifted from negative to positive or vice versa. Plenty of major gold miners earning profits in Q2’17 suffered net losses in Q2’16. So in cases where data crossed that zero line, I included the raw numbers instead. This whole dataset offers a fantastic highlevel fundamental read on how the major gold miners are faring today. They’re doing pretty darned well!

After spending days digesting these elite gold miners’ latest quarterly reports, it’s fully apparent their vexing consolidation this year isn’t fundamentally righteous at all! Traders have abandoned this sector since the election because the allure of the levitating general stock markets has eclipsed gold. That has left gold stocks exceedingly undervalued, truly the best fundamental bargains out there in all the stock markets!

The elite ranks of the world’s top gold miners haven’t changed much in the past year, seeing only slight shuffling in their GDX weightings. All the usual suspects are here. Since gold miners are in the business of wresting gold from the bowels of the Earth, production is the best place to start. These top 34 GDX gold miners again collectively produced 9,854k ounces in Q2’17. That merely rose 0.5% YoY, essentially flat.

That’s misleading though. GDX’s indexers have long loved the South African gold miners, despite them suffering ongoing heavy depredation by one of the world’s most corrupt and racist governments. Back in 2004, the South African government mandated gold miners increase their black ownership to 26% over the next decade. That was largely accomplished by diluting existing shareholders to give to new ones.

Many of these new black owners soon sold their share windfalls, which forced the unconscionable racial quota lower. Just in mid-June, South African stocks were crushed after their government declared a new black-ownership target of 30%. Even if miners had already hit that previous 26% racial quota, they were given just one year to top back up to 30%. So the entire South African mining industry is reeling in disarray.

Foreign investors being discriminated against for their skin color are fleeing in droves. The South African miners are under so much pressure they are delaying their financial reporting. This week Sibanye Gold was GDX’s 15th-largest holding, and it hadn’t even reported Q2’17 gold production yet. In Q1’17 it ran 330k ounces. So assuming that holds, the top 34 GDX components’ Q2 production is actually running 10,184k ounces. That makes for impressive 3.9% YoY growth!

That latest World Gold Council data shows global mined gold supply slipped 0.3% YoY in Q2. So the major gold miners are using their superior capital firepower to take gold-mining market share from smaller miners. Given the South African government’s openly-racist policies hostile to current shareholders, GDX’s managers should boot all the South African miners from this ETF.

Back in mid-May when I published my analysis of the major gold miners’ Q1’17 results, I discussed an interesting seasonal phenomenon. Between 2011 and 2016, world gold production dropped 8.4% on average from Q4s to Q1s. The drivers of this were explained back in that essay. The relevant part today is that global gold production bounces back dramatically in Q2s and Q3s following those Q1 slumps.

That indeed came to pass again this year despite the lackluster gold-price environment in Q2’17. With that assumed Sibanye Gold Q2 production thrown in, the top 34 GDX gold miners’ Q2 production surged 5.5% quarter-on-quarter from Q1! That’s in line with global gold production’s 6.3% average gain between these two quarters from 2011 to 2016. Everything looks good on the major gold miners’ production front.

Gold production varies seasonally within calendar years partially due to mining plan timing. Gold-bearing ore was certainly not created equal, with even individual deposits seeing big internal variations in their metal-to-waste-rock ratios. Miners often have to dig through lower-grade ore to get to the highergrade zones underneath. This still has economically-valuable amounts of gold, so it is run through the mills.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-goldprice environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’17, these top 34 GDX-component gold miners that reported cash costs averaged just $605 per ounce. That was indeed down a sizable 1.9% YoY from Q2’16, and 2.9% QoQ from Q1’17.

Gold-stock traders are notoriously excitable. Literally everything scares them, the sky is always falling in their worlds. They collectively have little courage in their convictions, always looking for excuses to flee. If they want something real to fear, it’s gold falling below the cash costs of mining it. And at $605 in Q2, that true fundamental disaster isn’t in the cards. Gold miners face no meaningful threats at today’s gold prices!

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

In Q2’17, these top 34 GDX-component gold miners reporting AISC averaged a level of just $867 per ounce. That’s down 2.1% YoY and 1.3% QoQ. That gold price is effectively this industry’s breakeven level. As long as gold is higher, the major gold miners can collectively earn profits mining. And earnings were already hefty in Q2, with gold’s average price of $1258 remaining $391 above the prevailing AISC levels.

Even today with gold investment demand in tatters thanks to the extreme Trumphoria stock-market rally since the election, the gold miners are thriving. The $391 per ounce they earned on average last quarter was a whopping 14.3% higher than their average profits of $342 in Q1’17. Yet the average gold price only rallied 3.1% QoQ. Thus the major gold miners enjoyed outstanding profits leverage to gold of 4.7x!

Yet you sure wouldn’t know it from gold-stock prices. That leading HUI goldstock index which is closely mirrored by GDX saw its average level actually fall 3.1% QoQ in Q2’17. Despite gold miners’ earnings soaring dramatically, goldstock prices slumped. That proves the gold-stock weakness in Q2 was purely a sentiment thing, it was totally unjustified fundamentally. Today’s low gold-stock prices are an anomaly.

Gold-stock price levels and psychology are totally dependent on gold, the dominant driver of miners’ profits. As these bubble stock markets inevitably roll over, probably soon with the Fed’s quantitative tightening looming, gold investment will return to favor for prudent portfolio diversification. And once gold rallies long enough and high enough to convince traders its strength is sustainable, gold stocks will be off to the races.

The key fundamental reason gold stocks enjoy such massive upside is their profits leverage to gold. Gold-mining costs are essentially fixed during mineplanning stages, when engineers decide which ore bodies to mine, how to dig to them, and how to process that ore. Quarter after quarter, generally the same numbers of employees, haul trucks, excavators, and mills are used regardless of prevailing gold prices.

So higher gold prices flow right through to the bottom line, costs don’t rise with them. If gold rallies just another 3.4% from Q2’s average prices to average $1300 in a coming quarter, profits will surge another 10.7% at Q2’s all-in sustaining costs. In a $1400-average-gold quarter, merely 11.3% higher from Q2’s levels, gold-mining profits would soar 36.3% higher. At $1500, those gains surge to 19.3% and 61.9%!

Another key measure of gold miners’ fundamental health is their cash flows generated from operations. With Q2’s average gold price only 0.1% lower YoY, and AISC down 2.1%, I expected to see OCF growth last quarter. But it didn’t happen, as these top 34 GDX components reporting Q2 cash flows generated from operations only totaled $3362m. That was down a sharp 17.0% YoY, raining on gold stocks’ Q2 parade.

Of the 29 of the top 34 GDX components reporting Q2 OCFs, a majority 17 were down YoY. I looked at this on a company-by-company basis, but no industrywide trends jumped out. Operating cashflows can vary considerably from quarter to quarter depending on what companies are doing with their operating gold mines. As long as OCFs remain massively positive, the gold miners’ operations are quite profitable.

Between Q1’17 and Q2’17 when average gold prices only climbed 3.1%, the top GDX components’ OCF still surged 11.0% sequentially! So the major gold miners are faring quite well despite all the excessively-bearish psychology arrayed against them. Their GAAP-accounting-profits growth in Q2’17 was nothing short of spectacular, which will directly translate into lower price-toearnings ratios to entice investors back.

The 25 of these top 34 GDX component gold miners reporting Q2 profits earned $2371m. That was a mind-boggling 757% higher YoY! Some of this collective growth wasn’t normal. GDX’s largest component and the world’s largest gold miner is Barrick Gold. In Q2 it reported an enormous gain of $880m on one-time sales of one-half and one-fourth of its interests in a couple major gold projects in Argentina and Chile.

IAMGOLD was another notable outlier, with a colossal $524m gain from reversing impairment charges. But even without these two huge one-off gains, overall GAAP profits for these top 34 GDX gold miners that reported Q2 still soared 250% higher YoY! Note in these tables how most of the miners saw substantial profits growth in Q2, with lots of green and little red in that column. The swings across zero are telling too.

More miners swung from losses a year ago to profits in Q2’17 than the other way around. Again all this profits growth will really bring down prevailing gold-mining price-to-earnings ratios, making this sector look a lot more attractive by that popular fundamental valuation measure. Based on this year’s dismal gold-stock sentiment you’d think these miners were doing terribly, but the opposite proved true again in Q2.

With higher production most of these elite gold miners enjoyed sales growth too, but overall revenues in the top 34 GDX components reporting them last quarter still slipped 2.1% lower YoY. There were two drivers. This year’s Q2’17 results had 27 of these 34 companies report sales compared to 28 a year ago. And these gold miners collectively saw a sharp 8.7% YoY drop in their silver production, weighing on revenues.

Still the $10.7b in collective sales among these top gold miners last quarter is up 3.9% QoQ, in line with the average gold-price gain of 3.1%. Those sales are impressive for gold mining, but serve to reveal just how small this little contrarian sector remains. It only takes a tiny fraction of stock-market capital to slosh into the gold miners’ stocks to fuel enormous gains fast. Gold rallying is the key, which shifts sentiment to bullish.

Finally these top 34 GDX gold miners saw big gains in the cash on their balance sheets in Q2. Weighing in at a hefty $13.7b, it surged 14.1% YoY. The sales of major mining projects likely weren’t a big factor, as most sellers and buyers are in this top-GDX-component list. Overall cash grew 3.5% or $462m QoQ, leaving the major gold miners with lots of firepower to snatch up promising projects and mines from the juniors.

So overall the major gold miners’ fundamentals looked quite impressive in Q2’17, a stark contrast to the miserable sentiment plaguing this sector. Gold stocks’ vexing consolidation this year wasn’t the result of operational struggles, but purely bearish psychology. That will soon shift as the stock markets roll over and gold surges, making the beaten-down gold stocks a coiled spring today. They are overdue to soar again!

Though this contrarian sector is widely despised today, it was the best performing in all the stock markets last year despite that sharp post-election selloff in Q4. The HUI blasted 64.0% higher in 2016, trouncing the S&P 500’s mere 9.5% gain! Similar huge 50%+ gold-stock gains are possible again this year, as gold mean reverts higher on the coming stock-market selloff. The gold miners’ strong Q2 fundamentals prove this.

While investors and speculators alike can certainly play gold stocks’ coming rebound rally with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will trounce the ETFs’, which are burdened by over-diversification and underperforming gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

The bottom line is the major gold miners’ fundamentals were very strong in the just-reported second quarter. Production growth drove lower costs, which along with rallying gold prices really helped catapult profits radically higher. This is translating into falling P/E ratios, emphasizing the extreme undervaluation rampant in this deeply-out-of-favor sector. Sooner or later investors will take notice and start returning en masse.

The universally-despised gold stocks are the last dirt-cheap sector in these Trumphoria-inflated stock markets. No one wants anything to do with them, which is the best time to buy low before they soar. All it will take to ignite gold stocks’ overdue mean-reversion rally is gold investment demand returning. The miners’ profits will really leverage gold rallying higher, making gold stocks even more fundamentally compelling. Adam Hamilton, CPA August 18, 2017 Copyright 2000 – 2017 Zeal LLC (www.ZealLLC.com)

In July, the Rogers International Commodity Index (RICI) had its best month since September, 2016, according to Price Asset Management, a US-based firm that manages a commodity fund based on the RICI index.

The index was up 3.13%, slightly ahead of the benchmark Bloomberg Commodity Index (BCOM) which was up 2.26%.The RICI is a composite, US dollar-based index designed by legendary commodity investor Jim Rogers Jr. in the late 1990’s. Metals continue to be the leading sector as both precious and industrial metals are showing strength as a result of continued strong fundamentals and global disturbances supporting precious metals.

For the year, the RICI was down 2.82% versus a 3.12-per-cent downturn in the BCOM. July was the first month of 2017 where commodities outperformed US Equities, with the S&P 500 Index up 2.06%. The increase in the RICI was very broad based as 29 of the 37 components were positive for the month. The index was led by the energy sector which was up 6.68%, followed by metals up +2.51% and agriculture down a slight 0.42%, For the year so far, metals continue to be the leading sector as both precious and industrial metals are showing broad strength as a result of continued strong fundamentals and global unrest supporting precious metals. Tin was the only metal in the negative at 1.46% for the year.

According to Alan Konn, Managing Director of Price Asset Management LLC, commodities, after an extensive bear market, are now up over +15% from a low in February of 2016. Prices of the RICI components are on average still 50% below their highs. He notes that the recovery has started with tremendous pressure on producers due to the prolonged downturn which has caused marginal production and capital expenditures to be cut. With the possibility of rising interest rates, increased inflation expectations, and fiscal stimulus in the form of global infrastructure spending replacing quantitative easing; the global macro outlook appears decidedly positive. These global macro forces that should be positive for some commodities but may also cause problems in other asset classes.

About the Rogers International Commodity Index:

The Rogers International Commodity Index® (RICI®) was developed by Jim Rogers to be an international, diversified, investable raw materials index. The RICI® currently has thirty-seven commodities representing the energy, metals, and agricultural sectors. The index is a basket of commodities consumed in the global economy. The index’s weightings attempt to balance consumption patterns worldwide (in developed and developing countries) with specific future contract liquidity. The value of this basket is tracked via futures contracts on 37 different exchange-traded physical commodities, quoted in four different currencies, on nine exchanges in four countries.

About Price Asset Management LLC:

Price Asset Management, LLC (PAM) has been registered with the CFTC as a Commodity Trading Advisor (CTA) and a Commodity Pool Operator (CPO) since 2000, and has been managing its main commodities fund since 2007. PAM is an SEC Registered Investment Advisor, a member of the National Futures Association (NFA), and has adopted the Global Investment Performance Standards (with independent verification) and the CFA Institute Asset Manager Code of Professional Conduct. PAM operates with robust compliance and risk management, offsite IT redundancy, business continuity and disaster recovery planning, with external audit and fund administration.

(Sources: Price Asset Management, July 2017 Update)

Aug 15, 2017

For gold to perform well against the US dollar, it needs to perform well against the Japanese yen.
Please click here now. Double-click to enlarge.
Since 2011 gold has traded sideways against the yen. Since 2013 it has been coiling in a very positive symmetrical triangle pattern.
An upside breakout would usher in a major move higher for gold against both the yen and the dollar.
Since 2013, the Indian market has been dealing with major duty, import rule, and hallmarking issues. The process has weighed on demand since 2012.
India’s gold market has undergone an enormous restructuring in response to these issues. The good news is that the restructuring is essentially complete now.
That paves the way for higher imports on a much more consistent basis.
China has made significant progress in tying gold price discovery more to physical demand versus supply.
Trump has also had major success in pushing the dollar lower against most of the world’s currencies.
These are not just one-time events. Events like tension in Korea can move gold $20 – $50 in a short period of time. A $100 – $200 move is possible if the tension intensifies (which it hasn’t).
Unfortunately, these gains are no more sustainable than the gains from the 1980 Russian invasion of Afghanistan were sustainable.
When the tension subsides, all the gains from these one-time events tends to be lost.
To move $1000 higher or more, gold needs to see a quasi-permanent ramp-up in the physical market demand against static or limited supply growth, and that’s happening right here, right now.
Trump’s actions on the dollar are a long-term process. He is now beginning a trade war with China. From a gold price discovery perspective, this is vastly more important than tension involving Korea.
Please click here now. Double-click to enlarge this gold chart.
Gold looks fabulous. After rallying about $90, gold is consolidating its gains. A new minor support zone at $1260 – $1280 is in play. Both traders and accumulators can be buyers in this support zone, in anticipation of a sustained rise above $1300.
Please click here now. Double-click to enlarge this daily chart of the Dow. If the US stock market suffers a major crash in September or October, there tend to be “cracks in the dike” in August.
That’s what’s happening now. The uptrend is still intact, but getting tested. The next technical event to watch for is an RSI non-confirmation. This happens when the Dow makes a new high, but the RSI oscillator (shown at the top of the chart) does not.
Investors can lighten up in August and essentially take a two month stock market holiday. That’s what I do. It reduces emotional stress.
My focus is more on the Asian stock markets than America, and I’ve sold about 30% of my positions into this price strength. If there is a crash, investors can buy aggressively, with a focus on banks and Asian markets.
Asian consumers carry debt that is similar to US citizen debt, but they have a lot of savings and strong saving rates as a percentage of income. US citizens have almost no savings and abysmal saving rates.
Asian markets will rebound from any crash with the resiliency shown by US markets during the late 1800s. In contrast, US markets are in danger of descending into a stagflationary gulag if they crash. I’m a buyer of US markets if they crash, but not with much risk capital compared to my Asian market allocation.
Please click here now. A number of influential money managers are following GDX right now, including Jeff Gundlach. The triangle formation they are following is important, but what is more exciting is the bullish volume action.
Volume is rising on rallies within the triangle, and ebbing on declines. That’s very positive. Bullion and mining stock investors should be very comfortable right now. Technical breakouts appear imminent and fundamentals are strong!

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.