Each day our fascination with the market kaleidoscope arises as it attempts to influence us and confuse us at the same time. This is why Gold Stock Trades examines the unfolding developments with the panoramic eye of an eagle. This great bird of prey is gifted with vision that can see both the immediate terrain and at the same time extending to the most distant horizon. In like manner, our telescopic view surveys the daily events as they might possibly influence our long range position.
For the past few weeks we have been dealing with an ebullient metals and miners market. We notice that the capital markets are undergoing travail soon after The West has instituted a bailout of Greece. Add to this the Moody’s statement that the Yuan of all things may need to be downgraded based on higher than expected difficulties encountered by their local governments. This talk of the possible need to lower Chinese credit ratings may be tonic to the very mining sectors that GST follows. Do not forget the U.S. debt ceiling talks closely approaching the August 2nd deadline.
The concept of safe havens continue to reemerge as an underlying theme in our market weltanschauung. This comprehensive conception of risk aversion is a valid specific standpoint for the preservation of our investment capital.
What do we see from our aerie that can help us to grow our selections? There are plenty of concerns globally such as the Arab Spring, the Islamist Winter, Euro-Zone Debt Concerns, U.S. Debt Ceiling among other threats to international stability. Gold is not a merely an inert clump of metal as it might be viewed by its critics. It is a looking glass into which we can see the many global pitfalls that surround us.
Now China is being added to the banking contagion that is spreading as a virus to the fiscal world community. There has always been a psychological component to investing. It might not take long for the realization that this infection may proliferate in the minds of market players and spread fungus-like. Remember that the Chinese may have foreseen such an eventuality and have been encouraging the purchase of gold and silver in their neighborhood banks. We may soon witness the acceleration of gold and silver purchases by the nascent Chinese middle class. Notice the emergence of the Hong Kong Mercantile Exchange which will allow 3 billion people in China access to silver as a safe haven hedge. This may be a catalyst for silver prices to move into new record highs. The Comex may think twice before any late Sunday Night margin rate hike blitzkrieg’s.
Focussing on the record divergences between bullion and mining equities is rapidly becoming an important consideration. For the past few months, the hard metals have outperformed mining equities. We are emerging from a seasonally weak period for miners, which we have identified as the “summer goldrums”. We see the time to sow the seeds for the approaching Autumn harvest season which over the past few years has been very profitable for mining investors. There is favorable seasonality during the months from August to December.
Presently, there are extremely attractive valuations in mining equities vis a vis bullion. Eventually, there is usually a reversion to the mean as mining equities play catch up to bullion, which has been commanding the field up to now. Soon the Barrick’s, Newmont’s and Goldcorp’s of the world with increasing profit margins will be faced with a choice to either distribute sizable cash dividends or invest them in mergers and acquisitions. Discovery and production rates in the industry are declining as the bullion prices continue to soar. Takeover’s may be the way to go for them to replenish their shrinking reserves. The see-saw may be swinging to the side of well managed and adequately financed junior miners as featured in our roster of selections.
Gold Miners (GDX) appear to have formed a potential bottom area and have shown great relative strength over the past few weeks. The critical $52.50 level, which is a key Fibonacci retracement and 2011 low, has held.
The negative divergence between price and momentum indicated that the recent move below $52.50 was not a break of support or long term trend. It was a classic case of gathering in the stops by strong hands in a typical exhaustion move.
This is why we keep our stop loss orders close to our vest in order to avoid the cognoscenti from using awareness of our stratagems against us. I distinctly recall my market maker friends telling me that they follow charts in order to exploit outsiders. That is why the markets are akin to a skillful chess game, in which we avoid being “faked out”. One must be aware of the common traps.
Gold Stock Trades subscribers have been well aware of the extreme negative divergence between the prices of mining equities versus its underlying metal over the past two months. A reversion to the mean may be in process as miners formed a pivot point ahead of gold and silver bullion and is showing increasing relative strength.
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