Sunday, June 30, 2013
The Case for Buying Precious Metals : sell euphoria and buy hysteria.
http://www.marketanthropology.com/2013/06/the-case-for-precious-metals.html
In
a financial era defined by a more visible hand of the central banks,
asset classes are bouncing with great frequency between the emotional
poles of euphoria and gloom. As
our work tends to focus on what lies ahead based on what has come
before - the recent historical narrative has provided prescient context
and analogy for previous asset movements echoing current market
behaviors.
From our perspective, climate change is here - and appears to have brought all the trauma and collateral damages we routinely find within our own backyards these days.
Over the past two years we have read countless research reports, both from technical and fundamental perspectives, advocating positions in the precious metals sector - specifically, their underperforming miners. Just last December, when the XAU gold and silver index and corresponding ETF's such as GDX were twice what they currently fetch, they were heralded as great value plays by the media darlings and fast money crowd eager to catch the next wave.
Thankfully, we took a less than favorable opinion on them as well as their denominating backdrops and rightfully saw them as the enormous value traps (see Here) they quickly became this past year.
Today, as the sentiment pendulum within the sector has accelerated with great inertia towards the depressive side of the continuum, those same advocates who recommended positions at less than favorable valuations and vulnerable technical underpinnings have suffered such emotional and monetary duress, that they simply don't want any part of them and see further weakness on the horizon.
If it wasn't so predictably tragic - it would almost be funny.
While we recognize our opinion and posture for the sector has pivoted before the prevailing winds have materially shifted (see Here), this is typically the case for us - considering our process tends to be proactive towards major pivots and our timeframes old fashioned. For us, timing is a relative phrase as buying and selling into market extremes is one of the few occasions where dexterity doesn't count for much - assuming you are positioned on the right side of the tracks and are not day trading. While we can appreciate a quick day trade as much as the next guy, we've always found our most profitable ideas have horizons a bit longer than the average news cycle. This was the case for us in April of 2011 with silver's blatant parabolic top, and believe the same execution methodology and perspective will work on the dark side of exhaustion with a clear waterfall structure now in place. Keeping it simple - sell euphoria and buy hysteria. Certainly easier said than done, but if you step back from the emotional undercurrents that have drowned countless participants over the past two years, the structures left behind in the charts are all too obvious.
Moving further down the road to the bear den we once inhabited, we see that the Nouriel Roubini's of world are likely following the same fallacies they applied towards downside targets in the equity markets in 2009, in extrapolating the culmination and capitulation of positions in precious metals - likely at or near the bottom. Far from absurd, we can recognize aspects of their logic in seeing spot prices significantly below where they currently reside. As example, we had up until recently expected the bear market in metals to extend far into 2014.
What changed for us?
1. Market structure and momentum went from a gradual and erosive decline - to a full waterfall cascade.
2. Ratio expressions for the sector have extended beyond historical extremes.
3. Both the currency and interest rate backdrops have shifted.
A. We have a less favorable opinion on the US dollar; &
B. Interest rates have spiked - relieving yield differentials unfavorably impacting the sector.
4. Anecdotal evidence of prominent gold bulls capitulating and despondent conditions within the sector.
As
evident below, the value trap comparative that we have worked with this
year for guidance as to how far the miners could fall relative to gold
has fulfilled its proportional equivalent with the banks "generational
low", circa 2009. Outside of the comparative, the correlation
relationship with the banks is following the previous cycle pivot in
2000, where the banks relative to the SPX washed out before the miners
relative to gold bottomed.
Despite marching to different rhythms, it has paid very well to buy both the banks and the miners when
their respective ratio expressions (now flipped) have reached parabolic
extremes. As noted in the first series, they have proportionally
exhausted along similar lines. What is particularly interesting is the
miners are completing the same exhaustion parallel that the banks
navigated in the first half of 2009 - despite putting in a higher high
and higher low. It had always bothered us while we were negative and
short the sector that the miners had never strongly outperformed spot
prices during the span of the entire bull market. Historically speaking -
it was a rather large outlier. While outlandish as it seems right now -
perhaps their best days are yet to come. Considering the write downs
and efficiencies now dictated by current market conditions - lean and
mean for the next leg higher just may provide those conditions.
Back in 2011, a similar market and sentiment environment was spawned in the financial sector as the banks careened lower and tested participants moxie in the shadow of the financial crisis. As we recall, the general sentiment at the time - both within the trading and the pundit class, turned overtly bearish on the banks just as they were completing their cycle lows. The thought of buying Bank of America and Citigroup for anything more than a quick trade was seen as reckless and foolish by analysts and pundits so keen on extrapolating current market conditions forward. From a purely psychological perspective, the retest is often as difficult to navigate and appraise as the initial crisis itself - due to the long tails of the recency effect.
In terms of market structure and momentum, the parallels are evident in the symmetrical and positive divergent nature of their RSI fingerprints and the deeper imprints they recorded versus even during the crisis lows in 2009.
Similar to the equity indexes in 2011, gold and silver have now retraced all of their gains recorded subsequent to QE2.
Like
the financials in 2011, the more emotionally traded miners have
exhibited disproportional losses to their denominating asset class. Our
expectations - and similar to the financials circa October 2011, is once
the retest is successfully completed, the miners will once again lead
the sector higher.
The Case for Buying Precious Metals
From our perspective, climate change is here - and appears to have brought all the trauma and collateral damages we routinely find within our own backyards these days.
Over the past two years we have read countless research reports, both from technical and fundamental perspectives, advocating positions in the precious metals sector - specifically, their underperforming miners. Just last December, when the XAU gold and silver index and corresponding ETF's such as GDX were twice what they currently fetch, they were heralded as great value plays by the media darlings and fast money crowd eager to catch the next wave.
Thankfully, we took a less than favorable opinion on them as well as their denominating backdrops and rightfully saw them as the enormous value traps (see Here) they quickly became this past year.
Today, as the sentiment pendulum within the sector has accelerated with great inertia towards the depressive side of the continuum, those same advocates who recommended positions at less than favorable valuations and vulnerable technical underpinnings have suffered such emotional and monetary duress, that they simply don't want any part of them and see further weakness on the horizon.
If it wasn't so predictably tragic - it would almost be funny.
While we recognize our opinion and posture for the sector has pivoted before the prevailing winds have materially shifted (see Here), this is typically the case for us - considering our process tends to be proactive towards major pivots and our timeframes old fashioned. For us, timing is a relative phrase as buying and selling into market extremes is one of the few occasions where dexterity doesn't count for much - assuming you are positioned on the right side of the tracks and are not day trading. While we can appreciate a quick day trade as much as the next guy, we've always found our most profitable ideas have horizons a bit longer than the average news cycle. This was the case for us in April of 2011 with silver's blatant parabolic top, and believe the same execution methodology and perspective will work on the dark side of exhaustion with a clear waterfall structure now in place. Keeping it simple - sell euphoria and buy hysteria. Certainly easier said than done, but if you step back from the emotional undercurrents that have drowned countless participants over the past two years, the structures left behind in the charts are all too obvious.
Moving further down the road to the bear den we once inhabited, we see that the Nouriel Roubini's of world are likely following the same fallacies they applied towards downside targets in the equity markets in 2009, in extrapolating the culmination and capitulation of positions in precious metals - likely at or near the bottom. Far from absurd, we can recognize aspects of their logic in seeing spot prices significantly below where they currently reside. As example, we had up until recently expected the bear market in metals to extend far into 2014.
What changed for us?
1. Market structure and momentum went from a gradual and erosive decline - to a full waterfall cascade.
2. Ratio expressions for the sector have extended beyond historical extremes.
3. Both the currency and interest rate backdrops have shifted.
A. We have a less favorable opinion on the US dollar; &
B. Interest rates have spiked - relieving yield differentials unfavorably impacting the sector.
4. Anecdotal evidence of prominent gold bulls capitulating and despondent conditions within the sector.
- Ratio Extreme
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| Click to enlarge image |
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- The Retest & QE2 Retracement
Back in 2011, a similar market and sentiment environment was spawned in the financial sector as the banks careened lower and tested participants moxie in the shadow of the financial crisis. As we recall, the general sentiment at the time - both within the trading and the pundit class, turned overtly bearish on the banks just as they were completing their cycle lows. The thought of buying Bank of America and Citigroup for anything more than a quick trade was seen as reckless and foolish by analysts and pundits so keen on extrapolating current market conditions forward. From a purely psychological perspective, the retest is often as difficult to navigate and appraise as the initial crisis itself - due to the long tails of the recency effect.
In terms of market structure and momentum, the parallels are evident in the symmetrical and positive divergent nature of their RSI fingerprints and the deeper imprints they recorded versus even during the crisis lows in 2009.
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| Click to enlarge image |
For the broad equity indexes, the cascade in 2011 marked a complete retracement of gains recorded in QE2.
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| Click to enlarge image |
- Patterns & Fractals
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Thursday, June 27, 2013
The Adjusted Gold/XAU Ratio as an Indicator of Forward Returns for Gold Stocks
http://www.advisorperspectives.com/newsletters12/19-adjgold.php
The Adjusted Gold/XAU Ratio as an Indicator of Forward Returns for Gold Stocks – An Update
urrently the gold/XAU ratio is below the extension of the trend line. If the blue trend line is indeed an indicator for peaks in the ratio, then we can expect such a peak to occur soon. Extending the current trend of the adjusted ratio, as represented by the short green line, we can anticipate intersection with the blue line at a level of about 11.4, which would indicate the expected peak level of the gold/XAU ratio. An increase in the price of gold with XAU gaining relatively less – or, alternatively, a further decline of XAU with gold remaining at the current price – could lead to the anticipated peak level. Once the trend-adjusted ratio has formed a peak and starts to decline, one can reasonably expect good gains for gold stocks afterwards, as has always been the case in the past. Those prior examples are listed in Table 1.
Table 1
The recent gold/XAU ratio and historic returns for XAU
As mentioned in my October 2011 article, one could have, based on the then-prevailing gold/XAU ratio of about 8.30, expected significant gains for XAU over the subsequent eight months. That time has almost passed, and XAU has instead lost value since then.
In order for XAU to gain, the gold/XAU ratio would have had to get lower and stay below the criterion value of 8.30 during the remainder of the stipulated investment period, or the extended investment period, as explained in the original article. Since the ratio never fell below 8.30 and is now about 10.5, the investment period is not complete, and thus a final determination cannot be made on whether the investment strategy was successful or not.
But what performance can we expect from gold stocks in the near future? Looking back we see that there were only two other occasions when the adjusted ratio was as high as the current level, namely in 1980 and 2008. The returns that followed on those occasions when the adjusted ratio was 10.0 are shown in the table below.
Table 2
If history repeats itself, then substantial returns await investors in gold equities – and they may be realized fairly soon.
The Adjusted Gold/XAU Ratio as an Indicator of Forward Returns for Gold Stocks – An Update
urrently the gold/XAU ratio is below the extension of the trend line. If the blue trend line is indeed an indicator for peaks in the ratio, then we can expect such a peak to occur soon. Extending the current trend of the adjusted ratio, as represented by the short green line, we can anticipate intersection with the blue line at a level of about 11.4, which would indicate the expected peak level of the gold/XAU ratio. An increase in the price of gold with XAU gaining relatively less – or, alternatively, a further decline of XAU with gold remaining at the current price – could lead to the anticipated peak level. Once the trend-adjusted ratio has formed a peak and starts to decline, one can reasonably expect good gains for gold stocks afterwards, as has always been the case in the past. Those prior examples are listed in Table 1.
Table 1
date when peak of adjusted gold/XAU occurred
|
level of XAU at peak of adjusted gold/XAU
|
date when XAU gained most after peak of adjusted gold/XAU
|
max XAU after peak of adjusted gold/XAU
|
%-gain
|
annualized rate of return
|
1/21/1980
|
105.24
|
10/1/1980
|
183.59
|
74%
|
122%
|
7/15/1982
|
52.8
|
1/5/1983
|
150.11
|
184%
|
795%
|
7/30/1986
|
60.04
|
9/9/1987
|
155.74
|
159%
|
136%
|
11/30/1992
|
65.81
|
1/6/1994
|
145.57
|
121%
|
106%
|
11/20/2000
|
42.17
|
3/5/2008
|
206.37
|
389%
|
24%
|
10/28/2008
|
72.72
|
3/30/2011
|
228.95
|
215%
|
61%
|
The recent gold/XAU ratio and historic returns for XAU
As mentioned in my October 2011 article, one could have, based on the then-prevailing gold/XAU ratio of about 8.30, expected significant gains for XAU over the subsequent eight months. That time has almost passed, and XAU has instead lost value since then.
In order for XAU to gain, the gold/XAU ratio would have had to get lower and stay below the criterion value of 8.30 during the remainder of the stipulated investment period, or the extended investment period, as explained in the original article. Since the ratio never fell below 8.30 and is now about 10.5, the investment period is not complete, and thus a final determination cannot be made on whether the investment strategy was successful or not.
But what performance can we expect from gold stocks in the near future? Looking back we see that there were only two other occasions when the adjusted ratio was as high as the current level, namely in 1980 and 2008. The returns that followed on those occasions when the adjusted ratio was 10.0 are shown in the table below.
Table 2
Historic XAU Returns for Criteria Value of Adjusted Gold/XAU = 10.0
and minimum investment period of 180 days |
||||||
Investment Period from - to
|
XAU value at start
$ |
XAU value at end
$ |
no. of months in each period
|
absolute return for each period
|
gain
(loss) over period $ |
|
1/3/80
|
10/6/80
|
79.5
|
178.0
|
9.1
|
123.8%
|
98.5
|
10/22/08
|
5/16/09
|
71.7
|
136.7
|
6.8
|
90.7%
|
65.0
|
4/11/12
|
-
|
164.3
|
-
|
-
|
-
|
-
|
If history repeats itself, then substantial returns await investors in gold equities – and they may be realized fairly soon.
Wednesday, June 26, 2013
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