Though the sector itself is risky, there are still numerous companies that can be defined as an investment. An investment is something which you receive a return on your money and a return of your money. Therefore we are looking for companies that are making money and have the reasonable ability to grow cash flow and earnings. The royalty companies and large and senior producers fit this bill. An investment in GDX or a gold mutual fund fit this category. Mid-tier and smaller producers with experienced management, a track record and a strong financial position can be categorized as investments.

Anything and everything else falls into the speculation category. How about a large developer with 10 M oz Au? It is a speculation. No one knows if the owner will ever be acquired, much less if the project will ever go into production. Even if a junior explorer or junior developer are trading at $10/oz in the ground, it still qualifies as a speculation.

Why are we talking about this?

Many gold bulls were hurt in 2007-2008 and again this year as they forgot that most of the companies in this sector as speculations. They forgot that shares can fall tremendously, even as the metals remain firm or even rise. You cannot just sit in your juniors and think they will be up 50-fold by the end of this bull market. After all, you should know by now that most juniors will fail and even fail in this historic bull market.

This year provides a clear example of the difference between speculating and investing. GDX is down 14% while GDXJ is down 33% while the CDNX is down 38%.

Going forward, one has to have a plan that distinguishes between investing and speculating. How much of your portfolio should be in Gold-related investments and how much should be in speculations?

Obviously, we are coming out of a difficult year and those who held too many speculations will feel jaded. They will feel that the juniors will never gain or that gold stocks will always underperform the metal. The result of this year will cloud their thinking for 2012 and beyond. On the other hand, the real professionals were cautious this year. They held high cash positions and focused most of their risk-capital on investments and not speculations. Since the market is likely to make a major low within potentially days or weeks, it may be time to consider some of the speculations, rather than become really defensive and only sit in a few large cap stocks.

Your job, Joe Investor is to figure out the right balance for your portfolio and then shift accordingly with market conditions. Your investments should earn you a return of your money and a return on your money. Whether that is 80% or 50% of your portfolio depends on your risk tolerance, time horizon and other factors. In our premium service, we look for both investments and speculations in this sector that can make you money. If you’d like professional guidance in navigating what lies ahead, while managing risk, consider learning more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

First, we have to understand that gold mining is a very difficult business. The law of numbers makes it even more difficult for the largest producers. They have to operate multiple mines and then continuously acquire or find new resources to maintain reserves and maintain production levels into the future. It’s a difficult business regardless of where the Gold price is. Hence, mining stocks do not outperform Gold over time whether in a bull market or not. The following chart is from Steve Saville who is one of the first to understand this subject. The surge in the 1960s was due to the Gold price being fixed.

Also we must understand that Gold and gold stocks are entirely different markets that share different performance in a panic or crisis. Gold can be a safety hedge but gold stocks most certainly are not. They are the worst performers in any type of crisis. During the 1987 stock market crash, the gold stocks performed far worse than the market. The same happened in 2008 as the gold miners led the market crash.

During the present European sovereign debt crisis, the gold stocks have actually held up reasonably well relative to other stocks. From top to bottom, emerging markets and commodity shares have been hit the hardest while gold stocks declined in line with the S&P 500. Keep in mind we are referring to the gold stocks as in the large producers. The senior gold stocks are notoriously volatile but the hundreds of mid-tier and junior companies are far more volatile than the seniors. If the seniors fall 15-20% then others can fall 40% or more.

Moving along, one has to consider which is the best market index for tracking the gold stocks. We posit this as there are several indices but all are composed differently and therefore their performance is not always in line with each other. In the chart below we plot GDX, XGD.to, XAU and SIL. Note that GDX mirrors the HUI which is about 10% comprised of silver stocks. The XAU is comprised of 20% silver stocks and base metal stocks (FCX) while SIL, the silver stock ETF is 100% silver stocks. XGD is 100% in gold stocks and is priced in Canadian Dollars.

Judging from this we see that the weakness is almost entirely in silver stocks and not in gold stocks. XGD is holding up the best and is little threat to break its summer lows while XAU and SIL are in downtrends that began in April and printed new lows in October. Though the gold stocks have underperformed Gold, note that XGD and GDX did make new, albeit marginal highs in September. The reality is during a tough year gold stocks have held up relatively well while silver stocks and smaller mining stocks have trended down.

The gold stocks (GDX & XGD) have actually been in a consolidation that shares similarities to the consolidation from 2004-2005. See the chart below.

The consolidation in 2004-2005 lasted 18 months and broke to a new high 23 months after the peak at the end of 2003. The 2001-2003 advance lasted 36 months and gained nearly 350%. The 2009-2010 advance gained 313% in 25 months. Based on time, the current consolidation would bottom this month and then break to a new high in March 2012. We should also note that the first consolidation bottomed at the 38% retracement and the lower 400-day band. The lower 400-day band is currently at $48 and should touch $51 by the end of January while the 38% retracement is at $47.

The similarities between this consolidation and the 2004-2005 consolidation indicate that the gold stocks are in a consolidation and digesting the rapid rebound gains from 2009-2010. This along with the aforementioned reasons explains why the gold stocks have not broken out to new highs. Moreover, while not as strong as it was this year, Gold did make a new high in 2004 while the gold stocks lagged as they were stuck in a consolidation having to digest the massive gains from 2001-2003. That is another key similarity between the two periods.

There is plenty of evidence that confirms we are likely in the latter stages of this consolidation.

Here is a chart posted by my friend Sean Brodrick. It shows the HUI index along with the price earnings ratio of the index. The PE ratio is currently at its lowest point in nearly nine years.

The next chart is from sentimentrader.com. It plots the Rydex Precious Metals Fund in line with the assets in the fund and the assets as a percentage relative to other sectors. As we can see, the assets in the fund are near an absolute low while relative to other sectors the assets are much closer to a low than a high.

To conclude, the gold stocks have underperformed for a variety of reasons. Historically, it is what they tend to do- underperform. Secondly, the gold stocks have been stuck in a consolidation, digesting the rapid gains the post 2008 recovery. Third, the consolidation came about at a time when the first major aftershock from 2008 came to the forefront. The European sovereign debt crisis took equities and commodities lower and historically, the gold stocks are never spared from a panic or crisis.

The good news is the gold equities are coming to the end of the consolidation and a resolution within months is likely. Sentiment is bullish from a contrary perspective. The consolidation has weeded out the week and impatient as earnings and cash flows for gold companies have improved and stock valuations have moved to multi-year lows. Even in Gold and Silver we see that speculative long positions are near multi-year lows. This setup combined with the forthcoming monetization in Europe, stimulus in China and more monetization from Bernanke could produce quite the launch pad for the gold shares in early 2012. If you’d like professional guidance in navigating what lies ahead, while managing risk, consider learning more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

The consolidation has endured due to a working off of the overbought condition from 2009-2010 gains as well as the lack of a real catalyst. The Fed, though accomadative has been on hold while emerging markets turned their focus to inflation. European bond markets were in fair shape into the summer. However, the good news for gold investors is that a trio of major catalysts lie on the horizon and should easily trigger the next breakout.

The obvious catalyst is a massive bailout of European nations and European banks through a $3 Trillion debt monetization (the figure stated by many). Until last month the European crisis was limited and a hope of being contained. Since then interest rates on French bonds, which had been following Germany began following Spain and Italy higher. The 10-year yield on French bonds has surged in the past six weeks from about 2.50% to nearly 4%. Meanwhile, Ambrose Evans Pritchard, the intrepid reporter wrote that Asian investors are pulling out of German Bunds and Europe all together. Bund yields (10-year) look to be forming a double bottom just below 2%. Bunds stopped rising in last month as yields surged in Spain, Italy and France. Understandably, Germany has stood in the way of an ECB bailout. However, the sooner the crisis spreads to Germany, the sooner we can expect a German-led ECB bailout.

Moving over to Asia, we hear that China has started to turn its focus away from inflation and towards growth. Last weekend the Chinese Vice-Premier, Wang Qishan indicated publicly that “ensuring growth is the overriding priority,” and “unbalanced growth would be better than a balanced recession.” He also noted the persistent weakness in the global economy.

China’s tightening, which began October 2010 has been effective. It was recently reported that Chinese inflation rate has fallen in recent months from a high of 6.5% to 5.5% and industrial production growth slipped to a one-year low. GDP growth has slowed in recent quarters from 9.7% down to 9.1%. According to analysts at Citigroup, the slowdown could intensify. Bloomberg reports:

If tightening measures aren’t relaxed, property investment will “scale back significantly” in the next two quarters, “dragging down the whole production chain and GDP growth,” Minggao Shen and Ben Wei, analysts at Citigroup, wrote in a report dated yesterday. Exporting firms are also facing an environment worse than in late 2008 due to the overseas slowdown and rising costs, they said.

Last but not least let us consider the USA. Our bond market remains the strongest in the world while the US Dollar is likely to rally further in the near term. This combination along with lower commodity prices and a global move to inflationary policies will allow the Fed the political cover to institute another round of debt monetization. Combined with potential action in China and imminent action in Europe, this is powerful policy that should result in a massive catalyst for select markets.

The current investor psychology of fear, indifference, and surrender is leaving them vulnerable as they miss the big catalysts that lie directly ahead. Gold and gold stocks remain in excellent position for a potentially tremendous 2012 and 2013. Required action from Europe, a shift in Chinese policy and more monetization on steroids from the Fed is going to catapult the bull market in precious metals like we haven’t seen since the late 1970s. In our premium service, we seek to manage the short-term risks in this volatile sector while keeping focused on the major opportunities. The technicals are lined up while fundamental catalysts are soon to emerge. The combination could lead to an explosive 2012 for gold bugs. We invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

As you can see, GDX was able to maintain its support while GDXJ broke support and made a new 52-week low. As a result, the ratio surged in favor of GDX.

Traders and investors need to remember that gold stocks are a risky bunch and that the non-producers are extremely risky. Yes, the sector is in a bull market but that by itself is not enough to drive the speculative plays higher. Until we reach the bubble phase, the non producers will rise on their own merits and not because “it’s a bull market.” Though we are likely at least two to three years from the birth of a bubble, does it mean the non-producers will continue to underperform in the meantime?

Hardly. Remember, the large caps (GDX) have been in a consolidation for a year and that has a negative effect on the speculative plays. The longer a consolidation lasts, the more weak hands jump ship. At the start of the consolidation, the non-producers held up better. Ultimately they are going to underperform in a weak market and outperform in a strong market. The good news is the large caps are close to a major breakout which is not only a catalyst for the large stocks but a catalyst for everything else in the sector.

A breakout in GDX, as we presume in the above chart, would certainly have a positive impact on junior developers and junior exploration plays which have underperformed badly in the last few months. After all, this is happened before. GDXJ performed better in Q3 and Q4 of 2010 when GDX broke out of an eight month consolidation. GDX also made a huge breakout in the second half of 2005 and junior stocks surged over the next 18 months.

This time, GDX is close to a very significant breakout as it could pull away from a one-year base as well as the 2008 highs and on some charts, the 1980 highs. Although the non-producers have lagged, they would ultimately find a huge bid in the immediate aftermath of a breakout in GDX. Traders and investors need to know when to play it safe and when to take risks. Heading into this potential breakout, it is wise to stick with producers who are finding a bid. However, when the breakout appears imminent, it would be wise to set your sights a bit lower on the food chain and find the developers and explorers ready for a major rise. If you’d like professional guidance in navigating this bull market and finding the best performing stocks, then we invite you to learn more about our service.   

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

One of the best times to use relative strength is during or after a strong market selloff or panic. After 2008, I was most bullish on Gold and Agriculture for the simple fact that both didn’t have the long-term technical damage that occurred in most markets. Most markets plunged below 2005 lows. Markets that escaped that fate and held up reasonably well would make new highs first and well ahead of global stock indices (which have yet to make new highs).

In the chart below we show various markets (Gold, AGs, T-Bonds, Chile, S&P). Gold bottomed in late 2008 above its summer low in 2007. Agriculture prices bottomed slightly ahead of their bottom in spring 2007. Bonds maintained their uptrend in 2008 and beyond. Chile has been one of the strongest markets (held above 2006 lows) and surged to new highs while the S&P is nowhere close to a new high. The other four markets had the best relative strength in 2008 and thus performed the best from 2009-2010.

So how does that history apply to today? We just had a mini-panic or a mini-2008. The stock market likely put in an intermediate bottom. This doesn’t mean it will breakout but it means the lows are safe for a while. Now its time to spot the relative strength leader which will be a leader in the immediate future. In the chart below we compare gold stocks to commodity stocks, emerging markets and the S&P 500.

While emerging markets and commodity shares are in structural bull markets, both will soon meet multi-year resistance. Also, both broke their previous 2011 lows. Essentially, both have short-term technical damage to repair and long-term resistance to overcome. Meanwhile, the gold stocks have been in a consolidation for 12 months and held above their summer low during the mini-panic. We see a combination of relative strength and very limited overhead resistance.

A weekly close above $67 in GDX should usher in the beginning of a true bull market move in the gold stocks. After viewing these charts one can visualize the gold stocks galloping higher in 2012 while their commodity and emerging market counterparts encounter multi-year resistance. The reasons do go beyond technical. We’ve written about the low valuations, lack of ownership and the bull market moving towards its recognition point. The recent double bottom in GDX should make one feel more comfortable. Their relative strength in 2011 indicates leadership and potential for a major move higher in 2012. If you’d like professional guidance in navigating this bull market and finding the best performing stocks, then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailygold.com

As it stands now, the next few days will be critical for the mining stock complex. Wednesday, GDX closed below support at $55 which hasn’t been penetrated on a weekly basis since June. The market has found reliable support this year at $52 which also marks the 600-day moving average, a level which has supported GDX at every key bottom except in 2008.

There are other things to consider beyond basic technical analysis. This chart from sentimentrader.com shows the HUI along with some breadth indicators which are looking very healthy relative to 2008. In mid 2008, the McClellan Summation index had already broken to a multi-year low. Presently, the index is yet to break to any major new low. Also, the cumulative advance decline line remains in an uptrend and close to a new all time high.

Typically, breadth indicators will breakdown first and signal trouble. That is what happened in 2008. We aren’t seeing that yet. Furthermore, we should note that the bullish percent index (the percentage of stocks on P&F chart buy signals) for GDX is only 23%. The recent low of 16% was the lowest figure since, you guessed it late 2008. Needless to say, the gold stocks are quite oversold.

In addition to being oversold, many analysts believe the gold stocks are undervalued. Among others, Frank Holmes via TD Securities finds that in particular, the explorers and developers are significantly undervalued. It is hard to argue with the following chart.

More important than being undervalued, gold stocks are under-owned. After all, if they were over-owned then who would be left to buy? A recent MoneyShow article mentions that the TIS group, a research-oriented institution finds that gold stocks are quite under-owned. Quoting from the article:

The total value of all gold mining shares in the world is about $240 billion, but less than 1% of all global pension fund assets hold gold or gold stocks. If market conditions persuade them to double their weighting in gold shares, it would cause $300 billion in new buying that would leave shares in shortage.

You may be surprised to learn that most pension funds and individuals have not been investing in gold mining stocks or the metal itself, even though gold has been the trade of the millennium.

These are times when discipline has to trump emotion. The emotional investor is worried about the current environment and a pending retest of the lows. Will they hold? Is this 2008 all over again? All we can do is consider the evidence and position ourselves accordingly while mitigating all risks. This is a bull market, so over time the market will trade much higher. That does not mean we can’t fall another 20% before a bottom. One should have a plan and cash if that is the situation. Also, one shouldn’t have too much cash if the market rockets higher after a retest. If you’d like help from a professional in navigating and profiting in these markets, then we invite you to learn more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

First we want to show that Bonds have reached an extreme. Below is a composite sentiment indicator from the very trustworthy sentimentrader.com, which provides excellent sentiment data. Their indicator has nailed the last three peaks in Bonds and I’m guessing it will be four for four.

The chart below illustrates that the gold stocks tend to bottom ahead of important peaks in Bonds. On top we show TLT, the Bond ETF and below it the HUI Gold Bugs Index. The past three peaks in TLT coincided with the early phase of a strong advance in the mining stocks. The 2005 peak in Bonds lasted for two years while the 2008 peak lasted for the two years.

The recent widespread carnage came as a surprise to us as the gold stocks never provided any negative signals. However, we forgot about warning signals such as a surge in Bonds and plunge in emerging markets including China. Now its time to look forward. At present Bonds have reached an overbought extreme and the risk reward is quite negative and in turn, positive for other markets.

Meanwhile, global equities are very oversold while the mining stocks have rebounded from support without violating their summer lows. These equities are set to benefit as capital shifts out of Bonds. Precious metals have been the entire focus of our premium service but we’ve supplemented this with increased coverage of global markets. If you’d like help from a professional in navigating and profiting in these markets, then we invite you to learn more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

In the chart below we graph GDX (gold stocks) and SIL (silver stocks) at the top followed by the S&P 500, EEM (emerging markets), CRX (commodity stocks) and XLE (energy stocks). In each graph (but SIL) we show the 400-day moving average. The 50 and 200 day moving averages are important but in my opinion the 400-day moving average is the most important when dealing with the primary trend.

The 400-day moving average has been significant for each market as it easily distinguishes between bull and bear markets. Each market, with the exception of the precious metals stocks has broken its 400-day moving average. Equities, emerging market equities and commodity stocks are now in a cyclical bear market. This doesn’t mean these markets will fall another 20%. I think they’ve seen most of their downside. The key point is that these markets won’t make a new high anytime soon and will likely remain in a trading range over the next 12 months.

Meanwhile, despite Thursday’s drubbing, the gold and silver equities remain healthy from a long-term technical perspective. GDX would have to fall another 10% to test its 400-day moving average. SIL doesn’t have 400 days of history but its holding 6% above its 350-day moving average. Back in the summer of 2008, the mining stocks plunged through support alongside commodity stocks and emerging market stocks. Today we continue to see an entirely different picture.

The gold and silver stocks are right where they need to be, holding up well amid a summer swoon that likely ends next month. There may be some more downside for these shares but don’t expect a penetration of long-term support. These stocks have held up well for fundamental reasons. Metals prices are up significantly on all time frames while cost pressures are abating. That is a recipe for higher profits and higher share prices. As we near 2012, a peak in bonds and bottom in equities will send money flowing into the gold and silver stocks. Go here to learn more about how you can take advantage of our professional service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

First, crashes and big declines don’t happen frequently. The fact is, a crash and recession pave the way for a new advance and recovery. There has to be a long buildup of new excesses before the next major decline. Sure markets can correct 20-30% but after a big bust there is much flat-lining. For example, Japan’s economic growth for much of the past 20 years has flat-lined. We’ve had two bad recessions and bear markets in the last 10 years. Don’t you think that has already cleansed some excess from the system?

Secondly, and this is most important, the credit crisis has transitioned from the private sector to the government sector. Much of the needed liquidation in the private sector has already happened. However, rather than let the liquidation run its course governments stepped in terminated the liquidation and absorbed some of the massive losses and debts of the banks. In doing so, governments have put themselves and their creditworthiness at risk.

You should have noticed that markets perform in different ways in these differing crisis’. A private sector credit crisis is strongly deflationary. Everything declines in nominal terms while government bonds and and reserve currencies rise. Gold fell in nominal terms but was a very strong performer in real terms. In a government led credit crisis, some currencies rise and some fall. The same can be said for bonds. Equities and commodities will initially decline but far less than in a private sector credit crisis.

Consider the performance of the precious metals complex. In 2008, Gold fell 30% but performed well in real terms. Silver and the mining stocks collapsed. Today in the perhaps “repeat of 2008,” Gold accelerated 25%, Silver advanced off its bottom and the equities as of a few days ago completed a major breakout. Yet with the Euro falling, Greece near default, the Eurozone in turmoil and the general equity market struggling, investors remain skeptical of our beloved gold stocks.

The fact is, the gold stocks are undergoing significant accumulation by the smart money.  The daily chart of GDX (below) shows a strong recent surge in both accumulation and on balance volume. Moreover, consider the past two days. Yesterday GDX gapped lower and was down about 5% at the low of the day. The market rallied into the close and was only down about 1% from where it opened. Today we see similar activity. The market moved lower early but has gradually made it back to positive territory.

It is also wise to check the money flow indicators on a larger time scale. The strong daily accumulation is no aberration as it is confirmed by the weekly chart. Note the strength of the increase in accumulation and on balance volume.

Yes, in recent weeks we’ve written much and probably too much about the gold stocks. However, the opportunity is too great and potentially to profitable to ignore. We’ve shown the value, the lack of ownership, the improving fundamentals and the beautiful technical setup. The market is breaking out and this is to be expected given the huge positives in the money flow indicators. Yet some still worry. They think this could be 2008, even though it is clearly not. We guided our subscribers through the earlier weakness and are now taking advantage of the major profits that lie directly ahead. If you are a serious investor then we invite you to learn more about our service and how a professional can help you. Don’t be left behind as this bull market enters its most profitable phase.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

In the chart below we show GDX (large-caps), ZJG (junior golds) and both against Gold. As we can see, GDX has made an obvious breakout while ZJG is not far behind. Consolidation in ZJG will produce the handle on a bullish cup and handle pattern. The breakout target is $31. Relative to Gold, both markets bottomed in August and are trending higher.

Why are the equities performing well now? For one, the S&P 500 has held up after finding good support at 1100. However, strength in the real price of Gold is more important. Charting Gold against Commodities provides a look at the real price of Gold which is a leading indicator for performance in the Gold equities. As you can see, Gold relative to Commodities has reached its 2009 spike high. Gold is outperforming because not only is it rising but other Commodities such as Oil and Copper are not rising.

The gold stocks are not only rising because they are in a technical sweet spot but they are rising due to strengthening fundamentals. Gold and Silver have been rising yet input costs such as Oil remain stable. This explains why the large miners have begun to outperform. It is a positive for the entire sector as it catches the attention of the big money and gives the miners a stronger currency for potential acquisitions. That is of course where the juniors come into play.

Meanwhile, there is little competition for the gold equities. The S&P 500 is basically in a range and fodder for day traders. Commodity equities and emerging market equities, while in structural bull markets, figure to underperform for months until the next round of artificial stimulus hits the economy. It is why you need to seriously consider a heavy position in gold and silver equities. In our premiums service, we work to uncover the best and strongest performing equities as well as those juniors with multi-bagger potential. We invite you to learn more about service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com