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

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

To get a feel for how the gold shares could perform after the breakout, consider one of the most classic breakouts. In late 1982 and 1983 the DJIA broke past 1000. This came after a 16-year consolidation. The retest came in early 1984 and the gradual move back to 1300 formed a cup and handle type pattern that facilitated an explosive move from 1300 to 2700 in just two years. The cup and handle lasted about 16 months.

The large cap gold stocks broke to new all time highs in late 2010. The breakout move, though small has formed a very bullish consolidation that has lasted almost one year. Tight consolidations are bullish. In this context of sustained new all-time highs for the first time in 30 years, an ensuing breakout after tight consolidation would have hugely bullish implications.

Interestingly, its actually the junior golds that look more like the DJIA post-breakout. We use ZJG as it includes only gold companies and is more reflective of the junior gold sector than GDXJ. As you can see, ZJG is likely forming a cup and handle pattern. Look for a breakout in this market shortly after the breakout in the large caps.

Here we go. The table is set. Unlike in 2008, the fundamentals for this sector are outstanding. Unlike in 2008, we have trouble in the sovereign credit. Unlike in 2008, Gold is accelerating and Silver is not far off its parabolic high. Unlike in 2008, the gold and silver stocks are holding up while the rest of the market falters. A simple way to take advantage would be to invest in a gold mutual fund, GDX or GDXJ. However, picking the right stocks and employing market timing tactics will produce better returns and in some cases, reduce your risk. If you’d be interested in professional guidance then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

In both stock market crashes (1987 and 2008), the gold stocks performed much worse than the market. In the 2007-2009 equity bear market, the gold stocks escaped the start and the end but fell victim to the middle stages when equities crashed. From the September high to October low, the S&P 500 fell by 33% while the gold stock indices fell by about 60%. Checking back to 1987, the XAU plunged 41% while the Dow fell by 34%.

In the recent carnage, the S&P 500 fell by about 19% while large cap gold stocks (GDX) fell 13%. Beyond the numbers there are some important observations here.

In the chart below we plot large golds, junior golds, silver stocks, commodity stocks, emerging markets and the S&P 500. The short-term observation is obvious but important. The mining stocks held their summer lows while the other markets failed and plunged below support. The horizontal line shows each market’s 2007-2008 highs. The gold stocks are trading above their previous all-time high and though SIL doesn’t go back that far we can probably assume its trading above its 2007-2008 highs. Note that commodity stocks and emerging markets failed to surpass that resistance and the S&P of course is furthest behind.

Here is why all of that is important. The various conventional equities not only have to repair significant short-term damage but in the process they face multi-year resistance. Precious metals shares do not have that short-term damage and have already surpassed and successfully retested that multi-year resistance. So what will happen in the next six months as precious metals equities make new highs, Gold is at $2000, Silver at $50 and the average person is looking at their stocks going nowhere?

The next six to nine months should set the table for the beginnings of a bubble in precious metals. Throughout this bull market, other markets have performed well enough at times which has diverted investors attention and capital away from precious metals. With conventional equities fading, major concerns with bonds and relative strength in precious metals, the tables are set for the mining shares over the next few years. If you’d like professional guidance in riding this bull market and selecting the right mining stocks, then we invite you to consider our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

From top to bottom we plot GDXJ (junior golds), SIL (silver stocks), and GDX (large cap golds). While each has broken down in recent days, each is only 5-6% away from a confluence of very strong support. These ETFs gained significantly in 2010 and what we are seeing is a correction and deep retracement of substantial gains. Buying on weakness in a bull market is always a good plan but with the exceptionally volatile mining stocks we want to see deep oversold conditions and the presence of strong support.

In addition to an oversold condition and technical support, we want to see evidence that the sector is unpopular and underowned in a short-term sense. We don’t want to get bullish when the crowd is chasing a particular market. Below is a chart from sentimentrader.com which shows data from the Rydex Precious Metals Fund. In only the past five and a half months, assets in the fund have declined from $345 Million to $135 Million.

The broad weakness in risk assets and the decline in precious metals shares has some worried and concerned. However, this is not another 2008. Then there was credit stress in the private sector and not on the sovereign side. Oil and inflation cut into margins of the miners and there was forced selling as hedge funds blew up. We don’t see any of these problems today.

The sector will bottom in the coming days and look for it to coincide with a worsening of problems in Europe. Bond yields in Greece, Portugal, Ireland and Spain are dangerously breaking out to the upside while credit default swaps are starting to move. As the Euro weakens Gold may catch a nice bid in anticipation of more debt monetization.  If you are looking for more analysis and professional guidance, then we invite you to learn about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

May was the worst month for the S&P 500 since August 2010, but the percentage loss for the month only ended up being about 1.5%.  The four day rally at the end of May, including the big up day on Tuesday, served to soften some of the damage done in May.  But the market reversed all of that bounce in one day to start June with a massive selloff.

Poor economic statistics was one of the main reasons for the selloff on Wednesday.  The ADP Employment Report and the ISM Index both came in below expectations.   This was on the back of a poor Chicago PMI and Consumer Confidence numbers, and confirmation from the Case-Shiller Index that housing has officially reached double-dip status.

Source: Briefing.com

I noted in a previous article that the financial sector was extremely weak so far this year, and it has been a drag on the market as a whole.  The performance graph below shows that the financial sector is the only sector that is down so far this year.  The rotation into defensive sectors is also clear on this graph with Healthcare and Utilities leading the market.

Another potentially negative signal for the market is the Stage 2 breakout that is starting to form in the Consumer Staples sector vs. the Consumer Discretionary sector.  This ratio chart trended higher during the 2008-2009 bear market and when that concluded it began a long trend lower.  Over the past few weeks this ratio has broken back above the 30-week moving average on strong relative volume flowing into the Consumer Staples sector.

Not only are deteriorating economic indicators making news but the Euro crisis continues to rear its ugly head.  The European Union is attempting another bailout package for Greece but the market so far isn’t putting a lot of faith in it.  The Greek stock market is falling and credit default swap prices are surging.  The dollar is exhibiting a similar technical pattern to the start of the previous European debt crisis.

Gold has held up fairly well in recent weeks and is threatening to make a higher high.  This is in contrast to silver which is still stuck deeper in its trading range.  Gold actually broke out to new highs before silver in 2007 and 2009, but that didn’t occur until the fall of both years, and after gold attempted and failed to make a new high in the summer.  It should be interesting to see whether gold repeats that same pattern this year.

One factor working against gold is its relative outperformance against gold stocks, which is typically a negative sign.  The next two charts show that gold has broken out against gold stocks on a relative basis.  The ratio has also produced a bull flag recently which isn’t a good sign for the gold sector.

There also has been a lack of buying pressure in gold stocks since last fall, which has contributed to the unwillingness of gold stocks to outperform gold over the last few months.  A pickup in volume will probably be needed to break gold stocks out of this trading range.  Until then they could be vulnerable to further selling in the general stock market.

Source: Swing And A Miss To Start June

First we have the NYSE Gold Miners Index. This is broader than the HUI and GDX but generally follows the same pattern. The market brokeout in September 2010 and successfully retested the breakout in January and two weeks ago. The large cap miners have struggled but are now in an excellent position. Essentially there is no resistance after the peaks near 1800. We also want to note that on any historical gold stock index, the 2008 highs are essentially the same as the 1980 highs. Thus, the breakout in late 2010, if sustained is a historic breakout.

Our Junior Gold Index (25 companies equal weighted) has been the strongest. It broke past its 2007 high in late 2009. The market has a larger retest zone than the others. The market recently bottomed at a strong confluence of support. The bottom came at the 62% retracement of the 2010 advance, an area of lateral support as well as our 300-day moving average band. We expect the low to be retested later this summer but it should hold.

Meanwhile our Junior Silver Index (10 stocks equally weighted) has the clearest breakout/retest pattern. The market broke past 170 in late 2010 before reaching 240 in early 2010. The late January bottom occurred at 175. The recent bottom occurred at 210. These breakouts are from multi-year resistance so retests will generally last longer than a few months.

There you have it. Gold and Silver shares have acted according to a big picture plan we laid out at the start of the year. Major multi-year breakouts are always accompanied by a retest that can take months to play out. Nine or twelve months from now this retest will be a distant memory and likely a missed opportunity for most to accumulate shares in a bull market that could is on the cusp of a major move higher. If you are looking for more analysis and professional guidance as to how to profit in this bull market, then we invite you to learn about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com