Commodity Trade Mantra

Upside Turn in Stocks & Slam-down in Gold and Silver – Both may be FAKE

Upside Turn in Stocks & Slam-down in Gold and Silver - Both may be FAKE

Upside Turn in Stocks & Slam-down in Gold and Silver – Both may be FAKE

If the summer slowdown and glasses of rose are making you optimistic, you’re not alone. And for the stock market, that’s terrifying. 

Euphoric Turn in Stock Market May Point to End of Bull Run

With the S&P 500 Index sitting within 2 percent of a record following a volatile week, bullishness on U.S. stocks reached its highest level in six years, according to Bank of America Merrill Lynch’s Sell Side Consensus Indicator.

The problem is the bank uses the measure as a contrarian indicator. So its analysts are now concerned that this could be the “euphoria moment” they were anticipating in their year-ahead outlook in December that forecast the possible end of the eight-year bull market.

“The recent inflection from skepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle,” Bank of America analysts led by Savita Subramanian, head of U.S. equity and quantitative strategy, wrote in a client note Monday.

Bank of America

At these levels, the indicator is pointing toward a 12-month return of 12 percent, the team wrote, adding that historically this level has also led to positive returns over that time frame in 93 percent of all instances.

“In June, the Sell Side Indicator, our measure of Wall Street’s bullishness on stocks, rose by 2.4 percentage points to 56.4, its highest level since 2011,” the analysts wrote.  – Julie Verhage, Bloomberg

Not ‘Shocking’ If Gold Jumps 50%, Stocks Fall 25% By Oct

The “old rules” always apply, according to Ron Paul, who is convinced that a drastic correction is coming and could hit the market as soon as October.

“If our markets are down 25% and gold is up 50% [in October], it wouldn’t be a total shock to me,” former congressman and two-time presidential candidate Ron Paul told CBNC’s Futures Now.

The biggest triggers traders are concerned about include the Fed’s agenda as well as Trump’s ability to pass the promised reforms.

“The markets are very nervous for a good reason. They don’t know what to expect. It’s unpredictable what the Fed will do, but it is also unpredictable how the markets will react,” Paul said.

He added that Nasdaq, the dollar and bonds are already looking shaky.

“It is a very precarious market, and the Fed better be very careful. Since they are incapable of knowing what to do. They cannot anticipate. They haven’t been right on most of their projections in their planning. I’m not thinking that the bubble atmosphere and the wonderful things going on on Wall Street will last forever. I think it is coming to an end,” he noted.

If Trump fails to pass his vital reform measures it will negatively affect the market by October, Paul explained, noting that the stock rally will not last.

“People have been convinced that everything is wonderful right now and that stocks are going to go up forever. I don’t happen to buy this. The old rules always exist and there is too much debt and too much mal-investment. The adjustment will have to come,” he said. – Anna Golubova

Gold – Are We All Dead Wrong?

The natural resource sector is the most volatile sector to invest in, says Lior Gantz, editor of Wealth Research Group, and he discusses factors to take into consideration when investing.

The fact remains that the natural resource sector is the most volatile sector we can invest in.

In your brokerage account, if you see reds and not greens, as you did between January 2016 and August, then make sure you read today’s piece thoroughly.

Bull and Bear Markets

Mining is a tough business because it is capital-intensive. The upfront costs for building a profitable mining operation are often close to $300 million for a sizable project, and it can take 10-15 years from start to finish.

The costs of prospecting, surveying, permitting, drilling, personnel, machinery, energy, legal work, and replacement of equipment are truly challenging.

There are innumerable risks along this decade or more of taking a property from the exploration level into production.

Rick Rule, who has made tens of millions of dollars in this sector, sat down with me to discuss how he really distinguished himself from countless others.

The Discovery Curve

This is a simplified chart, which underscores important market characteristics:

1. Exploration is the Chief Speculation Period: For most companies, this stage is make or break.

When speculating with pure exploration companies, the idea is to keep the position size extremely conservative. Anything else is too risky. We also look for companies that are actively drilling where they’ve previously discovered minerals; therefore the likelihood of expanding their resource base is higher. This is especially true if 20 or 30 years have gone by since the last explorer drilled it with far inferior technologies.

2. Development and Production are Dependent upon Rising Metal Prices: Natural resource companies don’t get to make one cent until they are in production and are able to do it profitably.

This can take years.

Until that time, their share prices are a speculation on whether or not they will be able to execute their plans and what the timeline is to achieving this.

It’s a function of “de-risking.”

What the serially successful people in this business do is ask themselves one question at all times:
A. What do I need to do next in order to manage the risk involved with my company?

The fact of the matter is that this is a ridiculously hard business, and just having a great property isn’t enough.

I’ve seen lousy and immature management teams take a lucrative gold project and turn it into a shareholder’s nightmare.

Because this business is so cyclical, it takes dedicated people—those that are in it for life and have their own funds tied up in their activities—for us, as investors, to truly be sure that we chose a company led by a winner.

When you are invested with an experienced and proven mining entrepreneur, it’s always a matter of WHEN and not IF your investment will succeed.

The only variable these people can’t control is the price of the commodity.

Contrary to what most analysts stress, gold’s price is not mainly derived from jewelry sales, short-term political chaos, or inflation.

Since the 1971 detachment from fiat currencies, gold is mostly correlated with two factors:

* Real Interest Rates: This is the level of core inflation deducted by the 10-year Treasury yield. When this is low and declining, the price of gold rises 93% of the time.

Right now, bond yields are rebounding and inflation is stable—this affects the price of gold and pressures it down.

* Investment Demand: Since 1971, and especially since 1974, when gold ownership became legal again, and now with China’s and India’s middle class rise, what sets the price of gold the most is retail demand.

American Gold Buffalo Sale in May, 2006-2017

Since the election, President Trump’s term has had the effect of calming the middle class and giving them confidence in the future.

They are buying stocks, specifically tech and medical ones, instead of fearing the debt burden of the U.S. government.

That’s the main reason why the quality companies are performing as they are.

Remember, junior mining companies contain much less risk when commodity prices rise because large-cap companies target them for mergers and their projects are economical and make sense.

Shares of companies that burn through cash, raise money again, and burn through it again for years can be notoriously volatile. They can drop 30%-70% without any fundamental change in the stability, wherewithal, and strength of the properties or the balance sheet.

You and I don’t get to play and participate in the world’s most potentially lucrative sector—where 500%–1,000% returns in two to five years are common and 5,000%–10,000% gains occur with every cycle—without realizing that we must be tenacious and sophisticated ourselves.

Volatility is the King of Mind Games and They Will Always Test Your Conviction.

One simple strategy is to limit the amount of companies you own and track them closely. When you see a drop in price of 10%–20%, call or email the company and watch the news releases. If it is mostly due to the fluctuations in the price of gold or any other commodity, it’s a buying opportunity.

That’s why you should decide how much you want to invest in a given company and split your purchases into four to five separate occasions—you’re now using volatility to your advantage and not getting clobbered by it.

 

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