Can the Shine Return to Gold?

Posted by Patrick Ceresna on Jan 10, 2014 11:12:00 AM

Over the last 3 years we have witnessed one of the most severe gold miners bear markets in history.  It has been an indiscriminate decline that has broken the will of the retail investor.

So how does this end? Does gold mining go the way of the buggy whip and disappear into obscurity? Are all the gold mining stocks going to shut down operations in a state of bankruptcy? Will the world never again look at gold as a store of value and a hedge on our monetary system?   

The most common argument has been that in spite of the aggressive central bank quantitative easing programs, the published inflation numbers have been benign. The market place is therefore making the following assumptions:

  1. Printing money has not created inflation (at least that is what they tell us), and therefore printing money will never lead to inflation. 

  2. During the Q.E. (quantitative easing) programs, the U.S. Dollar did not collapse nor lose its status as the world reserve currency, therefore there is no need to hedge your currency risk.

So the question I have for our readers, do you really believe that inflation will never be a problem again? Do you believe there will never again be a new crisis?  Do you believe that the exponential growth of credit (money) will never erode the confidence and purchasing value in the U.S. Dollar?

In my perspective, there is no new paradigm.  Structurally, the economy and the markets today are fundamentally the same as they were a decade ago.  Therefore, the problems and risks that existed in the past will continue to exist into the future. It is just a matter of time.  

Every market goes through bull and bear market cycles. This is an undeniable and irrefutable fact.  Period.  When financial stocks went through their bear market in 2008, they were driven to the near point of bankruptcy based on the mortgage back crisis.  The Financial Select Sector ETF (NYSE:XLF)  dropped 84% from $38.15 to $5.88.  At that time, any investor that owned any financial bank stock was worried that their bank would go the route of Lehman Brothers. Investor confidence was at a historic extreme in a vortex of immense negative sentiment.  Yet 4 years later, the ETF has rallied from $5.88 to over $22.00 for 250%+ return. 

This is what markets do, it is what they have always done. 

So let's do a little history on the gold miners.  It is surprising how common it has been for the gold mining stocks to go through these bear market declines. In the last 40 years there have been 6 distinct gold stock declines that wiped out an average of 50-80%. 

History of Gold Bears resized 600

 The interesting observation — no matter how devastating the decline was, when the gold miners finally bottomed, some meaningful rally occurred making it a phenomenal investment. 

So have we hit bottom?  The extreme negative sentiment toward the gold miners is perfect for a bottom, but the price could still weaken. The gold miners can still head lower on the way to the bottom, but when this is all over, history suggests a unique buying opportunity will emerge.  

At minimum, recognize that the majority of the damage is now done and is "rearview mirror". Those that succumbed to the emotional release of tax loss selling their gold stocks, did their selling at historic lows.  If the history of bull and bear market cycles stays true, history suggests that in 3-4 years from now retail investors will be day dreaming about the opportunity they had if they simply looked at the situation in the big picture.     

Do you think the gold has hit a bottom or is it still going lower? Feel free to leave your comment below.

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Levels to watch S&P500 March 2014 Futures:

The Jobs numbers came out with the lowest jobs growth in more than a year and the market reacted with some initial weakness.  The timing of the report is interesting because it occurred at a time when the S&P500 was retesting it's all time highs. Can this be the catalyst for a double top?  It is very premature to make any such assumption, but you should pay attention to the price action with recognition of the risk. 

Things to watch –The 1820.00 is now a neckline and any weakness below that level will usher in the first wave of selling down to the 1800.00-1805.00 support below.

Market Breadth:

Ceresna Market Breadth Index: Bullishly Crossed Higher
52 Week Mean Price of S&P500: 1649 (176 points below market)
(*205 point peak Nov 15th)
Volatility Index: 12.83%
Number of Stocks Making 52 Week Highs: 250 
(Year high 894 Jan 2nd
Number of Stocks Making 52 Week Lows: 14 (Year high 504 Jun 24th
Number of Stocks Above 50 Day Moving Average: 66.59% (Year high 89.54% Jan 22nd)

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Topics: Gold, gold mining sector, gold miners

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