The S&P 500 Index was down 3.52% last week, which was fairly representative of almost every broadly-based major stock market barometer. However, except for the Russell 2000 Index which is now down on the year (-0.96%), most major indexes are still nicely higher year-to-date so far in 2014. In fact, the Dow Jones Transportation Index is up almost 20% so far this year, Semiconductor stocks have risen about 25%, and Biotech shares are up almost 50% year-to-date. There are two sectors that stand apart from this sea of green arrows. Oil and related Oil-service stocks are down more than 30% and Gold/Silver mining shares are down about 18%, on average, so far this year.
In the interest of full disclosure, over the last six weeks I built a significant hedged position with short sales in the S&P 500 against long purchases in Gold/Silver mining shares and related ETF's. Until this past week, this strategy was less than favorable (to say the least). My ratio was $4 in SPX shorts for every $1 in Gold/Silver longs. With Gold up 2.47% last week, Silver up 4.60% last week, and the S&P 500 Index down 3.52% last week, you would think that I had the perfect hedge with major profits on both sides. While all the portfolios that I manage performed extremely well last week, Gold/Silver mining shares did NOT track the underlying precious metals like they normally do. In fact, Gold/Silver mining shares, as measured by the Philadelphia Gold/Silver Index (XAU) were actually down 2.10% on the week And one last portfolio disclosure before I discuss "The Perfect Storm" that is unfolding now globally. On Friday, December 12th, I covered my entire short in the S&P 500 Index "market-on-close". So now I am long Gold/Silver mining shares (unhedged) with a 30% portfolio allocation, 10% in top-rated corporate bonds, and 60% in cash.
Despite my longer term bearish view on the U.S. stock market, I was never really comfortable with my short position in the S&P 500 Index. In fact, I would never have guessed that it would be my short SPX position that would make the money in my 4:1 hedge with Gold/Silver mining shares as it did this past week (in spades). However, I now believe that a "The Perfect Storm" is unfolding for Gold/Silver mining shares in terms of their massive upside potential. Many of these stocks are now down 75% or more from their peaks set in 2011. In fact, the Gold Junior Mining Share ETF (symbol GDXJ) is down 86.60% from it's all-time high set 4 years ago. And even more incredible is the fact that this ETF is down 48.30% in just the last 5 months alone! Among major gold mining shares, the damage isn't as bad, but the popular Gold Mining Shares ETF (symbol GDX) is still down 32.90% over the last 5 months in response to just a 9.13% decline in the price of Gold over this same period. Silver mining shares have been annihilated over the last 5 months, with individual losses of 67% or more on a 21% decline in the underlying price of silver of the same period.
Here are just some of the reasons why Gold/Silver mining shares may double in price over the next three months:
1. The recent collapse in crude oil prices, and the related shock to global financial markets, will cause the U.S. Federal Reserve to maintain its dovish stance on monetary policy over the very near term at least.
2. The recent collapse in crude oil prices will allow other major global central banks to rationalize "stepping on the monetary accelerator" with major new "quantitative easing" programs to "fight" potentially harmful deflationary forces.
3. Lower oil prices will benefit Japan significantly more than the United States given the dramatic uptick in domestic U.S. oil production in recent years. After 7 straight weeks of upticks for the U.S. Dollar in foreign exchange dealings, the Greenback now looks like it finally topped out last week. A weaker Dollar will provide fuel for sharply higher gold and silver prices immediately ahead.
4. Lower oil prices will greatly enhance profit margins for Gold/Silver mining shares, where diesel oil for mining equipment is a major cost component.
5. On both precious metals charts, Gold and Silver, prices have now advanced above their key 50-day moving average lines, and the key 20-day moving average line is now pointing higher for the first time in 5 months in both. In fact, a crossover buy signal, where the 20-day MA crosses above the 50-day MA, is expected this coming week for Gold and Silver.
6. Gold bullish sentiment among often wrong investors fell to a record low of just 3% in early November. While sentiment has improved slightly since then, there still remains a dearth of believers in the yellow metal after 38 months of lower prices (September 2011 through early November 2014).
7. More and more countries are repatriating their sovereign gold supplies as uncertainty continues to escalate with respect to fiat paper currencies and their real value moving forward. Global central banks have been printing money at a record pace over the last six years, WITH NO END IN SIGHT! Talk of moving to some kind of "gold standard" is quietly building among many central bankers
8. Sales of 1-oz Silver Eagle coins by the U.S. Mint are now on-track to post a new record high this year. According to actual production figures presented daily at the www.usmint.gov website, 42,669,500 silver eagle coins have been sold so far this year as compared to last year's record full-year total of 42,675,000. Reports of silver shortages at sovereign-sponsored mints around the globe are becoming more common as investors and coin collectors step up their purchases in the face of increased uncertainty relating to the value of fiat (paper) currencies.
9. On Friday afternoon, December 12th, France's credit rating was downgraded one notch to AA from AA+ by Fitch
Ratings, given the lack of material improvement in the outlook for the
country's budget deficit. This is just another example of deteriorating economic conditions in Europe which sets the stage for a major transformation (and possible breakup) of the European Union as we know it today.
10. While the proof is illusive, I strongly believe that the size of gold purchases by China are dramatically understated in official reports. However, even if we use the "official" reported numbers, total combined gold purchases this year (2014) by India, Russia, and China are likely to exceed the entire year's global mined production now estimated at just short of 3,000 tonnes. It's just a question of time now before a major central bank announces some sort of gold backing for its domestic currency. My prediction is that a smaller central bank will act first (seemingly out of the blue), but then China will quickly follow with its own gold standard. Gold prices will jump at least 5% on that day, and a 10% single-day advance can't be ruled out!
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| First Majestic Silver (symbol AG) Weekly Chart with 200-Week Moving Average Line |
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| U.S. Dollar Index (DXY) Monthly Chart with 200-Month Moving Average Line |
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| Gold ETF (GLD) Weekly Chart |
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| Silver ETF (SLV) Weekly Chart |
