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This article originally appeared on Apple-Stock-News.com

Next Generation Of Apple Watch Rumored To Be Revealed Next Year

Many Apple enthusiasts have been anxiously waiting for the purported Apple event in March of this year. Among the speculating crowd, rumors that Apple will reveal its plans for the newest iPhone, the next generation of Apple watches, and possibly, even more, information on the Apple car.

Apple Stock News

Unfortunately, however, the most recent article from 9 to 5 Mac, might cause some disappoint. The rumor site believes that the March event doesn’t have as much excitement in store as Apple fans would have hoped. The website indicates that as far as the Apple watch goes, there will probably be an update of the operating system, to WatchOS 2.2. In terms of new hardware, Apple fans can look forward to new color band options. The website also mentioned that Apple could potentially reveal a new 4-inch phone, the iPhone 5se.

The report mentioned that the full second-generation Apple watch redesign will probably not be revealed until September.

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This article was previously published by I Know First

pabloPablo Akawie is a Financial Analyst Intern at I Know First

Follow Up On The Stock Market Forecast For 2016 Based On A Predictive Algorithm

Summary

  • The Market In 2015
  • Commodities and Gold Positioning In The Market
  • US Economy and Global Influence
  • The 2016 Predictions of The Global Financial Markets

2015 In A Nutshell

2015 may have been a turning point for markets. In November 2008, the Federal Reserve started with the first Quantitative Easing (QE), a monetary policy used to stimulate the economy, which was in severe crisis. The Central Bank was increasing the money supply, buying financial assets from commercial banks and other financial institutions, thus raising the prices of those assets and lowering their yield.

There were three periods of QE. During the first QE, the Fed injected 600 billion dollars into the US economy, 35 billion per month for 17 months. Two years later, the Fed injected 600 billion dollars more in 7 months with the second QE, 85 billion per month. And finally, in September 2012 the FED started with the third QE, injecting around 85 billion dollars per month until October 2014, which marked the end of QE3. The total amount added by the Fed to its balance sheet was more than 3.5 trillion dollars in 7 years.

From the lowest level (666 points) in March 2009 to the highest level in May 2015 (2134 points), the S&P 500 index increased 220% offering a good deal for investors. Those were very quiet years for investors because they were supported by the Federal Reserve’s purchases, which kept the prices of most assets around the world to constantly go up during the 7 years.

Now, it´s over. In December 2015, the Fed raised the interest rate for the first time since 2008 to a range of 0.25%-0.50% and is expected to raise it again this year. Historically, an increase in interest rates is bad for stock markets, and 2015 was a year when investors bet that it could happen. As markets try to anticipate policies, some assets showed strong movements during 2015, primarily currencies and commodities.

Strong dollar and weak commodities, key to understand 2015

In early 2015 we saw the US dollar strongly strengthen against other currencies due to the desire of international investors to take advantage of the interest rate hike. During first 15 days of January, the US dollar increased about 15%. A strong dollar is painful for commodities, so the price of most commodities went down during last year, this was most heavily seen in the prices of Oil. Therefore, a lot of companies that deal with commodities are in big trouble which is affecting all of the world’s markets.

Another important explanation of the weakness of commodities is China. China, the second-largest economy, is still showing economic data that is cause for concern. Its economy is slowing down faster than market expectations. To counter this situation, the government depreciates their currency and decreases interest rates. It is important to mention this because China is the biggest importer of commodities.

 Follow Up

(Source: Yahoo Finance)

As you can see in the graph above, the first half of 2015 was incredible for China’s stock market, which gained more than 51%. In June, however, the bubble burst, which immediately affected all the stock markets negatively. China’s government had to interfere and offer liquidity to the market. Many analysts awarded the strong fall to the huge entry of inexperienced investors who had seen China’s big gains and wanted to join.

In addition, investors started to doubt the credibility of Chinese economic data. In August, Purchasing Manager´s Index (PMI) showed a contraction for the first time since 2012 and the services sector showed a strong deceleration in growth. These numbers combined with a fragile stock market could indicate a collapse in the economy.

During 2015, China’s economy grew 6.9%, a 25-year low. Some investors think that this number is fake and that the real is growth is only 4%. Analysts such as Jahangir Aziz, head of emerging Asia economic research at JPMorgan, said: “This is good. We’ve known for the last three years that the Chinese authorities are slowing down the economy. This economy is going to slow down”.

To understand why the oil, the most volatile commodity, is such a problem, it is important to discuss supply. As Cliff Krauss, National Business Correspondent at NY Times explained, US domestic production has nearly doubled over the last several years. Asian oil producers can’t sell their product to the USA and they are now suddenly competing for Asian markets, which leads to a drop in prices. Furthermore, other oil producing countries are also increasing their oil production, further increasing the oil supply.

 Follow Up

(Source: finviz.com)

US economy situation

During January 2016, the Federal Reserve showed its Beige Book with “modest growth”. Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded modestly in nine of the districts between the end of November 2015 and beginning January 2016. The growth of consumer spending ranged from slight to moderate in most districts (remember that consumption represents about 69% of US GDP). Auto sales were somewhat mixed, as activity has begun to drop off from the previously high levels in some Districts. Reports of tourism activity were also mixed.

Labor markets continued to improve with employment increases, but wage pressures remained relatively subdued. The US economy added 292,000 job in December 2015 more than expected by Reuters economists. The unemployment rate remained steady at 5%, a seven-and-a-half-year low, according to the US department of Labor. The US economy added 2.65 million jobs in 2015.

Concerns over the US came from inflation indices showing a little overall change in wages and prices, both have only increased minimally. Inflation and the labor market are the most important variables that Fed observes when deciding to increase the interest rate. The data could indicate that the fed will not increase the interest rate at next meeting in the end of January. As we mentioned, lower interest rates are good for stock markets, however, in the long run, they can lead to inflation.

Most manufacturing sectors show weakened activity, as the number of districts that show increases in manufacturing are declining. The data indicates that Low oil prices don’t really help the manufacturing sector and international demand is weakened by the strong dollar.

 Follow Up

(Source: Bloomberg.com)

Stock market outlook 2016

According to Charles Schwab, an American brokerage, the US and global stocks will continue to experience bouts of volatility and pullbacks; but a major bearish market is likely to be avoided.  Key determinants of the path that stocks will take include the policies of central banks, inflation, currency volatility and earnings/valuation.

David Kostin, Chief of US equity strategy at Goldman Sachs, holds a pessimistic view and maintains his 2016 year-end S&P 500 target of 2,100. The investment bank revealed one of the bleakest predictions for oil prices, establishing its target price to be $20 for 2016.

Dubravko Lakos-Brujas, Head of US Equity Strategy at JP Morgan, admits that while energy may be the highest risk-reward sector, he also sees it as a relative outperformer towards the end of 2016. The investment bank expects the S&P 500 climb up to 2,200 at the end of 2016.

Follow Up On 2016’s I Know First Algorithmic Predictions

I Know First utilizes an advanced algorithm based on artificial intelligence and machine learning to predict market performance for over 3,000 markets including stock forecasts, world indices, commodities, interest rates, ETFs, and currencies. The system follows the flow of money from one market into another.

I Know First published an article predicting the 2016 bearish market movement on December 1st, 2015. The recent downtrend of the US Stock Exchange is a reflection of this bearish stock market forecast below, which started to fulfill its prediction in just a month and a few days after the article was published.  Since this article the S&P500 fell by -10.63%, NASDAQ fell by -12.47% and Dow Jones fell by -11.02% as the algorithm correctly predicted. 

 Follow Up

A Closer Look

The algorithm predicted also predicted a bearish market for various indices as we can see under. The accuracy of the algorithm was 18 out of 20 bearish signals were predicted correctly. Bringing returns of up to 11.81% in a month.

Stock Market Indices

We can also see stock forecasts from different time frames (14 Days, 1 Month and 3 months) which all were predicted to have bearish signals for the market direction. The S&P500 in all the three cases was predicted accurately by the algorithm, in addition, the top stocks that brought the best returns were the short positions of Freeport-McMoRan Inc (FCX)  with 66.54%, Chesapeake Energy Corporation (CHK) with 57.37%, Petróleo Brasileiro S.A. – Petrobras (PBR) with 29.83%, Companhia Brasileira de Distribuicao (CBD) with 27.10%, Alcoa Inc. (AA) with25.32% and 29.62%. The I Know First Averages are all above the S&P500 of-7.09%, -9.30% and –9.05% with magnificent returns of 28.28%, 17.25% and17.42% in the predicted time horizons.

Stock Market PredictionsStock market forecastingstock market outlook

For Example previously I Know First predicted correctly the bearish forecast of the oil in the 1 month Crude Oil Forecast we observe CL1 with a bearish signal of -72.78 and a predictability of 0.49 it managed to bring returns of 15.21% as well as B1 with a signal of -41.29 and predictability of 0.51 managed to bring returns of 21.17% in just one month.

 Follow Up

Conclusion

Due to the slowdown in China´s economy, geopolitical concerns, increases in the US interest rates and declining commodities prices, the US stock market started 2016 with the worst performance since 2008. As you can see, I Know First predicted this situation in The Stock Market Forecast For 2016 Based On A Predictive Algorithm and recommended to short indices as well as in other forecasts for commodities, stocks, But not everything is so bad, I Know First recommended also to go long for certain investments like in this forecast.

An explanation on how to read the forecast is further elaborated here.

 

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Tomer Solel is a Financial Analyst  at I Know First. He graduated from Cal Poly Pomona with a bachelor’s degree in applied mathematics.

This article was previously posted in www.iknowfirst.com

Google Artificial Intelligence: Summary

  • Laying the groundwork with Android in 2007, Google has since stuck to its plan to dominate AI with the smartphone, making amazing profits ever since.
  • The Google Glass is another one of Google’s involved AI products, allowing people to wear something that looks like eyeglasses, and is practically a wearable hands-free computer or smartphone.
  • In November, Google open sourced TensorFlow, which is its artificial intelligence engine that uses deep learning.
  • Ford is now in talks with Google to implement self-driving cars.
  • Analyst Recommendation
  • I Know First is bullish on Google in the short term. 

Introduction

 Alphabet Inc. (NYSE: GOOG), better known as Google, is an American multinational technology company specializing in internet related services and products. Most of its profit comes from AdWords, an ad service next to the Google search results. Google was founded by Larry Page and Sergey Brin privately in 1998 and was eventually incorporated to the public in 2004. Incorporation led to a rapid growth which yielded a chain of different products and a quick rise. In 2013, Google was ranked as the most visited website, with over one million servers and over one billion requests for each server every day. Google is currently ranked 3rd in the world in terms of most valued companies with its brand valued at over $65 billion. But Google couldn’t have done all of this without its extensive use in artificial intelligence, as artificial intelligence has been taking over the world. Starting with the first Android phone in 2007 and continuing with the Google glass and most recently with the TensorFlow engine, and the talks with Ford about a self-driving car, Google has relied heavily on artificial intelligence during its success.

Google Artificial Intelligence

source: ai.ytimg.com

Android Phone Breakthrough

Android was Google’s breakthrough in terms of AI. First released in 2007, the Android Alpha was the first Google smartphone and the first product to use AI by the company. Since then, Google has launched many more Android phones and has relied more and more on AI. Most famously, Android phones have SILVIA, which is an artificial intelligence system which pretends to be another person and lets you talk to your device like you would talk to another person. SILVIA’s code is so advanced that it is now being used for training and simulation applications by the U.S. military. It is widely regarded as the most advanced intelligence system on the planet. Skyvi is another AI device which is like a Siri for android, and it does things such as voice texting, finding places, and social media updates. Now, eight years after laying the groundwork with the first Android phone, Android has an 80 percent market share, and now Google is using the same trick with artificial intelligence. That has helped Google gain an amazing 144% over the last five years. The use of artificial intelligence in Android has helped the stock of Google rise.

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Source: technobuffalo.com

Google Glass AI – You Haven’t Seen Anything Yet

The Google Glass is another important Google product that uses artificial intelligence. The Google Glass is basically a head-mounted wearable computer which was developed by Google. From recording a video or taking a picture hands-free to social networking and GPS, the sky is the limit for this product, and it is just starting its take off. The product came out back in April 2013, and it currently sells for $1,500. This project is known as project glass, and there is a lot of artificial intelligence behind it. In this product, not only is there the type of AI we have seen before but also, there are other behind the scenes implementations of AI within this product. This makes us think that in the future, AI could be used to build wearable computers which will take on more complex tasks than what we are seeing today. In the future, we will see more enhanced, improved products. A more sophisticated AI platform could allow doctors to have wearable screens which could help them diagnose patients. Ever since 2013, there have been a lot of improvements to the product. Google Glass has increased Google’s revenues dramatically, raising the share’s price. Google Glass is another product which uses extensive AI, helping the stock rise even more.

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Source: wired.com

Tensorflow in Google

TensorFlow is an open source software library for numerical computation using data flow graph. It is an artificial intelligence device that uses deep learning. In November 2015, Google announced that it open sourcedTensorFlow. That means that the code that powers Google’s intelligence is now accessible to anyone for free. This shows that the future in AI might lie in data, not in code as the data is still being kept secret. This TensorFlow code was originally developed by Google Brain team members for the purposes of conducting machine learning and deep neural networks research, but can now be used for a variety of other topics. This deep learning is the area that gives Google the power to provide groundbreaking services. It is now using this device to predict what the site’s users might need. This shows Google’s belief that machine learning is a key ingredient to future technology. Since open sourcing TensorFlow, the Google stock has kept rising, notably returning over 5% in the week after the news became public. With Google one of the world’s most advanced machine learning systems available to the public, we can expect to see huge strides in artificial intelligence.

Self-Driving Ford Cars

Earlier this week, Google started talks with Ford to create a joint venture to build self-driving vehicles. Building those self-driving cars will be done using Google technology. Those cars could be in the market as soon as 2020. Google is expected to make its self-driving cars unit its own business under its parent company of Alphabet Inc. Ford’s plan for self-driving cars includes automatic braking, steering, and more. Such a partnership could spread the introduction of self-driving cars, a direct result of Google AI. This would be great for safety as self-driving cars would dramatically decrease the number of car crashes. This news led to a rise of $2.23 per Google share, which now stands at $750 per share. Self-driving cars could be a huge source of revenue for Google in the future.

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Source: theoatmeal.com

Analyst Recommendation 5Source: Yahoo Finance

In this chart, we can see that among analysts Google is continuing to be a strong buy. 5 analysts ranked Google as a strong buy while 7 ranked it as a buy, a trend that has been holding since two months ago. Google certainly seems to be a safe investment for the short term at least. Artificial intelligence probably has a lot to do with the fact that analysts are bullish on Google.

Algorithmic Recommendation

I Know First provides daily investment foresight, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database and utilizes it to predict the flow of money across 3,000 markets.

The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

I Know First’s algorithm was able to correctly predict the behavior of GOOG’s stock price in the past. Indeed, I Know First wrote a Seeking Alpha article about Google on January 16th, 2015, claiming that 2015 will be a rebounding year for the stock. Since then, the stock increased an amazing 47% in the last 11 months.

Previous 3-Month & 1-year Algorithmic Performance For GOOG.

Having demonstrated an example of when I Know First’s algorithm was able to correctly predict the behavior of GOOG’s stock price in the past, looking at the current forecast can add meaning to the fundamental analysis above;

662

The figure above includes a 7-day and 14-day prediction from December 22nd, 2015. Currently, our algorithm is bullish on Google in the short term.

Conclusion

In conclusion, artificial intelligence is a huge factor in Google’s success, and it is going to develop even more. On top of that, On December 23rd, 2015, Mashable released an article in which they announced that Google was working on a new messaging app that uses artificial intelligence to provide users with answers to search queries. Even though Google has not been the best with prior attempts at social services, the company is likely hoping it will be able to both reach new users and keep existing ones engaged as messaging platforms become more ubiquitous.

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Gold stocks remain the pariah of the investment world. Despite gold’s strong early-year gains, the stocks of its miners have slumped to new secular lows. This whole forsaken sector continues to languish at fundamentally-absurd price levels, an extreme anomaly that is long overdue to start unwinding. The gold miners will be bid massively higher to reflect their impressive profitability even at today’s dismal gold prices.

Just this week, the flagship HUI gold-stock index plunged to a major new secular low. On Tuesday as gold merely slid 0.3%, the HUI plunged 5.6% to 100.7. This was an astounding new 13.5-year secular low, reeking of capitulation since gold’s price action certainly didn’t justify such a disastrous reaction in its miners’ stocks. That left already epically-bearish gold-stock sentiment even worse, which is hard to believe.

The gold stocks are ultimately leveraged plays on gold, because prevailing gold prices determine their profitability. And all stock prices eventually migrate to some reasonable multiple of their underlying corporate earnings, gold stocks are no exception. Gold’s overwhelmingly-dominant role in gold-mining profits has led this sector to amplify gold’s price moves, typically by 2x to 3x in major gold-stock indexes like the HUI.

So Tuesday’s extreme 21.9x downside leverage was wildly outsized. Gold stocks actually got off to a strong start in early 2016, surging 9.9% in this year’s first 4 trading days compared to gold’s 4.7% gain. But as soon as gold pulled back, the gold stocks got sucked into the bearish maelstrom of the plunging general stock markets. So by Tuesday, the HUI was down 9.4% year-to-date compared to gold’s 2.5% rally.

But this horrendous performance leading to calls for deep new lows is masking an ongoing bottoming. Back in mid-July, gold was blasted by an extreme gold-futures shorting attack explicitly executed to manipulate gold prices lower by running long-side stop losses. In the aftermath of that, the HUI dropped to 104.9 in early August. That would prove major new support near 105 that held strong until this week.

Despite the vast bearishness arrayed against them, gold stocks held their ground for 5.5 long months. Despite gold slumping to 7 new secular lows in November and December, the HUI didn’t fall materially under 105. Despite the Fed’s first rate hike in 9.5 years in mid-December that was universally expected to obliterate gold, that support held. And that continued into 2016 despite plunging global stock markets.

Even as of Tuesday’s new low, the HUI had only lost 4.0% since its initial early-August bottom. Gold’s price edged 0.2% higher over that span, while the benchmark S&P 500 stock index plunged 10.4%. With so many excuses to continue dumping gold stocks in the past half-year, their relative strength is a telltale sign of selling exhaustion. Pretty much everyone who wants out has already long since sold and exited.

So this week’s abrupt plunge to crazy new secular lows despite flat gold prices felt like a capitulation, which has been long overdue. The gold miners’ stocks are radically undervalued fundamentally, they have been pounded for years technically, and the extreme bearishness long plaguing them couldn’t possibly get any worse sentimentally. Everything is in place for gold stocks to carve a major secular bottom.

While ironclad technical and sentimental arguments can be made for gold stocks reversing and mean reverting sharply higher, the fundamental case trumps everything else. Despite this sector’s endless slide and universal antipathy, the gold miners’ underlying profit fundamentals are what’s going to turn around this left-for-dead sector. Gold stocks are truly trading at fundamentally-absurd price levels today!

Since the vast majority of mining costs are effectively fixed during mine-planning stages, the dominant variable driver of gold-mining earnings is the price of gold. And the relationship between these profits and gold is leveraged, not linear. This reality is easy to grasp. Imagine a gold miner producing gold for $850 per ounce. In a $1050 gold environment, December’s secular low, this miner earns a $200-per-ounce profit.

The miners’ costs don’t change as gold rallies, so all those gains amplify the bottom line. Since those Fed-rate-hike lows, gold has climbed back over $1100 in 2016. At $1100 even, that’s a 4.8% gold-price rally. Yet it still costs our miner $850 per ounce to produce, while selling that gold at $1100 now yields a $250-per-ounce profit. That’s a 25% increase on less than a 5% increase in gold prices, excellent leverage!

Since profits ultimately determine stock prices, essentially all that matters for the gold miners is the price of gold. Thus they have always moved in lockstep with gold, amplifying its price moves. But as this first chart of gold and the HUI reveals, a radically-unprecedented disconnect emerged in early 2013. And it has only worsened in recent years. The gold miners’ stock prices are no longer reflecting prevailing gold levels.

Absurd

 

This week’s bizarre capitulation selling pummeled the HUI to an extraordinary 13.5-year secular low. It was the lowest HUI close since all the way back in July 2002. Back then gold was trading near $305, and had yet to exceed $329 in its young secular bull. This Tuesday, gold closed near $1087 or 3.6x higher. Yet gold stocks were trading at levels last seen around $305. Does that make any sense at all?

Absolutely not! Such an extreme pricing anomaly in any other sector would lead to a stampede of new buying. Imagine if Apple’s stock was trading as if it could only sell its iPhones for 3/11ths of their actual selling price. Investors would rush in to buy this epic bargain, rapidly bidding up Apple’s stock price until it reflected actual underlying cash flows. Only in ignored gold stocks can such a radical disconnect exist.

The ludicrous magnitude of this deviation is confirmed looking the other way, through the lens of gold. Just after the Fed finally ended its 7-year-old zero-interest-rate policy in mid-December, gold fell to a deep 6.1-year secular low. Where was the HUI the last time gold prices closed near $1050? Trading way up over 390, 3.7x higher. Gold-stock prices are so low that they need to quadruple merely to reflect gold today!

This hard fundamental truth about the mind-boggling gold-stock undervaluation really irks people with a vested interest in seeing gold stocks spiral lower into oblivion. Gold-stock investors and speculators who succumbed to their own fear to sell into recent years’ major secular lows need to believe that was a rational decision. So market commentators tickle their ears with endlessly-bearish gold-stocks-to-zero talk.

Thus whenever I write about the fundamentally-absurd gold-stock prices and their unparalleled vast opportunities for hardened contrarian investors, I get attacked by the already-sold-low crowd. They have a desperate psychological need to perceive themselves as smart for selling low, they want to rationalize away their foolishness. So they argue that gold mining simply isn’t profitable at today’s out-of-favor gold prices.

The implication is obvious, that gold stocks deserve to be priced as if gold was trading near $300 instead of $1100. If they can’t earn any money, then their super-low price levels are probably fundamentally-righteous. As a lifelong student of the markets and contrarian speculator, I love investigating counter arguments. So every quarter after the gold miners have reported their earnings, I carefully analyze their results.

Gold miners generally report quarters a month or two after quarter-end, so the latest read available is from 2015’s third quarter. Back in mid-November I analyzed the results of all the elite gold miners in the leading GDX Gold Miners ETF. Consisting of the world’s biggest and best gold miners, this excellent gold-stock benchmark perfectly mirrors the HUI. GDX’s 35 component stocks reflect industry-wide fundamentals.

I painstakingly scoured all the latest quarterly filings from all the GDX component stocks. Before I got into the financial-newsletter business 16 years ago, I was a Big Six CPA auditing mining companies. So I’m quite fluent in financial reporting and quarterly filings. The combination of all these Q3 results from all the elite gold miners included in GDX shows exactly where this industry’s profitability is running today.

I wrote a whole essay on that research if you want to dig deeper. It turned out that the average cash cost of the GDX gold miners was just $618 per ounce in Q3. That’s their actual cost of production at the mine level. At today’s $1100 gold prices, that implies cash operating profits of $482 per ounce! Such massive 44% margins would be celebrated in any other industry, but they are totally ignored in the gold miners.

But cash costs are admittedly misleading, as mining costs extend far beyond these mine-level expenses. So back in mid-2013, the World Gold Council introduced broader all-in sustaining costs. These include all expenses necessary to sustain current production levels, adding in corporate-level administration, exploration, mine-development, mine-construction, and mine-reclamation expenses among others.

The elite gold miners of GDX, who represent the vast majority of world gold production, reported average all-in sustaining costs of just $866 per ounce in Q3! This hard data reported to government regulators by the biggest and best gold miners drives a jagged stake through the heart of the popular myth today that gold mining isn’t profitable. At $1100 gold, this industry can still earn a very impressive $234 per ounce!

With all costs necessary to maintain and replenish current production levels not far above $850, there is zero justification for gold stocks to be trading as if gold was 3/11ths of its current levels. Now if this AISC metric was running at $1350, $250 over current gold prices instead of $250 under, you could certainly argue that almost any miserable gold-stock prices were fundamentally justified. But that’s not the case today.

The only reason gold stocks are trading at such fundamentally-absurd prices relative to their profitability and the price of the metal that drives it is extreme fear. Investors and speculators are understandably terrified of gold stocks after their horrific plunge since early 2013. That’s when the Fed spun up its QE3 debt-monetization campaign to full speed, levitating the stock markets and sucking capital out of gold.

While underlying profit fundamentals always determine ultimate stock-price levels, extreme greed or fear sometime drag prices far away. But these emotional extremes never persist. Fear in the markets is finite, as eventually everyone susceptible to being scared into selling low has already done so. That leaves only buyers, resulting in a secular reversal followed by a major mean reversion sharply higher as fear dissipates.

And gold stocks themselves are a great example of this. Back in late 2008 this sector was crushed in the first stock panic in a century, a once-in-a-lifetime perfect storm of fear. By late October 2008 that panic had blasted gold stocks to fundamentally-absurd price levels relative to gold, which I pointed out at the time was supremely bullish. And indeed over the subsequent several years, the HUI would more than quadruple!

Incredibly, the gold-stock lows today are far more extreme than those seen in that stock panic. This is true in both absolute terms and relative to gold. The more extreme any price anomaly in the markets, the higher the odds for an imminent reversal and the larger the inevitable subsequent mean reversion will be. Gold stocks’ radical price disconnect has positioned them to be 2016’s best-performing sector by far.

This last chart distills down the immutable fundamental relationship between gold-stock prices and the metal which drives their profits into a simple ratio. Dividing the daily HUI close by the daily gold close yields the HUI/Gold Ratio. When tracked over time, it shows when gold stocks are both overvalued or undervalued relative to gold. And due to the extreme fear, they’ve never been more undervalued than today!

absurd

When the HGR rises, the gold stocks are outperforming gold. That’s what happens normally during gold uplegs since gold-mining profits leverage the price of gold. Conversely a falling HGR signals that gold is outperforming gold stocks. This usually happens when gold is falling slower than gold stocks. Note that this ratio has been falling on balance for over 8 years now, an extraordinary secular span of time.

The last time the financial markets were normal was before 2008’s stock panic, before the desperate Fed implemented QE and ZIRP and wildly distorted everything. Over the 5-year span ending in mid-2008 just before that epic panic, the HGR meandered in a tight trading range between 0.46x support and 0.56x resistance. On average the HUI traded at 0.511x the price of gold, with only minor and short-lived deviations

That strong relationship was shattered by 2008’s stock panic, the first since 1907. A panic is technically a 20%+ plunge in the broad stock indexes within a couple weeks. Leading into early October 2008, the benchmark S&P 500 plummeted 25.9% in just 10 trading days! The leading VIX fear gauge skyrocketed to 79.4, and gold-stock traders panicked like everyone else. That battered the HGR to a 7.5-year low of 0.207x.

But once again those horrendous gold-stock price levels weren’t fundamentally justified. They were just the result of epic fear that soon had to dissipate, just like today. So the HUI soon reversed and started to mean revert dramatically higher. The gold stocks climbed 319% over the subsequent 2.9 years, which earned fortunes for brave contrarians mentally tough enough to buy low when everyone else was too scared.

If there was a normal period after 2008’s stock panic, it was 2009 to 2012. Everything went crazy again in 2013 as the Fed ramped up its unprecedented open-ended QE3 bond-monetization campaign, which levitated the stock markets. The aggressive Fed jawboning about expanding QE3 if necessary any time the stock markets sold off created an effective Fed Put, so traders sold everything else including gold to buy stocks.

Stock investors dumped the flagship GLD gold-ETF shares at an epic record rate in early 2013, which cratered gold and obliterated gold stocks. That sparked such extreme fear that it hasn’t dissipated to this day, leaving this hated sector unable to stage any meaningful uplegs in the QE3 era. But back before that in 2009 to 2012, the HGR stabilized at a new post-panic average level of 0.346x. That’s the new normal.

The relentless ongoing gold-stock selling culminated this week in that capitulation day, forcing the HGR down to 0.093x. The HUI was trading at less than 1/10th prevailing gold-price levels! That tied the all-time HGR low from late September 2015. The gold stocks had never traded lower relative to gold, the metal that drives their profits and thus determines this sector’s fundamentally-righteous stock-price levels.

With the exception of gold stocks’ sharp mean-reversion rally in 2009, they’ve been falling relative to gold for over 8 straight years now. No market moves in one direction forever, they are all forever cyclical. And gold stocks are certainly no exception. As the Fed’s radical market distortions created by QE and ZIRP continue to unwind, both gold stocks and gold itself will mean revert far higher to reflect their fundamentals.

And that imminent mean reversion out of unsustainable fear-driven extremes portends enormous gains for gold stocks in the next couple years. Merely to return to that post-panic-average HGR of 0.346x at today’s gold prices would require the HUI to rocket about 275% higher from this week’s capitulation low to 375! That’s where gold stocks should be trading near $1100 gold, as proved in 2009 when $1100 was last seen.

Gold stocks are so despised, so incredibly undervalued, that they need to nearly quadruple from here merely to reflect today’s low gold prices! Is there any other sector in all the stock markets with such huge potential fundamentally-driven gains? Not a chance, especially with a major new stock bear awakening. Gold and therefore gold stocks move counter to stocks and rally during stock bears, a rare and valuable attribute.

But that easy-quadrupling potential from these extreme secular gold-stock lows greatly understates their potential. Why? Because gold itself is also overdue to mean revert dramatically higher in 2016 as the Fed’s gross market distortions unwind. Late last year when everyone hated gold, I laid out the strong case for a massive 2016 upleg. And gold has already started powering higher on an investment-demand renaissance.

I don’t know how high gold will surge this year, but 20% is very conservative. A 20% gold rally would leave this metal near $1275, in line with year-end targets from some major Wall Street banks. At $1275 gold and the post-panic-average 0.346x HGR, the HUI’s price target would climb over 440. That’s a 340% gain from this week’s capitulation low! And gold stocks’ potential in coming years is even greater than that.

2012 was the last normal year before the Fed unleashed QE3 and destroyed the normal functioning of the markets. Gold averaged nearly $1675 that year. So gold’s potential mean reversion out of its Fed-conjured extreme lows is to far-higher price levels than a mere 20% upleg. On top of that following any extreme, mean reversions tend to overshoot proportionally in the opposite direction. Think about that for a second.

Not only does gold have a high probability of overshooting beyond its pre-QE3 average levels, but the gold stocks have great odds of blasting to an HGR way above its post-panic normal-year average! So the upside potential in gold stocks in the coming years is vast, utterly unparalleled in all the markets. This is why I remain a hardcore contrarian so super-bullish on gold stocks, nothing else can compete.

And though everyone has long forgotten, there is recent precedent for extreme outperformance by the gold stocks. Between November 2000 and September 2011, the HUI powered 1664% higher in a life-changing secular bull! While contrarian gold-stock investors multiplied their wealth by nearly 18x, the S&P 500 lost 14%. Betting against the herd at secular extremes almost always pays off in a huge way.

All prudent investors and speculators need to have substantial gold-stock exposure in their portfolios. With the gold stocks near fundamentally-absurd 13.5-year secular lows already, the downside risk is trivial. Yet the upside potential is vast. Gold stocks can be bought via that GDX ETF of course, but the greatest gains by far will come in the best of the individual gold miners with the most-superior fundamentals.

At Zeal we’ve long specialized in this obscure contrarian realm. We’ve spent 16 years researching and trading the precious-metals miners and explorers, earning fortunes by buying low when few others would so we could later sell high when few others could. And with gold stocks’ fundamental disconnect so darned great today, there’s never been a greater buying opportunity. So we’ve been aggressively deploying.

All these new gold-stock and silver-stock trades are detailed in our acclaimed weekly and monthly subscription newsletters. They draw on our decades of exceptional experience to explain what’s going on in the markets, why, and how to trade them with specific stocks. With a new general-stock bear upon us, it’s exceedingly important to cultivate a studied contrarian perspective. Don’t procrastinate, subscribe today!

The bottom line is gold stocks remain at fundamentally-absurd price levels relative to gold which drives their profits. Heavy capitulation selling just forced them to 13.5-year secular lows, prices last seen when gold traded just over $300. Such a radical fundamental disconnect driven by irrational fear can’t persist, especially with gold already starting to mean revert higher. Gold-mining profits will leverage its coming gains.

Gold-stock prices can’t defy their underlying profitability forever, so their long-overdue mean reversion far higher will soon be underway. This gold-stock rally will feed on itself, attracting widespread interest during an accelerating general-stock bear where upside momentum is hard to find. The early contrarians willing to buy in near these lows stand to multiply their wealth and earn fortunes. Will you be among them?

Adam Hamilton, CPA

January 22, 2016

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam?   I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

 

Copyright 2000 – 2016 Zeal LLC (www.ZealLLC.com)

Gold-Stock Levels 3

Gold stocks remain the pariah of the investment world. Despite gold’s strong early-year gains, the stocks of its miners have slumped to new secular lows. This whole forsaken sector continues to languish at fundamentally-absurd price levels, an extreme anomaly that is long overdue to start unwinding. The gold miners will be bid massively higher to reflect their impressive profitability even at today’s dismal gold prices.

Just this week, the flagship HUI gold-stock index plunged to a major new secular low. On Tuesday as gold merely slid 0.3%, the HUI plunged 5.6% to 100.7. This was an astounding new 13.5-year secular low, reeking of capitulation since gold’s price action certainly didn’t justify such a disastrous reaction in its miners’ stocks. That left already epically-bearish gold-stock sentiment even worse, which is hard to believe.

The gold stocks are ultimately leveraged plays on gold, because prevailing gold prices determine their profitability. And all stock prices eventually migrate to some reasonable multiple of their underlying corporate earnings, gold stocks are no exception. Gold’s overwhelmingly-dominant role in gold-mining profits has led this sector to amplify gold’s price moves, typically by 2x to 3x in major gold-stock indexes like the HUI.

So Tuesday’s extreme 21.9x downside leverage was wildly outsized. Gold stocks actually got off to a strong start in early 2016, surging 9.9% in this year’s first 4 trading days compared to gold’s 4.7% gain. But as soon as gold pulled back, the gold stocks got sucked into the bearish maelstrom of the plunging general stock markets. So by Tuesday, the HUI was down 9.4% year-to-date compared to gold’s 2.5% rally.

But this horrendous performance leading to calls for deep new lows is masking an ongoing bottoming. Back in mid-July, gold was blasted by an extreme gold-futures shorting attack explicitly executed to manipulate gold prices lower by running long-side stop losses. In the aftermath of that, the HUI dropped to 104.9 in early August. That would prove major new support near 105 that held strong until this week.

Despite the vast bearishness arrayed against them, gold stocks held their ground for 5.5 long months. Despite gold slumping to 7 new secular lows in November and December, the HUI didn’t fall materially under 105. Despite the Fed’s first rate hike in 9.5 years in mid-December that was universally expected to obliterate gold, that support held. And that continued into 2016 despite plunging global stock markets.

Even as of Tuesday’s new low, the HUI had only lost 4.0% since its initial early-August bottom. Gold’s price edged 0.2% higher over that span, while the benchmark S&P 500 stock index plunged 10.4%. With so many excuses to continue dumping gold stocks in the past half-year, their relative strength is a telltale sign of selling exhaustion. Pretty much everyone who wants out has already long since sold and exited.

So this week’s abrupt plunge to crazy new secular lows despite flat gold prices felt like a capitulation, which has been long overdue. The gold miners’ stocks are radically undervalued fundamentally, they have been pounded for years technically, and the extreme bearishness long plaguing them couldn’t possibly get any worse sentimentally. Everything is in place for gold stocks to carve a major secular bottom.

While ironclad technical and sentimental arguments can be made for gold stocks reversing and mean reverting sharply higher, the fundamental case trumps everything else. Despite this sector’s endless slide and universal antipathy, the gold miners’ underlying profit fundamentals are what’s going to turn around this left-for-dead sector. Gold stocks are truly trading at fundamentally-absurd price levels today!

Since the vast majority of mining costs are effectively fixed during mine-planning stages, the dominant variable driver of gold-mining earnings is the price of gold. And the relationship between these profits and gold is leveraged, not linear. This reality is easy to grasp. Imagine a gold miner producing gold for $850 per ounce. In a $1050 gold environment, December’s secular low, this miner earns a $200-per-ounce profit.

The miners’ costs don’t change as gold rallies, so all those gains amplify the bottom line. Since those Fed-rate-hike lows, gold has climbed back over $1100 in 2016. At $1100 even, that’s a 4.8% gold-price rally. Yet it still costs our miner $850 per ounce to produce, while selling that gold at $1100 now yields a $250-per-ounce profit. That’s a 25% increase on less than a 5% increase in gold prices, excellent leverage!

Since profits ultimately determine stock prices, essentially all that matters for the gold miners is the price of gold. Thus they have always moved in lockstep with gold, amplifying its price moves. But as this first chart of gold and the HUI reveals, a radically-unprecedented disconnect emerged in early 2013. And it has only worsened in recent years. The gold miners’ stock prices are no longer reflecting prevailing gold levels.

 

This week’s bizarre capitulation selling pummeled the HUI to an extraordinary 13.5-year secular low. It was the lowest HUI close since all the way back in July 2002. Back then gold was trading near $305, and had yet to exceed $329 in its young secular bull. This Tuesday, gold closed near $1087 or 3.6x higher. Yet gold stocks were trading at levels last seen around $305. Does that make any sense at all?

Absolutely not! Such an extreme pricing anomaly in any other sector would lead to a stampede of new buying. Imagine if Apple’s stock was trading as if it could only sell its iPhones for 3/11ths of their actual selling price. Investors would rush in to buy this epic bargain, rapidly bidding up Apple’s stock price until it reflected actual underlying cash flows. Only in ignored gold stocks can such a radical disconnect exist.

The ludicrous magnitude of this deviation is confirmed looking the other way, through the lens of gold. Just after the Fed finally ended its 7-year-old zero-interest-rate policy in mid-December, gold fell to a deep 6.1-year secular low. Where was the HUI the last time gold prices closed near $1050? Trading way up over 390, 3.7x higher. Gold-stock prices are so low that they need to quadruple merely to reflect gold today!

This hard fundamental truth about the mind-boggling gold-stock undervaluation really irks people with a vested interest in seeing gold stocks spiral lower into oblivion. Gold-stock investors and speculators who succumbed to their own fear to sell into recent years’ major secular lows need to believe that was a rational decision. So market commentators tickle their ears with endlessly-bearish gold-stocks-to-zero talk.

Thus whenever I write about the fundamentally-absurd gold-stock prices and their unparalleled vast opportunities for hardened contrarian investors, I get attacked by the already-sold-low crowd. They have a desperate psychological need to perceive themselves as smart for selling low, they want to rationalize away their foolishness. So they argue that gold mining simply isn’t profitable at today’s out-of-favor gold prices.

The implication is obvious, that gold stocks deserve to be priced as if gold was trading near $300 instead of $1100. If they can’t earn any money, then their super-low price levels are probably fundamentally-righteous. As a lifelong student of the markets and contrarian speculator, I love investigating counter arguments. So every quarter after the gold miners have reported their earnings, I carefully analyze their results.

Gold miners generally report quarters a month or two after quarter-end, so the latest read available is from 2015’s third quarter. Back in mid-November I analyzed the results of all the elite gold miners in the leading GDX Gold Miners ETF. Consisting of the world’s biggest and best gold miners, this excellent gold-stock benchmark perfectly mirrors the HUI. GDX’s 35 component stocks reflect industry-wide fundamentals.

I painstakingly scoured all the latest quarterly filings from all the GDX component stocks. Before I got into the financial-newsletter business 16 years ago, I was a Big Six CPA auditing mining companies. So I’m quite fluent in financial reporting and quarterly filings. The combination of all these Q3 results from all the elite gold miners included in GDX shows exactly where this industry’s profitability is running today.

I wrote a whole essay on that research if you want to dig deeper. It turned out that the average cash cost of the GDX gold miners was just $618 per ounce in Q3. That’s their actual cost of production at the mine level. At today’s $1100 gold prices, that implies cash operating profits of $482 per ounce! Such massive 44% margins would be celebrated in any other industry, but they are totally ignored in the gold miners.

But cash costs are admittedly misleading, as mining costs extend far beyond these mine-level expenses. So back in mid-2013, the World Gold Council introduced broader all-in sustaining costs. These include all expenses necessary to sustain current production levels, adding in corporate-level administration, exploration, mine-development, mine-construction, and mine-reclamation expenses among others.

The elite gold miners of GDX, who represent the vast majority of world gold production, reported average all-in sustaining costs of just $866 per ounce in Q3! This hard data reported to government regulators by the biggest and best gold miners drives a jagged stake through the heart of the popular myth today that gold mining isn’t profitable. At $1100 gold, this industry can still earn a very impressive $234 per ounce!

With all costs necessary to maintain and replenish current production levels not far above $850, there is zero justification for gold stocks to be trading as if gold was 3/11ths of its current levels. Now if this AISC metric was running at $1350, $250 over current gold prices instead of $250 under, you could certainly argue that almost any miserable gold-stock prices were fundamentally justified. But that’s not the case today.

The only reason gold stocks are trading at such fundamentally-absurd prices relative to their profitability and the price of the metal that drives it is extreme fear. Investors and speculators are understandably terrified of gold stocks after their horrific plunge since early 2013. That’s when the Fed spun up its QE3 debt-monetization campaign to full speed, levitating the stock markets and sucking capital out of gold.

While underlying profit fundamentals always determine ultimate stock-price levels, extreme greed or fear sometime drag prices far away. But these emotional extremes never persist. Fear in the markets is finite, as eventually everyone susceptible to being scared into selling low has already done so. That leaves only buyers, resulting in a secular reversal followed by a major mean reversion sharply higher as fear dissipates.

And gold stocks themselves are a great example of this. Back in late 2008 this sector was crushed in the first stock panic in a century, a once-in-a-lifetime perfect storm of fear. By late October 2008 that panic had blasted gold stocks to fundamentally-absurd price levels relative to gold, which I pointed out at the time was supremely bullish. And indeed over the subsequent several years, the HUI would more than quadruple!

Incredibly, the gold-stock lows today are far more extreme than those seen in that stock panic. This is true in both absolute terms and relative to gold. The more extreme any price anomaly in the markets, the higher the odds for an imminent reversal and the larger the inevitable subsequent mean reversion will be. Gold stocks’ radical price disconnect has positioned them to be 2016’s best-performing sector by far.

This last chart distills down the immutable fundamental relationship between gold-stock prices and the metal which drives their profits into a simple ratio. Dividing the daily HUI close by the daily gold close yields the HUI/Gold Ratio. When tracked over time, it shows when gold stocks are both overvalued or undervalued relative to gold. And due to the extreme fear, they’ve never been more undervalued than today!

 

When the HGR rises, the gold stocks are outperforming gold. That’s what happens normally during gold uplegs since gold-mining profits leverage the price of gold. Conversely a falling HGR signals that gold is outperforming gold stocks. This usually happens when gold is falling slower than gold stocks. Note that this ratio has been falling on balance for over 8 years now, an extraordinary secular span of time.

The last time the financial markets were normal was before 2008’s stock panic, before the desperate Fed implemented QE and ZIRP and wildly distorted everything. Over the 5-year span ending in mid-2008 just before that epic panic, the HGR meandered in a tight trading range between 0.46x support and 0.56x resistance. On average the HUI traded at 0.511x the price of gold, with only minor and short-lived deviations.

That strong relationship was shattered by 2008’s stock panic, the first since 1907. A panic is technically a 20%+ plunge in the broad stock indexes within a couple weeks. Leading into early October 2008, the benchmark S&P 500 plummeted 25.9% in just 10 trading days! The leading VIX fear gauge skyrocketed to 79.4, and gold-stock traders panicked like everyone else. That battered the HGR to a 7.5-year low of 0.207x.

But once again those horrendous gold-stock price levels weren’t fundamentally justified. They were just the result of epic fear that soon had to dissipate, just like today. So the HUI soon reversed and started to mean revert dramatically higher. The gold stocks climbed 319% over the subsequent 2.9 years, which earned fortunes for brave contrarians mentally tough enough to buy low when everyone else was too scared.

If there was a normal period after 2008’s stock panic, it was 2009 to 2012. Everything went crazy again in 2013 as the Fed ramped up its unprecedented open-ended QE3 bond-monetization campaign, which levitated the stock markets. The aggressive Fed jawboning about expanding QE3 if necessary any time the stock markets sold off created an effective Fed Put, so traders sold everything else including gold to buy stocks.

Stock investors dumped the flagship GLD gold-ETF shares at an epic record rate in early 2013, which cratered gold and obliterated gold stocks. That sparked such extreme fear that it hasn’t dissipated to this day, leaving this hated sector unable to stage any meaningful uplegs in the QE3 era. But back before that in 2009 to 2012, the HGR stabilized at a new post-panic average level of 0.346x. That’s the new normal.

The relentless ongoing gold-stock selling culminated this week in that capitulation day, forcing the HGR down to 0.093x. The HUI was trading at less than 1/10th prevailing gold-price levels! That tied the all-time HGR low from late September 2015. The gold stocks had never traded lower relative to gold, the metal that drives their profits and thus determines this sector’s fundamentally-righteous stock-price levels!

With the exception of gold stocks’ sharp mean-reversion rally in 2009, they’ve been falling relative to gold for over 8 straight years now. No market moves in one direction forever, they are all forever cyclical. And gold stocks are certainly no exception. As the Fed’s radical market distortions created by QE and ZIRP continue to unwind, both gold stocks and gold itself will mean revert far higher to reflect their fundamentals.

And that imminent mean reversion out of unsustainable fear-driven extremes portends enormous gains for gold stocks in the next couple years. Merely to return to that post-panic-average HGR of 0.346x at today’s gold prices would require the HUI to rocket about 275% higher from this week’s capitulation low to 375! That’s where gold stocks should be trading near $1100 gold, as proved in 2009 when $1100 was last seen.

Gold stocks are so despised, so incredibly undervalued, that they need to nearly quadruple from here merely to reflect today’s low gold prices! Is there any other sector in all the stock markets with such huge potential fundamentally-driven gains? Not a chance, especially with a major new stock bear awakening. Gold and therefore gold stocks move counter to stocks and rally during stock bears, a rare and valuable attribute.

But that easy-quadrupling potential from these extreme secular gold-stock lows greatly understates their potential. Why? Because gold itself is also overdue to mean revert dramatically higher in 2016 as the Fed’s gross market distortions unwind. Late last year when everyone hated gold, I laid out the strong case for a massive 2016 upleg. And gold has already started powering higher on an investment-demand renaissance.

I don’t know how high gold will surge this year, but 20% is very conservative. A 20% gold rally would leave this metal near $1275, in line with year-end targets from some major Wall Street banks. At $1275 gold and the post-panic-average 0.346x HGR, the HUI’s price target would climb over 440. That’s a 340% gain from this week’s capitulation low! And gold stocks’ potential in coming years is even greater than that.

2012 was the last normal year before the Fed unleashed QE3 and destroyed the normal functioning of the markets. Gold averaged nearly $1675 that year. So gold’s potential mean reversion out of its Fed-conjured extreme lows is to far-higher price levels than a mere 20% upleg. On top of that following any extreme, mean reversions tend to overshoot proportionally in the opposite direction. Think about that for a second.

Not only does gold have a high probability of overshooting beyond its pre-QE3 average levels, but the gold stocks have great odds of blasting to an HGR way above its post-panic normal-year average! So the upside potential in gold stocks in the coming years is vast, utterly unparalleled in all the markets. This is why I remain a hardcore contrarian so super-bullish on gold stocks, nothing else can compete.

And though everyone has long forgotten, there is recent precedent for extreme outperformance by the gold stocks. Between November 2000 and September 2011, the HUI powered 1664% higher in a life-changing secular bull! While contrarian gold-stock investors multiplied their wealth by nearly 18x, the S&P 500 lost 14%. Betting against the herd at secular extremes almost always pays off in a huge way.

All prudent investors and speculators need to have substantial gold-stock exposure in their portfolios. With the gold stocks near fundamentally-absurd 13.5-year secular lows already, the downside risk is trivial. Yet the upside potential is vast. Gold stocks can be bought via that GDX ETF of course, but the greatest gains by far will come in the best of the individual gold miners with the most-superior fundamentals.

At Zeal we’ve long specialized in this obscure contrarian realm. We’ve spent 16 years researching and trading the precious-metals miners and explorers, earning fortunes by buying low when few others would so we could later sell high when few others could. And with gold stocks’ fundamental disconnect so darned great today, there’s never been a greater buying opportunity. So we’ve been aggressively deploying.

All these new gold-stock and silver-stock trades are detailed in our acclaimed weekly and monthly subscription newsletters. They draw on our decades of exceptional experience to explain what’s going on in the markets, why, and how to trade them with specific stocks. With a new general-stock bear upon us, it’s exceedingly important to cultivate a studied contrarian perspective. Don’t procrastinate, subscribe today!

The bottom line is gold stocks remain at fundamentally-absurd price levels relative to gold which drives their profits. Heavy capitulation selling just forced them to 13.5-year secular lows, prices last seen when gold traded just over $300. Such a radical fundamental disconnect driven by irrational fear can’t persist, especially with gold already starting to mean revert higher. Gold-mining profits will leverage its coming gains.

Gold-stock prices can’t defy their underlying profitability forever, so their long-overdue mean reversion far higher will soon be underway. This gold-stock rally will feed on itself, attracting widespread interest during an accelerating general-stock bear where upside momentum is hard to find. The early contrarians willing to buy in near these lows stand to multiply their wealth and earn fortunes. Will you be among them?

Adam Hamilton, CPA

January 22, 2016

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam?   I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

 

Copyright 2000 – 2016 Zeal LLC (www.ZealLLC.com)

 

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blue background with euro bills and european union flag symbolizing euro zone
The latest Commitment of Traders report that covers the four sessions through January 19 saw speculators anticipating the continuation of the current moves. Of the sixteen gross positions we track, only five were in reducing exposures. Last week there was only six increased exposures.
With the benefit of hindsight, we know that something changed a day or two after the reporting period ended. Given the magnitude of the reversal in some cases, some of these late positions were likely forced out.
There were two significant gross position adjustments (10k of more contracts) during the reporting period. The bears added 11.6k contracts to their gross short sterling position, which stood at 76.4k contracts at the end of the period. It is the largest such position since March 2015. The other was the 10.2k increase in the gross short Australian dollar speculative position to 81.7k. It has increased by more than a third since the start of the year.
Speculators generally increased their gross short currency exposures. There were two exceptions. These were the euro (gross shorts were reduced by 3.1k contracts) and yen (gross shorts were reduced by 6.3k contracts). The gross short euro position has been above 200k contracts since early November. The gross short yen position has fallen from 113k contracts in the middle of November to 46.8k contracts in the latest reporting period.
Speculators mostly increased gross long positions. The three dollar-bloc currencies were the exceptions. Given the spot moves, though the adjustment by the speculators in the futures market was minor. The gross long Canadian dollar positions was cut by 5.8k contracts to 33.1k. The gross long Australian dollar position was trimmed by 3.1k contracts to 45.5k. Speculators pared their long New Zealand dollar position by 2.2k contracts to 17.9k. The net Kiwi position flipped back to the short-side with the help of the bears adding 2.3k contracts to the gross shorts.
If our suggestion that it is helpful to conceive of the dollar as not the mover presently but the fulcrum,with the dollar-bloc, and sterling on one side and the euro, yen and Swiss franc on the other, then the surprise is with the speculators adding to long sterling and peso positions. The bottom pickers added 3.6k contracts to the gross long sterling position (to 37.9k). The gross long peso position edged up less than 1k contracts to 30.4k. If they held on as the peso made new lows on January 21, they were rewarded on January 22 as the peso posted its largest advance in 10 months.
Bullish speculators were happy to take profits into the rally in the US 10-year Treasury note futures.The gross longs sold 18.1k contracts to leave them with 413.4k contracts. Some sold into the rally. The gross short position was increased by 6.4k contracts to 481.1k. This resulted in an increase in the net short position from 43.2k contracts to 67.7k.

 

In contrast, in the light sweet crude oil futures short took some profits, but there were no bottom picked as the gross longs were pared. The gross long position fell by 17k contracts (to 482.8k), and the gross long position fell by 10% (32.9k contracts) to 303.4k. The low was set the next day, but its was several percentage points below January 19 when the reporting period ended. The March contract closed on January 22 $4.80 above it lows and posted its highest close in nearly two weeks.

 

19-Jan Commitment of Traders
Net Prior Gross Long Change Gross Short Change
Euro -137.0 -146.5 69.4 6.3 206.5 -3.1
Yen 37.7 25.3 84.5 6.1 46.8 -6.3
Sterling -38.6 -30.5 37.9 3.6 76.4 11.6
Swiss Franc 0.9 3.3 25.2 0.7 24.3 3.1
C$ -66.4 -59.2 33.1 -5.8 99.5 1.4
A$ -36.3 -23.0 45.5 -3.1 81.7 10.2
NZ$ -3.0 1.5 14.9 -2.2 17.9 2.3
Mexican Peso -76.0 -74.0 30.4 0.9 106.4 2.9
(CFTC, Bloomberg) Speculative positions in 000’s of contracts

Disclaimer

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Traders today universally believe inflation is dead, that there is no persistent decline in the purchasing power of money. That’s what government price indexes around the world are indicating. But this false notion is one of recent years’ main Fed-conjured illusions. Price inflation is the result of rising money supplies, and they have been skyrocketing. Serious risks are mounting that they will spill into price levels.

As simple as money seems, it is very complex in both theory and practice. We all understand the idea of working to earn money to buy goods and services. But the seminal treatise on money, the legendary economist Ludwig von Mises’ “The Theory of Money and Credit” published in 1912, weighed in at 445 pages! Money is a topic that endlessly preoccupies elite central bankers with doctorates in economics.

Money is ultimately a commodity, its value determined by its own fundamental supply and demand. If demand exceeds supply for any given currency, its price will rise relative to other currencies. As this money grows more valuable, it takes relatively less to buy goods and services. The persistent increase in the purchasing power of money, resulting in a persistent decrease in general price levels, is deflation.

Today systemic deflation is assumed and feared by traders around the world. They look at the various price indexes published by governments, which show either slowing increases in general price levels or slight decreases. They worry incessantly that the former disinflation will decay into the latter deflation. So the idea that there are big risks of serious inflation breaking out is hyper-contrarian heresy, widely ridiculed.

Yet think about the commodity of money. Deflation requires demand growth to exceed supply growth, which is clearly not happening. In this era of extreme central-bank easing globally, money supplies all over the world are literally skyrocketing! With supply growth radically outpacing demand growth, the only possible ultimate outcome has to be big inflation. There is always a reckoning for huge monetary expansion.

Central banks have been conjuring vast amounts of new money out of thin air to buy bonds, the blatant debt monetization now pleasantly euphemized as “quantitative easing”. The resulting exploding money supplies guarantee each unit of currency is going to be worth less. With the money supplies growing far faster than the real-world pool of goods and services on which to spend it, serious inflation is inevitable.

Inflation is the persistent increase in general price levels driven by the persistent decline in money’s purchasing power. And given the extreme, wildly-unprecedented, and record levels of money printing the US Federal Reserve has executed in recent years, Americans are facing a major inflationary episode in the coming years. Excessive central-bank money printing throughout history always leads to serious inflation.

The Fed started sowing the seeds for this coming inflation back in late 2008. That year the US stock markets suffered their first full-blown panic in a century. In just 21 trading days leading into late October 2008, the flagship S&P 500 stock index plummeted 30.0%! The first two weeks of this alone witnessed an astounding 25.9% free fall, handily exceeding the formal stock-panic metric of a 20% drop in 2 weeks.

The US Federal Reserve was founded in late 1913, largely in response to the last true panic seen in US stock markets in 1907. So this central bank had never weathered a stock panic before, and its central bankers were utterly terrified. They feared we were on the verge of a new Great Depression due to the wealth effect. When Americans’ perceived wealth declines due to market selloffs, their spending falls in sympathy.

For all their power, central banks really only have two tools available. The great newsletter writer Franklin Sanders describes them as “liquidity and blarney”. Central banks can either print money, or talk about printing money. And with the Fed literally panicking in late 2008, it spun up the printing presses with a vengeance. This is readily apparent in this first chart of the narrowest US money supply.

This is called the monetary base, or M0 (M-zero). While the definitions of the various money-supply measures vary in different countries, the monetary base includes money in circulation, money in bank vaults, and reserves banks hold with the Fed. Here’s the US monetary base and its annual growth rate charted over the past third-of-a-century or so. Note the radical disconnect seen during late 2008’s stock panic.

Zeal100215A

That event that forever changed global markets thanks to central banks’ extreme reactions started in September 2008. During the 28.7 years before that beginning in 1980, the average annual growth rate in the monetary base ran 6.2%. That’s the baseline for normal monetary conditions. But in late 2008 when the Fed joined stock traders in panicking, it ramped its money printing up to stupendously-extreme levels.

The Fed rushed to inject liquidity into the system, creating vast torrents of new money out of thin air to try to stave off the feared depression. In just 4 months leading into December 2008 centered on that epic stock panic, the Fed had catapulted its monetary base 101% higher! It peaked at a staggering annual growth rate near 117% in May 2009. The money supply was exploding, a wildly-unprecedented event.

While these epic panic expansion rates didn’t last, the Fed never unwound its extreme money creation! Instead it followed its initial QE1 bond-monetization campaign with QE2 and QE3 in subsequent years, each of which greatly boosted the monetary base. When central banks buy bonds, they don’t use money that already exists. Instead new money is literally created out of thin air with the stroke of a keyboard.

So thanks to the Fed’s enormous quantitative easing of the post-stock-panic era, the monetary base has exploded from $847b in August 2008 to $4099b today! That extreme 4.8x increase was fueled by an incredible average annual M0 growth rate of 27.8% in the 7.1 years since the stock panic. The critical question traders need to ask is whether such record money creation can magically have no inflationary consequences.

Price inflation is the result of money supplies growing faster than the underlying pool of goods and services in the real economy on which to spend it. And there is absolutely no way the US economy today is roughly 5x larger than it was in late 2008, like the monetary base. That means there is a giant overhang of excess money out there threatening to flood into the real economy and drive up price levels.

The Fed intentionally injected this epic monetary inflation into the system. It wanted to artificially lower interest rates to boost economic activity, to stop the stock panic’s wealth effect from cratering the US economy. So it bought trillions of dollars of bonds. The Fed monetizations of US Treasuries enabled the massive government overspending of the Obama years, “financing” that Administration’s record deficits.

This vast monetary inflation indirectly led to the extraordinary post-panic stock-market levitation. The extremely-low interest rates created by the Fed’s enormous bond buying led US corporations to borrow way over a trillion dollars to buy back their own stocks. Instead of growing their businesses, companies took advantage of the gross Fed distortions to manipulate their earnings per share higher through vast buybacks.

There is zero doubt the Fed’s extreme money-supply expansion of recent years led to great inflation in bond and stock prices. With relatively far more money chasing relatively far less investments, their price levels were bid dramatically higher. The colossal inflation of asset prices by the Fed and other major central banks is undisputed. Markets would look far different today if the Fed hadn’t quintupled its monetary base!

It’s ironic how traders today fully understand how bond and stock prices would be far lower without the Fed’s extreme money printing, yet deny the threat of inflation. Once central banks unleash new money, they are powerless to control where it flows. Eventually money-supply expansions always permeate into general price levels. And despite what the government price indexes claim, this is already happening.

When the Fed conjures new dollars out of thin air to buy US Treasuries, what does the government do with this new money? Rapidly spends it. The money the Fed used to buy those government bonds immediately goes to Americans in the form of redistribution transfer payments, direct government salaries, and government purchases of private-sector goods and services which indirectly pay countless others.

This brand-new government money is then soon spent by its ultimate recipients on their own goods and services, bidding up general price levels. All that money the Fed has printed hasn’t just magically stayed in the bond markets segregated from the real economy, it was already injected right in almost as soon as it was wished into existence. Traders who buy into the deflation myth simply don’t understand money.

Much if not most of the Fed’s incredible $3.3t monetary-base expansion since late 2008 is already out there in the real US economy. This is a ticking time bomb threatening money-supply-growth-fueled widespread general inflation. And contrary to government-price-index claims of persistent disinflation or deflation, this serious inflation the Fed has unleashed is already becoming apparent to the observant.

Think of your and your family’s own financial situation, your personal economy. Has your cost of living been rising or falling in recent years? Are you having to pay more for virtually everything you need and want to live? Are your tax costs, housing costs, education costs, medical costs, utility costs, food costs, and entertainment costs rising or falling? Everyone I talk with is already seeing sharp real-world inflation.

Pretty much everything we buy on an ongoing basis is getting more expensive. With vastly more dollars in circulation in recent years thanks to extreme Fed money printing, the purchasing power of each has declined considerably if not dramatically. While there are certainly exceptions, most Americans are all too painfully aware that general price levels are relentlessly rising. Maintaining lifestyles requires more money.

The price indexes published by governments around the world are woefully inadequate for measuring prevailing price levels. Prices are just inherently difficult to measure. Our consumption patterns are constantly changing, with endless substitutions as prices and tastes evolve. Any basket of goods and services used to measure prices is soon obsolete, with a constant measuring rod impossible to achieve.

And governments actively obscure general-price-level increases as well for political reasons, muddying the picture. Higher reported inflation is bad for politicians’ job security. It leads to lower stock-market levels and thus greater electorate dissatisfaction. Provocatively, stock-market changes leading into US presidential elections are one of the most powerful predictors of their outcome! Incumbents lose when stocks weaken.

Higher reported inflation levels also cost governments big money in transfer payments, many of which are linked to their own government’s inflation gauge. The more governments have to raise things like welfare and pension payments to keep pace with reported inflation, the less money politicians have to spend on things that can win them votes. So governments have vast incentives to lowball reported inflation.

And they do. The US’s definitive inflation gauge that traders swear by is the Consumer Price Index published monthly by the Labor Department. It is showing zero inflation right now, a stark contrast to the actual experiences of Americans! This next chart shows the broad MZM (money of zero maturity) money supply, overlaid by its own annual growth rate and that of the CPI. Their great disconnect remains glaring.

Zeal100215B

Not surprisingly with the monetary base soaring thanks to the Fed’s extreme debt monetizations of recent years, the broad MZM money supply has surged massively as well. Since August 2008, MZM has exploded $4.9t higher! While this is in line with M0’s $3.3t growth, it is much smaller in percentage terms at a 56% gain compared to 384% because MZM was larger to start with. But this is certainly an anomaly.

The narrow monetary base directly supports the broad MZM money supply. Between 1981 and August 2008 when M0 averaged $450b, MZM averaged $3615b. This rough comparison suggests each dollar of monetary base supports about 8 dollars of broad money supply. In one of fiat money’s complicating factors, the monetary base is multiplied into a larger money supply by the fractional-reserve banking system.

When money is deposited in banks, the banks are allowed to lend out much more than deposited. They only need to keep reserves for a small fraction of their deposits, multiplying the money supply. Eventually as the Fed’s vast recent monetary-base expansion is absorbed, it has the potential to support a colossal MZM of $32.9t! That’s a staggering 2.4x above today’s levels. That would unleash an inflation superstorm.

But back to today’s reported-inflation situation, the US government’s CPI is claiming no inflation right now despite MZM still surging over 7% per year. Since expanding money supplies drive increases in general price levels, and MZM continues to grow rapidly, how on earth can there be zero inflation in the US today? It doesn’t make any sense that a fast-ramping money supply isn’t driving purchasing-power losses.

But this disconnect is a temporary anomaly, not some new era where prices are somehow divorced from the money supplies which determine them. The government reporting that inflation doesn’t exist sure doesn’t mean it doesn’t exist. And more and more Americans are waking up to this, unable to reconcile Wall Street’s price-index-fueled deflation worries with their own personal experiences of endlessly-rising prices.

Traders have duped themselves into believing that the most extreme central-bank money printing in world history will have no inflationary consequences, a ridiculous notion. They think that these trillions of dollars of newly-created money can be magically fenced into the bond and stock markets, where they love to see price inflation. They believe mushrooming money supplies won’t spill into the underlying real economy.

But history has proven over and over that big central-bank money printing always leads to big real-world inflation. There can be no other possible outcome as relatively more money chases relatively less goods and services, bidding up their prices. The faster the supply of anything grows, the less each unit of the existing supply is worth. Money has never been an exception to these ironclad laws of supply and demand.

There will absolutely be a reckoning for the Fed’s extreme post-panic money printing, serious adverse consequences for prevailing price levels. The Fed either has to fully normalize its balance sheet to where it would have been without the epic debt monetizations, or serious inflation is inevitable sooner or later here. And the Fed will never muster the courage to materially unwind its incredible bond purchases.

If the Fed had not panicked in late 2008 and kept the monetary base on its normal trajectory, it would be down around $1.1t today. So a full normalization would require an astounding $3.0t of bond selling by the Fed! When central banks sell bonds that they created money to buy, that new money vanishes back into oblivion. So if the Fed sold $3t in bonds, even over many years, it would unleash a market apocalypse.

Bond prices would collapse, sending interest rates soaring. That would utterly devastate much of the real economy reliant on debt financing, led by housing. Stock markets would fall for years on end as both higher-yielding bonds sucked capital away and higher borrowing costs weighed on corporate profits and sales. The Fed has painted itself so far into a corner that it can never fully normalize its vast monetizations.

And that means the only possible outcome is the near-quintupling of the US monetary base in 7 years is going to lead to serious general price inflation in the years to come. That’s the way monetary expansion has always worked historically, even though this process takes some time to fully run its course. And investors and speculators alike today wrongly fearing the deflation boogeyman are woefully unprepared for inflation.

History’s strongest asset in inflationary times, which are always unleashed by excessive central-bank money printing, is gold of course. Gold thrives when currency values are falling thanks to rapidly-growing money supplies. Investors start shunning cash as its purchasing power drops, and park capital in gold to preserve their purchasing power. This rising investment demand leads to surging gold prices.

And with gold so deeply out of favor in recent years thanks to the Fed’s extraordinary QE-fueled stock-market levitation, investors remain radically underinvested in gold. This gives gold enormous upside as deflation worries eventually yield to the real threat of serious inflation the Fed has unleashed. Gold and its leading ETF, the GLD SPDR Gold Shares, will thrive as prudent portfolio diversification returns to favor.

But the greatest gains in the gold sector by far in inflationary times will come from the left-for-dead stocks of its miners. Despite gold miners’ low costs and recent fundamentally-absurd price levels, traders have abandoned them on the historically-false belief that Fed rate hikes are terrible for gold. So as gold mean reverts higher in the coming years, its gains will be dwarfed by the uplegs in the best of the gold stocks.

We’ve long specialized in this ultimate contrarian sector at Zeal. We publish acclaimed weekly and monthly newsletters with an essential contrarian perspective. They draw on our decades of exceptional market experience, knowledge, and wisdom to explain what’s going on in the markets, why, and how to trade them with specific stocks.

The bottom line is the Federal Reserve has nearly quintupled the monetary base in just 7 years since 2008’s stock panic. This extreme money printing can’t be unwound without collapsing the bond and stock markets and causing interest rates to skyrocket, something the Fed will never risk. So it has no choice but to let the money supply remain near its vastly-inflated levels today, a harbinger of serious price inflation.

Such vast amounts of new money really lower the purchasing power of existing money. With relatively more money chasing relatively fewer goods and services, higher general price levels are guaranteed. Gold has always been the best asset to own after excessive central-bank money printing. And when the world’s traders realize inflation is the real threat, not deflation, they will start flocking back to the yellow metal.

Adam Hamilton, CPA, October 2, 2015

Copyright 2000 – 2015 Zeal LLC (www.ZealLLC.com)

 

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Gold has lapsed deeper into pariahdom this year, becoming the most-hated investment class in all the markets. Traders are avoiding it like the plague, utterly convinced gold is doomed to spiral lower perpetually. But this wildly-bearish psychology is dead wrong. Financial markets are forever cyclical, and gold is no exception to history’s ironclad rule. The best time to be heavily long anything is when few others are.

Gold’s universal disdain today is the natural result of dismal price action. This precious metal has not seen a new secular high since August 2011, 4.1 years ago. Between that latest bull-market peak and early August 2015, gold fell 42.8% in a brutal secular bear market. With the flagship S&P 500 stock index up 86.8% over that same span, it’s easy to understand why many consider gold the worst investment.

But gold wasn’t always this way. The greatest mistake investors and speculators make is extrapolating the present out into infinity. They succumb to our innate human tendency to assume the status quo will persist indefinitely. We all do this all the time in our normal lives. When everything is going well, we get euphoric and think good times will last forever. When nothing is working out, we despairingly see a bleak future.

This present-situation-lasting-perpetually outlook is obviously dead wrong, as life moves in cycles. We will all see good times and bad times, with neither extreme persisting for long. The financial markets work the same way. Just when the vast majority of investors and speculators are convinced that an old trend will be the new norm forever, it reverses. The markets shift and massive countertrend moves get underway.

Gold itself is a fantastic example of this. Back in the early 2000s as the stock markets soared, gold was considered dead. Investors despised it, and central banks couldn’t dump it fast enough. As the mighty secular stock-market bull peaked in March 2000, gold was around $285. Everyone thought the stock markets were destined to rally forever in a brave new technology-driven era, in which gold was totally obsolete.

But just as the market status quo seemed unassailable, it crumbled. Market extremes are always the result of excessive greed or fear among traders. And since these emotions are finite and inherently self-limiting, they can’t last. Once everyone who bought stocks high had already deployed their capital, no one else was left to buy. So the astounding prevailing stock greed in the early 2000s burned itself out.

Meanwhile gold was racked by excessive fear and despair. Everyone who wanted to sell it low had already done so, leaving no one left to sell. So gold’s decades-old secular bear shifted to a powerful new secular bull. Between April 2001 and August 2011, gold skyrocketed 638.2% higher while the S&P 500 lost 1.9%! Gold was the world’s best-performing asset class by far over an entire decade, creating fortunes.

Like all markets, gold flows and ebbs. It has great secular bull markets followed by long secular bears. As any multi-decade gold chart reveals, gold is highly cyclical. It doesn’t move in one direction forever any more than the stock markets do. And gold’s innate cyclicality means it is way overdue for a massive trend change out of the recent extreme lows and despair. Today’s universal gold bearishness is dead wrong.

Investors and speculators have witnessed gold weakness for so long that they have forgotten what an anomaly it is. Back in August 2011 when gold’s gargantuan secular bull crested, this metal was way overbought as I warned at the peak. Gold bullishness was ubiquitous, with greed off the charts. Even major Wall Street firms including Goldman Sachs were publicly forecasting a continuing rally for years to come.

But gold needed to correct hard out of such euphoria, and it did. Over the next 9 months it lost 18.8%, a major correction taking gold to the cusp of bear-market territory. After that gold stabilized, and actually averaged $1669 in 2012 which was 6.1% above peak-year-2011’s $1573. The gold market was working normally then, and building a strong base for its next upleg. But then extreme central-bank distortions derailed it.

Back in mid-September 2012, the Federal Reserve launched its third quantitative-easing campaign. The timing was highly irregular and suspect, as a US presidential election was less than two months away. Since 1900, the stock-market behavior in the Septembers and Octobers leading into the November presidential elections has predicted the winner 26 out of 29 times, a truly stunning 90% success rate!

If the Fed hadn’t acted right then to goose stock markets, they would have fallen leading into that critical 2012 presidential election. In fully 10 of the 12 times when the stock markets fell in September and October leading into an election, the incumbent party lost. The sharp post-QE3-announcement gains pushed stocks to a final-two-month rally. In 16 out of the 17 times that happened, the incumbent party won.

The Fed is usually very careful not to act leading into an election, because it doesn’t want to be seen as political which leads to all kinds of fury from Congress. But Republican lawmakers had been highly critical of the Fed’s enormous previous quantitative-easing debt-monetization campaigns, and a new Republican president would have made the Fed’s existence a nightmare. So it acted to sway an election!

QE3’s timing wasn’t the only odd thing, so was its methodology. QE1 and QE2 both had predetermined sizes and end dates when they were initially announced. But the radically-unprecedented QE3 was totally open-ended. The Fed intentionally never disclosed how big it intended QE3 to be and how long it intended QE3 to run. Just 3 months after its birth, QE3’s monthly purchases were more than doubled in December 2012.

Stock traders absolutely love central-bank easing, since the deluge of freshly-conjured money works to buoy stock prices. And since QE3 was open-ended, its psychological impact on the stock markets was far greater than the previous QEs’. Whenever the stock markets, which were already overvalued and overextended at QE3’s launch, threatened to sell off, Fed officials raced to the microphones to jawbone.

They were constantly alluding to the fact that they stood ready to ramp QE3 if necessary. Stock traders took this as the Fed intended, assuming the US central bank was effectively backstopping the US stock markets! Every dip was quickly bought on the ever-present promise of more Fed QE, spawning a truly extraordinary and unprecedented stock-market levitation. The QE3 era saw stocks do nothing but rally.

And thus began gold’s horrendous death march through the sentiment desert. Gold has always been and always will be an alternative investment. It is one of only a handful of assets that generally move counter to the stock markets. So gold investment demand is strong when stock markets are weakening or flat. With stock markets endlessly surging thanks to the Fed, gold investment demand cratered in 2013.

Professional money management is a fiercely-competitive industry, where investors always seek out the best returns. So the fund industry poured its clients’ capital into the Fed-goosed stock markets, driving them even higher. The strong stock-market gains were very attractive, seducing capital out of all other markets including gold. So this precious metal utterly collapsed in the first half of 2013 as investors fled.

This extreme selling was concentrated in the flagship GLD SPDR Gold Shares ETF, the premier way for stock traders to get gold portfolio exposure. When they buy GLD shares faster than gold is rallying, this ETF shunts that excess capital directly into physical gold bullion held in trust for its shareholders. GLD’s holdings peaked at 1353.3 metric tons just two days before QE3 was expanded back in December 2012.

With the Fed effectively backstopping stock markets, the S&P 500 levitated 12.6% in the first half of 2013. So stock traders sold their GLD shares to chase these big gains, plowing their capital back into general stocks. During that 6-month span, GLD’s holdings collapsed a radically-unprecedented 28.2%. Extreme differential selling of GLD shares forced this ETF to jettison 381.3t of gold bullion into the markets!

Such a deluge of marginal gold supply unleashed in such a short period of time was far too much for normal investment demand to absorb. That GLD selling alone equated to 63.6t per month. According to the World Gold Council, during 2012 which was the last normal year for gold, global investment demand averaged 135.5t per month. So the extreme GLD liquidations alone offset nearly half of normal-year demand!

These epic supply headwinds from investment selling caused gold to collapse 26.4% in the first half of 2013. Fully 5/6ths of this gold selling hit in 2013’s second quarter, where gold plummeted 22.8% to its worst quarterly loss in an astounding 93 years! A once-in-a-century superstorm of selling spawned by a central bank gone rogue is not a normal or sustainable market event. Everything subsequent is a huge anomaly.

With gold brutally hammered in 2013’s first half, American futures speculators rushed into the fray. Of course futures trading is a hyper-leveraged zero-sum game, vastly different from stock trading. Due to this very nature of futures, speculators have no choice but to try and follow trends. So they hopped on the epic-gold-liquidation bandwagon, selling long positions and adding short ones. This amplified gold’s drop.

This chart looks at the total positions in long and short gold-futures contracts held by American futures speculators during the Fed’s extreme QE3 anomaly. The Commodity Futures Trading Commission’s famous Commitments of Traders reports disclose gold-futures speculators’ collective bets once a week. And after the extreme GLD-share exodus, they are the other key driver of gold’s anomalous QE3-era price action.

Zeal092515A

As gold plunged in the first half of 2013 as the Fed’s incessant jawboning about expanding QE3 led to incredible stock-market distortions, American speculators sold gold futures aggressively. They dumped 66.2k long-side contracts while adding 99.6k short-side ones in those fateful 6 months. And with every gold-futures contract controlling 100 ounces of the metal, this unleashed a jaw-dropping amount of gold.

We are talking about the equivalent of another 515.9t of gold sold through the futures markets, a monthly rate of 86.0t! That alone would have offset nearly 2/3rds of the normal monthly gold investment demand in 2012. With this extreme gold-futures selling by speculators on top of that massive GLD-share dump, it’s no wonder gold fell off a cliff in the initial 6 months of full-strength QE3. The gold selling was epic!

Gold’s entire hyper-bearish psychological environment today remains the product of that superstorm of selling in the first half of 2013. Such an extreme event left such a traumatic imprint on investors and speculators alike that they now assume gold is doomed to spiral lower forever. But in financial markets which are forever cyclical, sentiment based on a perpetual extrapolation of present conditions is dead wrong.

You don’t have to take my word for it either, the hard data proves the first 6 months of 2013 have not become the new norm. While the GLD liquidation since has been ongoing as stock traders continued to exit gold, it has slowed dramatically since the middle of 2013. The average monthly liquidation rate of GLD’s holdings has collapsed from 63.6t in the first 6 months of 2013 to just 10.9t since. That’s a 5/6th reduction!

And the extreme gold-futures selling by speculators has actually reversed. It plummeted from that 86.0t-per-month average in the first half of 2013 to buying of 1.2t per month since! Both the extreme GLD-share and gold-futures selling were already largely exhausted by the middle of 2013. That’s why gold didn’t keep on plunging since, but has only been gradually grinding lower. And this trend is way overdue to reverse.

While gold psychology has been overwhelmingly bearish since that extreme Fed-fueled anomaly in the first half of 2013, it took a sharp turn for the worse just a couple months ago. In late July, gold plunged in an extreme gold-futures shorting attack exquisitely timed to wreak the maximum havoc on gold prices and long gold-futures stop losses. If you aren’t familiar with that event, it is exceedingly important to understand.

Late on a Sunday night when the vast majority of American traders weren’t paying attention, a stunning blitz of gold-futures short selling was unleashed. 24k contracts were shorted in one minute, forcing gold to its recent dismal new lows. But the exciting and bullish thing about this is all futures short selling has to soon be fully reversed. Speculators have to buy long contracts to offset and cover their short ones.

In early August just after that brazen shorting attack, American speculators’ gold-futures shorts soared to an all-time record high of 202.3k contracts. That is extreme beyond belief! In 2009 to 2012, the last normal years before the Fed’s epic QE3 market distortions, speculators’ gold-futures shorts averaged just 65.4k contracts. And major support for these positions visited multiple times in the subsequent QE3 era is 75k.

There is zero doubt that speculators will cover their massive short bets back down to 75k, that is a total certainty. And per the latest Commitments of Traders report before this essay was published, American speculators’ total gold-futures shorts were back up to 173.9k contracts. This remains incredibly high. In the 141 CoT weeks since early 2013, only 9 saw higher speculator shorting. Today’s levels are unsustainable.

 

In order to buy down their massive short-side bets back to recent years’ strong 75k-contract support, speculators need to purchase an incredible 98.9k contracts! That’s the equivalent of 307.5t of gold. And as the chart above shows, short covering rallies tend to rapidly unfold over a couple months or so. With gold futures so hyper-leveraged, speculators have to be quick to cover or face catastrophic losses as gold rallies.

So once a small fraction of speculators buy to cover, the rest are forced to follow. And that would create marginal new gold investment demand on the order of 153.7t per month for a couple months! According to the World Gold Council, global investment demand in the first half of 2015 averaged just 75.7t per month. So speculators’ gold-futures short covering alone has the potential to temporarily triple investment demand!

And believe me, that happening in today’s lopsided sentiment environment where gold is loathed will lead to this metal soaring. Major new uplegs are almost always sparked by futures short covering, as these speculators are the only ones legally and contractually forced to buy low. And once they get the rally ball rolling, the bandwagon speculators and investors hop on to ride the momentum and accelerate the gains.

Between 2009 and 2012, American futures speculators had average long positions in gold of 288.5k contracts. Merely mean reverting back up to those levels would require another 81.7k contracts of buying, equivalent to another 254.0t of gold demand. A conservative estimate for this mean reversion is 6 months or so, adding another 42.3t of gold demand per month. See how that buying will really add up?

But the speculator buying, no matter how large coming out of such extreme short highs and long lows, is just the pre-game show. Gold’s real upleg requires investors to return, which they are overdue to do in a major way. As the trivial value of GLD’s bullion holdings relative to the overall stock market’s market capitalization proves, investors are radically underinvested in gold today. They will start returning as gold rallies.

Gold’s hyper-bearish psychology is dead wrong due to this causal chain of self-feeding buying being on the verge of being ignited. First gold-futures speculators are forced to cover, which will drive gold sharply higher. Then the long-side futures speculators will jump on to ride the momentum, further accelerating gold’s gains. And once gold rallies far enough to capture investors’ attention, they’ll take the baton.

With everyone despising gold right now and convinced it is dead, near-record speculator gold-futures shorts wound like a coiled spring, and the stock markets decisively rolling over which will rekindle gold investment demand for prudent portfolio diversification, only a fool would not want to be heavily long gold! History proves the great majority of traders are the most bearish right as major bottoms are being carved.

And contrary to the bearish boogeyman, the upcoming Fed-rate-hike cycle is no threat to gold. I recently did a comprehensive study on how gold performed in every Fed-rate-hike cycle since 1971. Gold not only rallied in 6 of these 11 cycles, but did so dramatically with an average gain of 61.0% in the exact Fed-rate-hike-cycle spans! Gold surged 49.6% in the Fed’s last rate-hike cycle between June 2004 to June 2006.

This was despite the Fed more than quintupling its federal-funds rate from 1.00% to 5.25% through 17 separate hikes! And in the other 5 Fed-rate-hike cycles where gold lost ground, every one of them started with gold near major multi-year highs. Today gold is just off that gold-futures-shorting-attack-driven 5.5-year secular low. So the coming Fed-rate-hike cycle is likely to prove exceedingly bullish for it.

How can that be? Gold yields nothing, so higher rates should slaughter it right? Wrong, history proves. Higher rates are very damaging for stocks and bonds, and when stock markets weaken gold investment demand surges since gold prices generally move contrary to stock markets. Fed-rate-hike cycles work to rekindle demand for alternative investments since they wreak so darned much havoc on mainstream ones.

So the prudent bet for investors and speculators to make today is to fight the crowd and be heavily long gold and the derivative plays that rally with it, silver and the precious-metals mining stocks. Physical gold and the GLD ETF are great places to park capital, but the coming gains in the radically-undervalued and left-for-dead gold-mining stocks will dwarf gold’s. This sector is trading at fundamentally-absurd price levels!

And that’s why you need us at Zeal. We’ve long specialized in this obscure contrarian sector, with great success. Since 2001, all 700 stock trades recommended in our newsletters have averaged annualized realized gains of +21.3%! And we’ve been aggressively building our trading books again with dirt-cheap high-quality gold and silver stocks with the potential to easily at least quadruple as gold mean reverts higher!

 

The bottom line is today’s hyper-bearish gold psychology is dead wrong. Like all financial markets, gold is forever cyclical. It’s not going to keep on falling perpetually. The extreme central-bank-spawned gold selling of recent years is exhausted, everyone who wants to sell into secular lows has already done so. That leaves only buyers poised to flood back in as gold decisively rallies to mean revert much higher.

Gold’s next mighty upleg will be jumpstarted by American futures speculators covering their near-record shorts back down to reasonable levels. Gold’s resulting upside momentum will convince other futures traders to pile in on the long side, further accelerating its gains. And that will ultimately get investors interested in redeploying in gold again. They will have to buy for years on end to regain normal portfolio diversification.

Adam Hamilton, CPA, September 25, 2015

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Apple Inc. $AAPL Set to Unveil New Apple TV, But Will it Include Streaming?

Apple Is A Safe, Valuable Long-Term Investment

by I Know First Research

The new iPhone was announced during Apple’s September event last week, offering few advantages over the previous model. While the camera has been improved and a new operating system is included, the upgrade pales in comparison to the one announced last year, when the larger screened phones were unveiled for the first time. The company is relying on loyal Apple customers that have not upgraded their older iPhones to keep sales numbers growing, as CEO Tim Cook has claimed multiple times that a large percentage of the original sales last year were from customers switching over from other companies in response to the larger screen.

If this proves to be the case or not will have a huge impact on Apple’s performance next year, as investors will look for continued strong sales of the company’s flagship product. Apple has set extremely high standards to meet moving forward, and the current economic climate in China could cause the stock price to suffer moving forward. However, other projects that Apple is currently working on make it worthwhile to continue buying Apple stock, especially during any further dips in the stock price. The entrance into new markets, as well as the emphasis being placed on markets it will look to capitalize on further, will lead to future growth, while the company’s large cash holdings make Apple a rather safe investment.

Apple Stock Predictions 1

Apple TV

For years, the Apple TV has just been a hobby for the world’s largest company, but Apple is now ready to play a major role in the future of the television market. Rumors for most of the year have been that the company would offer a live-streaming service of a slimmed down package of channels for a substantially cheaper price than traditional cable packages. However, this is not the product that Apple unveiled at its September event.

Instead, Tim Cook said the company believes that apps will be the future of television. While other companies have attempted to integrate this type of technology before into customers’ viewing experience, it has not been able to catch on. However, Apple has a penchant for correctly timing when to jump into markets and popularize them with larger markets. In order to do so with the Apple TV, the company is counting on a few things to take place, which should be watched closely moving forward.

One key will be getting old users of the Apple TV to buy the newer version. The first version of the device was released in 2007, but sales were slow until more recently when the streaming trend started to become more prominent. This could prove to be difficult, as the new device will still have the same content as older versions, as it only makes it simpler to do so. In addition, a number of users have other devices for streaming already. In order to get users to upgrade, Apple is hoping that the new apps convince users they need the new device.

Apple TV

Much of the presentation for the Apple TV was focused on gaming capabilities, with a new Wii-like remote making the device extremely interesting for casual gamers. Apple announced that certain video game favorites among casual gamers like Disney Infinity and Guitar Hero would be released on the App Store, making it extremely easy for users to buy the games and play. Beyond this, it’s not yet clear how app developers will take advantage of the new App Store for the Apple TV. Apple is hoping that they will be able to do so, as the success of the new device is dependent upon it.

Moving forward, the ability to add a streaming-cable package could be made easier if the Apple TV proves to be popular, as it will give Apple more negotiating power moving forward. Currently, CBS is planning to bring an all-access app to Apple TV that will allow users to watch all of its programming for a small, flat monthly fee. This would still require a cable subscription, but is still a step in the right direction. If this hobby of Apple’s can become a strong generator of revenue moving forward, the company’s stock price could skyrocket.

Apple Cash

Due to the incredibly strong sales of the iPhone, which Apple is able to sell at a premium price, the company has a rather large cash position. Its cash pile actually increased to over $200 billion. This makes the company an extremely safe investment, as the company has quite a cushion to withstand any issues the company might face, such as the recent news that the company’s apps in China were hacked with malicious software.

Further, this position could allow the company to enter into completely new markets, such as the rumored Apple car. The company is rumored to be working on its own electric car, with the project being codenamed Titan. While this project is in the very early stages and will not be ready for at least a few years, it still shows the power of the large corporation, as Tesla has recently been worried about the impact Apple’s entry into the market could play on it.

This is prospective at this point, but the cash holdings could play a large role for young investors looking for a future source of income. While Apple is clearly looking for ways to invest its cash into new ventures such as the Apple car, Tim Cook has proven to be more willing to return value to shareholders than Steve Jobs was when he was CEO of the company. Apple currently has a dividend yield of just 2%, but this number could jump over the next decade.

Dividend

Since the company reinstated its dividend in 2011, it has increased the dividend by an average of over 11% annually. Further, the company announced in 2014 that it planned to continue increasing its dividend annually moving forward. Based off of its track record with the dividend, it would make sense that the dividend could more than double moving forward, perhaps within the next six years. With an extremely reasonable P/E ratio of roughly just 13.2, Apple is a safe investment for young investors, especially during the current dip in the stock price.

Algorithmic Analysis

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

I Know First has had success predicting the movement of Apple’ stock price in the past. In this one-year forecast from September 19th, 2014, Apple had a bullish signal strength of 28.67. In accordance with the algorithm’s prediction, the stock price increased 13.36% during that time.

Apple Stock Predictions (past)

Having explained how I Know First’s algorithm works, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The three-month and one-year forecasts for Apple are included.

Apple Stock Predictions (most updated)

A positive signal strength does not mean investors should automatically buy the stock. Dr. Roitman, who created the algorithm, created rules for entry for a stock such as Apple. Using this trading strategy, an investor should buy a stock if the last 5 signal strength’s average is positive and if the last closing price is above the 5-day moving average price. When both of these conditions are met, it is a good time to initiate a position in the stock.

Conclusion

Apple has a bearish signal strength over the near-term, which makes sense considering some of the company’s struggles in China. However, the company should rebound and start increasing over the long-term as the struggles in China are addressed, and the company’s safe position leads to thriving earnings reports moving forward. Continue buying this stock before earnings reports, as Apple remains a great investment choice, even for future income investors.