|Home||About Us||Resources||Archive||Free Reports||Market Window|
Tuesday, March 20, 2012
I was shocked when I saw the numbers... but they're true.
Based on numbers from Jason Goepfert's excellent SentimenTrader, investors hate gold now, more than at any time in 2009 or 2010.
The thing is, when investors hate gold this much... the metal tends to rise by a couple hundred dollars in the next few months.
Could gold do it again, starting now? The answer is yes (with some caveats). Let's take a closer look...
We'll start with the recent history first...
Back in late 2008, gold was more hated than it is today. What happened next? Gold rocketed from $750 an ounce to $1,000 in three months.
Gold was also MUCH more hated than it is today for a brief moment a couple months ago – at the end of 2011. And once again, gold soared a couple hundred dollars, trough to peak, in a couple months.
Gold was EQUALLY as hated as it is today twice in 2011: at the end of the second quarter and at the end of the third quarter. In both cases, gold managed to soar by a couple hundred dollars, trough to peak.
Gold was NOT QUITE as hated – but still hated – around the end of the first quarter and second quarter of 2010. Once again, gold did well, rising a couple hundred dollars, trough to peak.
So here we are again... Gold is hated. Could gold rise by a couple hundred dollars an ounce in a couple months?
The answer is... absolutely. So what are the caveats I mentioned?
The first is, what if the bull market in gold is over?
These numbers start in 2008... and gold's been in a bull market since then. But what if a bear market has just started in gold?
I checked in with Gold Stock Analyst writer John Doody to get his take...
"Hedge fund traders have abandoned gold in the last few weeks," he said. "Gold soared after the earlier QE1 and QE2 programs from the Federal Reserve. Once it became clearer there would be no QE3, they got out."
John is certain that we will remain in a long-term bull market for gold as long as "real" interest rates stay below zero. By "real" rates, John means the interest rates you earn on your money in the bank, MINUS inflation of 3%.
That puts today's real interest rate around -2.8%. So by John's measure, the gold bull market should stay intact.
So gold is hated, and it's likely still in a long-term bull market. In the past, that's led to gains of a couple hundred dollars an ounce.
But there's something even more hated than gold... gold stocks.
"Gold stocks have fared worse than the metal recently," John said. "They're extremely undervalued now – at a 19% discount to Fair Value as of my mid-month letter."
John explained gold stocks usual stay in a 10% overvalued/undervalued range, so this reading is extreme. "From the last three undervalued extremes," John said, "the HUI Gold Stock Index rallied over 100% gains." That typically happened in 12 months or less.
History could repeat... Gold could be a couple hundred dollars more expensive a few months from now... And gold stocks could soar by triple digits in a year.
The safest way to trade it would be to wait for a semblance of an uptrend before you buy... You might not pocket the full 100% profit, but you won't be trying to catch a falling knife, either.
Right now I hold shares of GDX in my True Wealth newsletter – it's a basket of gold stocks. It's the simplest way to get in this hated trade.
"My two 'go-to' metrics for gold stocks are telling me they're a great value right now," Matt Badiali wrote last week. "And there's another number I'm looking at that really drives the point home..." He believes gold stocks can't get much cheaper from today's levels. Read more here: Three Arguments for Buying Gold Stocks Here.
Earlier this month, Steve wrote about another opportunity where stocks are cheap, hated, and starting an uptrend... in a country most investors have never considered before. "Sentiment is bad, and opportunity is great," Steve writes. "Last time around that was good for triple-digit gains."
AN INTERESTING TRADE... BUT DON'T BET THE RENT MONEY
Traders take note... the "rare earth" sector is forming a bottom.
"Rare earth elements" is the name of a small group of metals, including strange-sounding members like "lanthanum" and "cerium." These little-known metals go into high-tech devices like mobile phones, weapons systems, and electric cars. And even though they are used in smaller quantities than, say, copper or iron, rare earths are critical to our modern economy.
Over the past three years, rare earth elements have received a lot of headlines. The current problem in the sector is China. It controls over 90% of the world's production of rare earths. It uses this dominant position as a political crowbar, both to beat people over the head and to get leverage in negotiations. Thus, the world is scrambling to develop other rare earth deposits and processing facilities.
When folks "scramble" for something, stock booms and busts usually follow. The rare earth sector is no exception. Many rare earth stocks soared hundreds, even thousands of percent in late 2010/early 2011. The overheated sector then blew up. The "big boy" of the rare earth complex, Molycorp (NYSE: MCP), fell more than 60% from its high.
But as you can see from today's chart, MCP has taken its lumps and "carved out" a bullish bottom in the $25-$30 per share range. This is no sector to bet the rent money on... but should the market warm back up to these "oddball" metals, MCP and its fellow players could easily double or triple.
In The Daily Crux