Gold Prices Slide: Why is the Market Selling?
A chain reaction is forming the last great gold stock buying opportunity of the decade, says Lior Gantz, editor of Wealth Research Group.
I want you to take a close, hard look at this chart:
The VanEck Vectors Junior Gold Miners ETF (GDXJ) is the ETF that has become one of the world’s most popular investment vehicles for gold investors over the last decade.
The idea behind ETFs is luring many investors by allowing you to buy and sell broad baskets of stocks with a single trade.
It’s a one-click way to buy a basket of small-cap gold exploration, development and production companies, and from January 2010 to May 2017, the market capitalization of the GDXJ grew by 480%.
Since it became so popular, a technical challenge has emerged: by definition, junior gold stocks don’t have large market caps and their shares don’t have tremendous trading liquidity. The GDXJ grew in popularity so much that it had too much cash and not enough places to put it.
Here’s where this becomes interesting. I know many precious metal investors who are hurting big time right now because they missed the phenomenal move between January and August of 2016 and have been seeing nothing but a massacre ever since.
My gut and the research I’ve put together suggests that we are about to undergo a frenzy sell-off, something that will cause some gold investors (who have too much of their net worth weighting in gold-related stocks) to feel like puking, but for those who prepare, I am telling you that this is your “Bitcoin at $3″ moment.
The sell-off has already begun, and it’s due to no fundamental reason at all—it is a “forced selling” based on technical issues.
Many junior gold stocks are Canadian. As soon as an entity owns more than 20% of a Canada-listed company, regulations restrict its trading ability and make holding the position a bureaucratic mess.
Because the ETF got so popular and the small-cap miners are truly a tightly knit group of companies that are not collectively worth that much, the ETF couldn’t find ways to deploy cash. As a result, it now has to rebalance its components.
This rebalancing is already underway, with hedge funds, short-selling funds and retail investors all looking for a way to either make a killing due to this selling avalanche or protect their holdings from further declines.
The rebalancing is set for June 16.
Between now and then, expect significant volatility in all the sub-$1 billion market cap junior and mid-tier gold companies. Shares of companies will be sold by the GDXJ so the new ETF can become a “large mid-tier to small major” gold ETF.
The Chain Reaction: Margin of Safety Will Be at All-Time High
Margin of Safety is the most important term in finance, according to Warren Buffett and his mentor, Benjamin Graham. Essentially, the idea is that no investment—and certainly no trade—are bulletproof, therefore the cheaper you can buy it, the better.
It goes deeper than that: a more effective use of Margin of Safety is contrarianism.
This means that you’re buying when assets are out of favor (and therefore cheap), with the certainty that demand will be increasing later.
But the most effective use of Margin of Safety is buying so cheap that the company actually trades at or below its liquidation value.
The GDXJ is going to dump close to $4 billion worth of junior mining shares—that’s a massive amount.
We all know how the market reinforces our most innate emotions, and as this forced regulatory selling commences, panic selling will ensue.
Gold stock investors will hit stop losses and dump shares, which will create more selling.
What may be in the cards here is a self-reinforcing cycle of forced, ignorant selling that will feed on itself and cause a panic in some of the world’s best small-cap gold stocks. It could be a chain reaction, and again, this is coming on June 16, right when the Federal Reserve next announces an interest rate decision.
Gold is not in a bubble, nor has it displayed any “bubble-like” golf stick-shaped chart.
Instead, it’s a highly depressed market where demand is high, but concentrated short positions by large funds who are long the SP 500 are absolutely creating havoc for the retail investor. As I said last week, once the entire investment community begins taking profits after a nine-year bull market, the over-leveraged short positions they currently hold in mining shares will be liquidated, and you will most likely be among the rare breed of investors that get to experience a 100-fold move in a stock you own.
At the moment, a total of 52 companies are estimated to be under excessive liquidation by the GDXJ, and we’re preparing for this as we speak.
You need to make a decision—one that will define you regarding gold stocks from here on out. You need to be absolutely sure that you can stomach high volatility, which will test every fiber of your being, because buying when Margin of Safety is at an all-time high is not as easy as it sounds. It requires nerves of steel, and most of all, it entails forgetting all about the pain you endured (if you endured any) by mismanaging positions in the past or getting the timing wrong.
There’s no escaping this—it will get bloody before we get our chance to create dynasty money.
Hold Gold Through Thick And Thin; Another Crisis Is Around The Corner
– Neils Christensen: Gold prices could have further room to fall ahead of a looming interest rate hike in one month and continued push for President Donald Trump’s tax reforms and deregulation proposals; however, one analyst still sees potential for the metal throughout the year.
In an interview with Kitco News, Martin Murenbeeld, president of Murenbeeld Co. said that he is comfortable with gold at current levels or even lower as he expects continued financial and geopolitical uncertainty to support the yellow metal for the rest of the year.
“I’m going to hold my position and just wait for the next crisis to hit,” he said.
In the near-term, Murenbeeld said that gold faces two major headwinds: higher interest rates and looser fiscal policies. These two factors will continue to drive the U.S. dollar and bond yields higher.
“The good news for gold is that none of this may happen because we just don’t know what is going to happen. Trump put out his tax reform proposal but it was more of a wish list than a proposed legislation,” he said. “We will have wait and see what Trump can actually get through Congress.”
Although gold is 5% down from its five-month highs seen last month, Murenbeeld said that gold is still managing to find support at higher levels. He added that this is because investors see value in holding a core positioning in gold as uncertainty continues to simmer in the background.
“In a model we ran, we saw gold get a $40 or $50 bump from the Syria conflict and the French elections. Now that things are calming down that has been deflated and gold is coming back to a fundamental bedrock,” he said. “Even though you are getting a surge in ETF buying and then a surge of selling after a crisis calms down, on average there is still a gain. In an advisory capacity, I would say hold a core position in gold through thick and thin.”
As to what could be the next crisis, Murenbeeld said that he is watching to see if Trump can get all the tax reform that he was hoping for, if the U.S. economy continues to weaken in the second quarter or tensions escalate between North Korea.
With markets betting on perfection from Trump, Murenbeeld said that anything less from the new president would be messy for equities and in turn good for gold.
“I have argued that President Donald Trump is going to be good for gold. He is unpredictable and that is creating all this uncertainty,” he said.
Turning to the Federal Reserve, Murenbeeld added that even if interest rate hikes remain a headwind for gold, investors still need to remember that real rates, will remain low for a long period of time.
“I don’t think the Fed is going to get ahead of inflation,” he said.
Gold Will Soar as We Return to the 1970’s Style Inflation
– Peter Ginelli: In 1977 I started my first year in college. Our newly elected president Jimmy Carter, had been sworn into office just a short time earlier and things were pretty normal. America was still trying to put President Nixon and Ford’s Watergate era behind and start fresh with a newly elected president who had no connection with that national scandal. Much like today with the election of president Donald Trump, the American people were filled with hope that Jimmy Carter will bring in the much needed change after a long period of uncertainty and national crisis.
But it wasn’t long before the storm came and many Americans saw their wealth destroyed by irresponsible public and financial policies of our leaders. After the OPEC oil embargo and Iranian revolution and the subsequent hostage crisis, the American economy fell into hard times as inflation began to rise at an alarming rate and the Federal Reserve began to raise rates to fight it with little success.
By 1980, millions of Americans had lost their jobs as unemployment reached above 10% and the rate of inflation had soared to 14%. To fight the rising inflation, the FED continued to raise rates to historic levels. Meantime due to the terrible economic condition and the ongoing Iranian hostage crisis, Jimmy Carter lost his re-election bid to president Ronald Reagan in 1981.
By 1982, the interest rates would reach an astronomical 21% to combat the soaring inflation before they were finally able to bring it slowly under control and the rates ultimately went back to normal.
Why, you ask, I’m giving you a history lesson? I’m convinced we are headed to the same direction in 2017, almost 40 years later, with only one exception.
This time when inflation starts to show its ugly face, and believe me, it will, they won’t be able to fight it by raising rates as they did in the late 70’s and early 80’s! Why? Well, this is where that little exception comes into play. You see, back then, we didn’t have a $20 trillion dollar national debt to pay back with interest, today we do.
Once inflation starts to soar, if the FED tries to raise rates only to 10%, just half of what it was back then, the interest on our national debt will climb to $2 trillion a year, Folks, there is a name for such a scenario, it’s called “Massive debt crisis,” much like today’s Greece debt crisis.
So how will they fight it? In short, they can’t. Why is that important to you? It’s not a matter of if, but when, we are faced with this unavoidable national crisis. We can see the iceberg and the ship is headed straight towards it without a chance to avoid a head-on collision. And yet, we are sitting on the deck of this debt Titanic, listening to our leaders on how things will be different this time around and that you have nothing to worry about.
The saying goes, “Those who don’t know history, are doomed to repeat it.”
One other thing strikes me about that era. When Jimmy Carter won the election in November of 1976, an ounce of gold was only worth $138 per ounce, by 1980, that ounce of gold had increased in value to $850 per ounce. That is over 600% increase in just 4 short years. You don’t believe me? Look it up for yourself. It happened!
If we use that model and apply it to today’s gold price at $1230, gold would have to go up to $7380 per ounce, but let me once again remind you of that little exception between today and back then. This time the FED won’t have the luxury of raising rates to fight the soaring inflation. Indeed, this time it WILL be different. In fact based on the current market trajectory, I believe it will be modest to project gold at $8000 an ounce and beyond, before someone puts an end to our leaders’ irresponsible fiscal behavior and put some sanity in the system.
One final thing you should look into, and that is, how billionaires become billionaires. If you study them closely, you will quickly discover that no billionaire has ever accumulated great wealth by being reactive to national, world or financial events. What separates them from the masses, is that they are proactive and see it coming before the rest of us do.
So that begs the following question: What do billionaires like Stanley Druckenmiller, David Einhorn, john Paulson, George Soros, Jim Rogers and Paul Singer see today that the rest of the population doesn’t see? After all, between them, they have purchased tens of billions of dollars in precious metals in the recent months. Even president Trump himself who is a billionaire has admitted to owning gold. The question is, why?
These people and others like them, buy the best advice money can buy, and they have been accumulating an enormous amount of gold. Maybe it’s time the rest of us wake up and start following the smart money, rather than hope for the best. Maybe it would be prudent to stop drinking Kool-Aid and prepare for what could be one of the worst periods in our nation’s history that is approaching at an alarming speed.
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