Category Archives: Trends

Watch List: Biotech Sector Pullback

The biotech sector has had an extensive a run over the last 3 years, more than doubling its 2011 average price.  Recently, however, as you can see in the chart below, it has pulled back about 25% to $130 from its peak of $170.

xbi price pullback

As part of its decline, this sector also recently crossed the upward trend line of “higher lows” as can be seen in the chart below.

xbi biotech trend line

Breaking such a long term trend line is a fairly big deal and further decline is likely to come as technical traders start to weigh in on the negative side by shorting the stock until it hits lower “resistance” zones.

In the chart below, I put percentage drop markers at two areas of resistance beyond the recent drop.

SPDR S&P Biotech ETF recent pullback

I’m looking to start investing in this sector, should it drop into those resistance areas between $105 – $120.  I’d like to see it get back to the $90 range in the long term and that’s where I would start adding stronger positions as part of my purchasing technique.

ETF Watch: REMX – Market Vectors Rare Earth/Strategic Metals

Just a quick bulletin to note that I’m starting to look into the “Rare Earth” and “Strategic Metals” ETF, REMX.

From the REMX ETF prospectus:

The Rare Earth/Strategic Metals Index is comprised of companies primarily engaged in a variety of activities that are related to the producing, refining and recycling of rare earth and strategic metals and minerals. Such companies may include micro-, small- and medium-capitalization companies and foreign and emerging market issuers. The fund is non-diversified.

REMX-performance

REMX is a thinly traded ETF having daily volume only in the thousands (as opposed to bigger ETFs like GDX, GDXJ or SIL which have daily volumes in the millions).  In my experience, due to the lack of liquidity, thinly traded stocks tend to be a bit out of whack from the market in the short term, either leading or lagging.  REMX appears to be lagging the commodities sector, so this may be a good time to start getting involved with the ETF, especially if you’ve missed the recent uptick in gold and silver miners.

As you can see in the chart above, REMX is only up about 5% over the last 2 months, whereas the junior gold miners and silver miners are up 46% and 37% respectively.

Even if you look at the minimum ($34.20) to maximum ($36.08) percentage change of REMX in the chart above during the time period, it is only up 6.5%, so it hasn’t yet participated in the commodity uptrend.

Looking at the longer term chart below, you can see that this ETF does tend to have the same outcome as the other commodity miners in the long run:

REMX-longer-term-performance

Should you invest in Bitcoin?

Bitcoin is a new digital currency that is gaining quite a bit of notoriety lately, especially since the Winkelvoss Twins (of Facebook fame) started promoting their involvement in the cryptocurrency by reportedly owning a significant amount of the virtual coins and also trying to bring to the stock market, a way for investors to easily purchase shares of Bitcoin value in an ETF.

I started researching bitcoin to learn more about what it is and how it works and it didn’t take long before I realized its not likely to be a long term, stable investment that I would put my money in for one big reason.

No… my reason is not that Bitcoin is not backed by something of physical value, like gold, as many other articles have pointed out.

If you read the original white paper that introduces the Bitcoin peer-to-peer financial network concept, you’ll continually see references that make statements like, “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

In my opinion, once there’s enough value to be stolen, there’s nothing stopping a well funded terrorist type group from attacking the integrity of the system by taking control of the system by overpowering the “honest nodes” with “dis-honest nodes”.

Also, I don’t like that the inventor of the protocol is a pseudonymous developer (named Satoshi Nakamoto).  It doesn’t sit well with me that the inventor(s) have chosen anonymity.  They seem to be pretty clever to have created such a brilliant scheme, but how do we know that their brilliance doesn’t go beyond what they are showing.  Maybe they have a secret, undisclosed, hard to discover, technique within the protocol to make a small amount of CPU power act like a lot of CPU power, such that they can easily take control and overpower all the “honest CPU” power on the network.  As the inventors are anonymous, they could easily watch the value of their invention skyrocket and cash out into real money before crashing the system and anonymously walk away with a huge amount of value.

Also, with something so new and untested, some form of a loophole will likely someday be discovered that allows someone to control the network in a negative way.  I haven’t delved into the encryption strength that Bitcoin uses within the system, but I do know that as computing power continually grows, we continually need better and better encryption technology.  There was a time, in the early internet days when 40-bit or 56-bit encryption was considered safe enough for financial transactions (https connections).  Now advanced 128-bit is considered the minimum.  So if the encryption strength is not easily modifiable over time, there is a likelihood that years down the road, someone will be more likely to be able to hack your Bitcoin encryption keys.

With all that said, I will not avoid using Bitcoin.  I hope it becomes as ubiquitous as PayPal.  I like the idea of it.  I own a couple small online storefronts and may soon start taking bitcoins as payment.

However, based on the potential network takeover possibility, I don’t plan to invest or store any significant amount money in the system as an investment.

As a final note, I’m not predicting that the value of Bitcoins won’t exponentially increase.  In fact, based on the growing hype, and especially if ETFs get created where big money can easily flow into and cause massive inflation within the Bitcoin system, a short term investor could make some decent gains, especially if one was to get in before the ETFs start showing up (it may be too late already).  However, I am a married man with a family who invests for the long term, and based on the discussion above, Bitcoin investing is too risky for me to have significant involvement.

 

 

Have the Gold Miners hit bottom?

Gold is up about 3% over the last couple weeks and that increase has translated to even larger gains in the gold miners.

2014-01-03-Gold-Increase

2014-01-03-GDX-Increase

2014-01-03-GDXJ-Increase

Backing up what I wrote in a previous article, “Is it better to invest in Gold or Gold Miners?“, after a large decline, you can see that a small gain in gold translates to much larger gains in the miners, with nearly an 8% increase in the large cap miners and 14% increase in the junior miners.

So have we hit the bottom and will gold and the gold miners take off exponentially from here?

I have no idea.  My technique is not to try and predict the market but to invest wisely with a proprietary long term, stable, technique.  I know that the sector has gotten beat down immensely, so, due to shorting and other factors, I know there is likely a higher probability that it is undervalued than it is overvalued.

If you haven’t started investing in the miners, now is a good time to get involved in the gold miners.  By “get involved”, I mean you should buy a small amount, maybe around 5% of your portfolio, not throw a large amount of your investment portfolio at it.

My proprietary technique of investing involves only purchasing into a sector as it is out of favor and on its way down, which is when it is most likely to be undervalued in the long term. So if the market shoots up from here, you’ll get a nice gain from your initial involvement. Don’t chase after the gains by adding more as the price goes up.  Hold on to the rest of your portfolio as there will be plenty of other opportunities in other sectors as the volatile market money flows shift over time.  Don’t be in a hurry to get all your portfolio into the market.  Keep lots of cash ready for “the next big thing”; there will be plenty of them.

If the miners settle back down and continue their decline, with my technique, you’d continue to make purchases at “minor” and “major” levels from YOUR initial purchase.  This way, your investment technique is tailored to your own involvement and starting point.

I get upset with investment advice that follows an adviser’s portfolio which may have started long before you started following the adviser.  That adviser’s portfolio usually shows a gain, lets say 20%.  You get involved at that point, then it drops by 15% and the adviser points out that the portfolio is still up 5%, so he/she thinks himself/herself brilliant, meanwhile you are down 15%.

I also don’t think there is one strong buy point as a lot of technical analysis will try to indicate.  Often you hear things like “once it crosses the X moving day average” or “after this other thing has a selling on strength day”, or “crosses this level of support” is the time to heavily load up on a stock or sector.

With my proprietary investing technique, I’ve made my strongest gains when I invest in sectors and purchase as a function of my own starting point.  I don’t get emotional and try to predict what is going to happen.  I start my investment when I think the sector is already highly undervalued and continue to build my position as it becomes even more undervalued.

So, at this juncture, I suggest you start to get involved in the miners and potentially begin to build your position.  In the not-too-distant future, I will create a membership section and give a better understanding of how you can use my proprietary investment technique for stable investing and long term gains.  Please join my newsletter to keep updated.

Do Gold Stocks move with Gold or the Stock Market?

I recently came across an article that referred to research that, over the long haul, 50% of Gold Miners price moves are based on the price of Gold and the other 50% is based on the stock market.

The article doesn’t go into what it means to move “based on the stock market”, but the author comes to the conclusion that if you are in the Gold miners to get an amplified move on Gold the historical odds are against you.

I though that was a pretty poor conclusion to obtain from that research.

First, of course Gold miners aren’t going to move 100% perfectly in an amplified manner to the movement of Gold.  It seems logical that some portion of the movement in miners is going to be based on the business of mining gold as well as market sentiment of the sector (read my article on how market sentiment affects the gold miners).

I interpret this 50/50 research to help strengthen the argument that now is the time to be getting into the gold miners as both sides are strongly pulling down on the gold miners.  The price of gold is falling, so right now, the miners are less profitable.  Because the price of gold has dropped so much, miners are less profitable and the market sentiment towards mining stocks is incredibly low.

Below is a chart of the ratio of the Junior Miners vs the relative price of Gold (as reflected by the Spider Trust GLD which virtually tracks the price of gold).

Radio of GDXJ to GLD (gold) over the last 3 years

Notice that the ratio of Junior Miners to the price of gold has drastically decreased over the last 3 years.  That means that Gold has drastically outperformed the Miners. Or you could say that Gold’s decline has been amplified in the miners.  If the two move perfect correlation without any amplification the ration would stay the same, and there chart would show a line straight across the graph.

Below is a graph of the ratio of Gold Miners to the Dow Jones Industrial average:

Ration of Gold Miners to the dow jones industrial average over the last 3 years

This graph also shows that the Junior Miners have significantly underperformed the Dow Jones Industrial Average.  Again, if the miners were in perfect correlation with the Industrial Average, the graph would be a straight line across the page.

So there’s a double witching happening.  Both portions of the “50/50” research outcome are working against Gold.  So when the turn around in the price of gold comes, there will be a double amplification in the opposite direction to keep the 50/50 rule in tact.  That will spell monster gains for the Miners as the sentiment will turn around and not only will the lost ground need to be recovered but the euphoria in the opposite direction will be required to compensate for the lost ground over the long term.

 

 

Are the Junior Gold Miners (GDXJ) set to rebound?

UPDATE: After reading this post, see my most recent update on the GDXJ rebound trend.

The Junior Gold Miners (GDX) ETF has rebounded as high as 59% ($52.46 on Aug. 26th) off its June 26th low of $33.04.  It has currently settled back down to about 46% above the low ($48.19).  So what’s going to happen next?  Will it go up or down?

Well if you ask the technical traders, they’ll show you a chart below, which could be interpreted to indicate that we are still in a down trend.

GDXJ Junior Gold Miners downtrend

However, pay attention to the green lines in the chart above.  There have been 3 major rebounds since the beginning of the decline in December of 2010.  Notice how the rebounds are getting bigger in size.  The first rebound was about 28%.  The second rebound was about 43%.  And, as stated earlier, the most recent rebound maxed out around 59%.  So on the technical side, this sector is more violently coming back with each rebound.

A major technical point was hit as well on the latest rebound as it crossed a previous peak and resistance level, as shown in the following chart:

GDXJ Junior Gold Miners rebound past resistance

Notice how the last peak when traced back (the red line furthest to the right) is higher than a previous peak and resistance zone.  This could mark a turn around of creating higher highs and higher lows, which would indicate that the sector / ETF is headed higher.

For the technical traders, the next couple of months will have big meaning towards how they will invest their capital.  If the price goes higher in the next few months, they will be looking for it to keep going to the next resistance zone of in the area of $65.

However, as it has pulled off its recent peak, and is declining again, it could start heading towards the all time low, in which case they’ll start shorting the stock again, helping to potentially push it past the lowest low.  This will keep the the trend of lower lows going and the stock will be thought to continue to decline.

For me, all this stuff is great to look at and think about what others are potentially doing, but I’m a long term investor.  These things really don’t matter much.

What I do know and count on is the fact that, relative to the long term scale, the Junior Miners are definitely not overvalued.  And at this point, I believe the miners to be significantly undervalued as I wrote about in this article.

I have been investing with my proprietary technique continuing my purchases as it continues down building a stronger base with each incremental investment.

I’m at the point in my method where I won’t be investing any further, unless the index hits new lows. At this point, I have built up a strong base and would be happy if it went in either direction.

If it goes up, I’ll start watching my investment hit positive gains; and if it goes down, I’ll have the chance to add more, further building a stronger base.

If you haven’t started investing in the Junior Gold Miners, now, even after its significant rebound, is a great time to get involved, as in the grand scheme, it is still significantly undervalued.

Now, I’m not saying you should put a significant amount of money in at this point, but instead should start cautiously acquiring and continuing to buy as it goes lower, if it does.  If it doesn’t.. well then you got something in and can enjoy the bumpy ride up.  Just don’t start chasing the gains.  All of this will be spelled out when I release my proprietary technique of investing for the long term.

The great thing about my technique is that it doesn’t matter where you start to get involved.  My technique is tailored to your investment and the timing where you got involved in a particular investment.

I read a lot of other blogs and websites by investment guru’s that have portfolios that they want you to follow, but if you haven’t been with them since the beginning, you don’t get the results they get.  …I’ll write more about this in another article, if I have the time; especially if some comments that you want me to explain it further.

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UPDATE: See my most recent update on the GDXJ rebound trend.

 

 

Could Gold’s trend suggest we are headed for another recession?

Gold is currently in an eight month down trend.  So what are the possibilities that gold’s downtrend could suggest?

A first notion could be that gold simply became overvalued starting after July of 2010 which is roughly the last time it was trading at the value it currently trades for today (July 16th, 2013).  After July 2010 the value of gold took about a year to peak at a price about 58% higher. Then it wavered near those highs for about  year, before dropping to, in this scenario, become more realistically valued as the price declined back over the last eight months.

Helping the drastic rise and fall could be the popularity of Gold Exchange Traded Funds (ie GLD, GTU, CEF, etc).  Gold ETFs have made it easier for the masses to purchase gold, so when market mob decides its in season, a lot of money can quickly surge into Gold and inflate the value (at least on virtual paper – but the difference between paper gold and physical gold is a subject for another article).  When the mob decides to exit, a lot of money can quickly leave, causing the value of gold to decline.

Another way to look at the current 8 month down trend could be that gold stayed reasonably valued as the Federal Reserve’s quantitative easing programs have devalued the dollar, thus making gold worth more.  Then Gold’s decline could indicate that though we are continually given data to suggest that the economy is doing well, the economy is really not very healthy, quantitative easing is becoming less and less effective, and gold is therefore secretly leading the charge into a recession or possibly even a depression where everything, including gold, becomes highly deflationary.

I know, you say… “Gold is a defensive commodity.  When people the world predicts a recession or depression, money is moved into gold and therefore the price of gold rises”.   I would agree with you, stating that yes, when a recession or depression is predicted, money is moved into gold and the price of gold rises.  But the world is not predicting a recession or depression and in a depression, everything loses value, including gold.  During a recession, what would cause gold to rise, would be the Federal Reserve “printing” even more money in an attempt to stimulate the economy and therefore gold would become the defensive place for money to flow into, due to fears of inflation and devaluing of the dollar.

Or, golds current decline could mean that everything that is happening in our economy is going well.  The reports we get on the economy are truthful and accurate.  Businesses are doing better and better, people are able to find jobs, unemployment is going down, etc.  Possibly the Federal Reserve’s quantitative easing programs are working wonderfully and stimulating the economy while not causing inflation and that is reflected in the current price of gold.

I don’t necessarily believe that gold is predicting a recession, but I am willing to accept that it is a possibility.  We’ve all heard the anecdote that Federal stimulus is like crack to the economy –  We are being loaded with a great feeling, but it takes more and more of the stimulus drug to keep the economy high.  We could be at a point where the current amount of continuing stimulus QE3 (currently 85 billion per month) isn’t enough to keep the economy high.  It needs even more stimulus to stave off the recession and following depression that would come without it.

Personally I think the future of gold’s price has some dependence on the regime in place.  Currently the democrats are in control and are very liberal in their spending.  Sure we have all these sequestration cuts, but if you look closely enough, most of the cuts are in the future, so who knows if they’ll really happen.  Its funny that when Enron did the same thing, it was illegal and the house of cards ending up falling down.  Luckily our government is more powerful than a single company.  If the republicans take over in the next presidential election and decide to halt a lot of the spending, I think we’ll see some drastic action in gold.

Do I really know where gold is going or what it is predicting?  Not really. I don’t believe to that in-tune with the market.  But I am a contrarian investor, and gold is currently down nearly 35% from its peak.  With its continual decline, it looks like it could be reasonably priced, and likely tending towards undervalued.

This undervalued pricing in gold, has a drastic effect on the mining sector and the miners are trading at very low prices relative to their peaks.

I have been buying and I believe it is a great time to start purchasing down in a proprietary pyramid fashion that I’ve developed over my years of successful investing, and I’ll discuss what that means and give deeper reasoning why I believe its time to purchase the mining sector in another article.

Join my mailing list to be notified when it comes out!

 

Why are the values of gold and silver mining stocks going so low?

With the price of gold taking over a 30% drop from its most recent peak in October of 2012 and nearly a 35% drop from its all time high in September of 2011, the precious metal mining sector has been absolutely crushed.

Specifically the large cap Market Vectors Gold Miners Index ETF fund (GDX) has dropped 58% and the small cap Market Vectors Junior Gold Miners ETF (GDXJ) has dropped 65% from their most recent peaks in September of 2012.  They are down substantially more from their all time peaks (65% and 80% respectively).

So why have the miners taken so much more drastic of a plunge than gold itself?  The following is a simplified analysis to help you get started understanding the answer.

Over the last hundred years (or so) we’ve removed all the easier to find gold from the near surface of the earth, and now miners have to do a lot more work, in more remote locations, while using bigger and more powerful equipment to get at harder to access deposits in the earth.  And that work and equipment costs more and more money.

If you add up all the expenses it takes for a company to pull as much gold as they can out of the ground in a year, then divide it by the total weight of that gold they extracted in that year, you get an average cost per weight that it takes for the company mine gold.

If that average price to mine gold is below the current price of gold, the miner obviously loses money when they sell their extracted gold.  If the price they can sell the gold for is greater than their average cost to pull it out of the ground, they obviously make money.

The kicker is that when the price of gold is bigger than than the cost to mine it, every extra amount that the selling price of gold goes up is pure extra profit.

Lets take an example.  Say it costs the mining company $1300/oz to extract the gold and get it ready to sell.  And, say the current price of gold is $1400/oz.  The miner profits $100/oz.

Now say that the cost to mine remains the same at $1300/oz, but the price of gold rises to $1500/oz.   Now the miner profits $200/oz.  So the miner’s profits doubled without them doing anything different.

A company who’s profits double, is (in simple terms) worth twice as much, or will have a 100% increase in value above its price before the profit change.  Whereas in the scenario above, gold only increased in value 7%.  So a 7% increase in gold price, caused a 100% increase in the value of the average company mining it.

From the example above, you should be able to see that relatively small changes in the price of gold can have significant impacts on the profits, and therefore, the trading prices of gold mining companies.

Currently, depending on what source you find and decide to believe, the price of gold is near or below what it costs for for an average mining company to mine it.  So the mining companies are, on average, losing money.

If a company loses money for more than a short period of time, it is likely to go out of business.  A company that is likely going to go out of business is worth very little and nobody wants to buy it.

So with the price of gold going down, and the miners seemingly losing money, it appears as though miner stocks are not worth purchasing, and their trading prices have plummeted to those apparent levels.

Beyond the basic examples above, it is also helpful to know that pricing gets taken to extremes as the sum of people trading in the market make up a virtual mob that is actually quite emotional. When things are going in a certain direction, the mob becomes increasingly focused in that unilateral direction and pays less and less attention to the extremeness of the trend.

It starts with the basic economics of supply and demand. Because just about everyone is doing the same thing, there is usually not enough of whatever the mob is buying (supply) for the amount of people in the mob trying to buy it (demand).  Therefore the price of that thing goes up to balance the limited supply and growing demand.

In the opposite direction, as is happening with the miners, there is too much supply because everyone is selling, creating an oversupply, and the price therefore goes down.

On top of this, add in the effect that people psychologically see that a trend is happening and expect that it will go on forever and you get an extreme overall sentiment in the mob.  People see that everyone is doing something, and expect that because everyone is doing it that same thing it will go on forever.  So it becomes seemingly obvious that one should join the crowd.

We saw this with the housing bubble.  People bought houses because they prices were going up so drastically.  If you didn’t by a house “now”, you’d never be able to own one, because the prices just kept going up and up.  Loans were easy and cheap so people bought as much house as they could afford the payments on, expecting that if anything went wrong, they could just sell the house for a profit as everyone had heard about “those people” that bought a house and sold it a few months later for a 50% profit.  This caused prices to surge.

Of course the reverse also turned out to be true.  When the short term interest rates on those easy loans started adjusting up, people could no longer afford the payments on their homes and suddenly everyone started having to sell their houses.  With virtually everyone selling and nobody buying, the prices plummeted.  Many homeowners, even though they could afford their payments, walked away from their houses, because there was “no way it would ever get its value back”.

Bringing this thought pattern back to gold and the gold miners, we currently have a situation where the price of gold and the miners are going down.  So we have a trend that is snowballing downward.  The mob is becoming unilaterally focused on the downward trend.  People believe that because the price of gold is going down, it is going to continue going down forever, and therefore the miners are never going to be profitable again.  So more and more investors are joining in on selling and “cutting their losses”.  So the miners seem to have virtually no value and their stocks are trading at such a value.

Now… there’s one more effect I need to mention that adds to exponentially increase the already exponential effect of the mob mentality.  And that is the wonderful and exciting ability for market participants in the mob to “short” sell a stock.  This means that a company (stock) can be sold by a person that doesn’t even own it!

What?!!

Yes, that’s right! And you can even short sell gold!  Yes, there are ways to sell gold that you don’t even yet own!

As this article is already getting long, we can get into the details of “short” selling stock and gold in another article, but for now you just need to know that people try to profit on the downtrend of a stock or commodities price.  They “sell” a stock they don’t yet own, and if the price goes down, they can make money.

This (somewhat virtual) selling makes it look like the mob is more focused on selling than it really is. This amplification effect causes the a fore mentioned psychological reasons to sell to be exponentially stronger, as the situation looks like even more of the mob is aligned in one selling direction, causing the trend to look even more negative.  A trend develops and the psychological effect to join in and sell before the value becomes worthless sets in.

So the miners are currently really getting hit hard by all these effects and their prices have plummeted.

So is it time to invest in the mining sector?

I have been buying and I believe it is a great time to start purchasing down in a proprietary pyramid fashion that I’ve developed over my years of successful investing, and I’ll discuss what that means and give deeper reasoning why I believe its time to purchase the mining sector in another article.

Join my mailing list to be notified when it comes out!

UPDATE:  See my article on ETFs creating shares for short positions for yet another reason why miner ETF prices get overly extended on the down (and up) side.