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Gold Stocks: Three Keys For The Bulls

  1. The first four months of 2015 have seen many gold stocks stage tremendous rallies.  In many cases, but not all, the gains appear to be “here to stay”.
  2. When some individual gold stocks rise by 100% - 400% in just four months, investors can begin to feel it’s a stock picker’s market.  While the best stocks will always produce bigger returns than the worst ones in any sector, I think what is occurring in the precious metal stocks is something very much “bigger”. 
  3. Simply put, if you put a bag of popcorn in the microwave oven, some kernels initially begin to pop.  As time passes, most of the popcorn pops together, with a thunderous sound!
  4. There are three powerful forces coming together that could soon create “upside thunder” across the entire gold stocks sector.  When I say “soon”, I’m referring to the late 2015 timeframe.
  5. First, there is the coming Chinese gold price fix.  Please click here now . The difference between a China gold fix and a London gold fix is that the Chinese fix is oriented around the love trade, while the London fix is oriented around the fear trade.
  6. Love traders don’t view good jobs reports in China as gold sell signals, like the fear traders do in London and New York.  They view very good jobs reports as gold buy signals.  Why? 
    Well, when Chinese citizens are doing well, gold is bought to celebrate their good fortune, and rightly so!
  7. Very bad jobs reports also result in gold buying by Chinese traders, because a weak economy leads the central bank and the government to engage in financial stimulus and money printing.  That’s the same view held by Western fear traders.
  8. As the “love trade fix” comes into existence later this year, gold should trade with even less volatility than it has in the early part of this year.  The current sideways trend should morph into a mild uptrend later in 2015.
  9. Gold stocks garner serious institutional interest when gold is in a mild but long term uptrend with a strong foundation, and that’s exactly what the Chinese fix brings to the global gold price discovery table.
  10. The second powerful force in price discovery play is the ten per cent gold import duty in India.  Please click here now .  India’s GDP growth rate of about 8% leads the world, and the current account deficit, as a percentage of GDP, is falling fast. 
  11. Top bank economists have predicted that deficit, which is the scapegoat for the gold duties, could soon become a surplus.  The Indian mafia has profited immensely from the duties, but the removal of the 80-20 rule in late 2014 has squeezed their profit margins.  As India becomes a bigger player on the world stage, the duties are becoming an eyesore that must be removed.  HSBC, which is considering relocating to Hong Kong (think gold), predicts the duties will be chopped later this year.  I agree, and in the right circumstances, it could happen this summer.
  12. Removing the duties will get the mafia off the back of India’s top jewellers.  That will allow demand to grow in sync with the economy’s growth, without mafia or government interference.  
  13. A huge surge in the price of India’s mangled jewellery stocks will almost be certainly followed by an equally huge surge in the price of Western mining stocks.
  14. The third big driver for gold stocks is inflation in the West.  I’ve argued vehemently that the main reason Janet Yellen wants to hike interest rates is to increase bank profits.  She wants to hike rates not because the economy is so strong, but to make it strong.
  15. Rate hikes are bullish for gold.  They give the banks tremendous incentive to begin loaning out the huge reserves they built up under the Fed’s QE program.  Those loans will be a game changer for M2V (money velocity).  Money velocity, not money supply, is the key to unleashing the Western inflationary genie from her golden bottle!
  16. In late 2013 I was very sure Janet would unveil a stunning taper of QE to zero in 2014, and she did.  She did it because QE was killing M2V.  Simply put, the M2V collapse had to be stopped before it created a complete deflationary meltdown. 
  17. I’m even more certain about Janet’s plan for rate hikes and the increase in M2V they will create, than I was about her plan to taper QE to zero.  Regardless, like a fine wine, the three main drivers of the gold bull era take time to gel, and create everything investors want to see.  My suggestion to all gold stock enthusiasts is to relax, and enjoy the process.
  18. Love trade events in Chindia and Janet’s apparent plan to drive M2V higher, are creating a very bullish foundation for most gold and silver stocks.
  19. Please click here now .  That’s the daily gold chart.  Gold is postured to move modestly “bull era higher”, from a nice drifting rectangle pattern.  Gold will continue to shock both the fear trade bulls, and the fear trade bears.  That’s because of the love trade’s growing dominance of price discovery, and because the kind of inflation Janet Yellen is looking to develop with rate hikes, is going to create a mindset of “stable but rising” amongst institutional gold stock investors.
  20. Please click here now . That’s the GDX daily chart.  The action of numerous individual gold stocks suggest to me that GDX will easily penetrate the green downtrend line, and grind its way towards $23.  The upwards grind will generate more institutional interest in gold stocks from a technical standpoint, as the three key fundamental price drivers I highlight above, grow exponentially more powerful.
  21. Please click here now:   That’s the silver stocks ETF.  There’s a nice breakout in play, from a symmetrical triangle pattern.  While silver is merely steady here, many silver stocks are moving nicely higher!
  22. There is clearly positive price action in many individual gold and silver stocks now.  Big rallies are occurring, even on days when gold and silver bullion are trading lower.
  23. Of course, these surging stocks are still a minority, but that’s because the fundamental drivers of the “bull era stove”, are only beginning to turn up the heat.
  24. Once M2V turns higher, Indian duties get chopped, and the China gold fix is launched, I expect the Western gold stocks community to be smiling, for a very long time!


Stewart Thomson 
Graceland Updates   



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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