Jordan Roy-Byrne, CMT
Jordan@TheDailygold.com

Last week we discussed the concept of relative strength. Again, relative strength is the measuring of one market against another. There are perhaps 1000 mining companies and maybe 5% of them are worthy of your research and investment. Fundamental analysis should lead you to the best companies while technical analysis (relative strength analysis in this case) can generate a precise list of top prospects. Today we are focusing on relative strength in a larger context and will then apply it to the gold stocks.

One of the best times to use relative strength is during or after a strong market selloff or panic. After 2008, I was most bullish on Gold and Agriculture for the simple fact that both didn’t have the long-term technical damage that occurred in most markets. Most markets plunged below 2005 lows. Markets that escaped that fate and held up reasonably well would make new highs first and well ahead of global stock indices (which have yet to make new highs).

In the chart below we show various markets (Gold, AGs, T-Bonds, Chile, S&P). Gold bottomed in late 2008 above its summer low in 2007. Agriculture prices bottomed slightly ahead of their bottom in spring 2007. Bonds maintained their uptrend in 2008 and beyond. Chile has been one of the strongest markets (held above 2006 lows) and surged to new highs while the S&P is nowhere close to a new high. The other four markets had the best relative strength in 2008 and thus performed the best from 2009-2010.

So how does that history apply to today? We just had a mini-panic or a mini-2008. The stock market likely put in an intermediate bottom. This doesn’t mean it will breakout but it means the lows are safe for a while. Now its time to spot the relative strength leader which will be a leader in the immediate future. In the chart below we compare gold stocks to commodity stocks, emerging markets and the S&P 500.

While emerging markets and commodity shares are in structural bull markets, both will soon meet multi-year resistance. Also, both broke their previous 2011 lows. Essentially, both have short-term technical damage to repair and long-term resistance to overcome. Meanwhile, the gold stocks have been in a consolidation for 12 months and held above their summer low during the mini-panic. We see a combination of relative strength and very limited overhead resistance.

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A weekly close above $67 in GDX should usher in the beginning of a true bull market move in the gold stocks. After viewing these charts one can visualize the gold stocks galloping higher in 2012 while their commodity and emerging market counterparts encounter multi-year resistance. The reasons do go beyond technical. We’ve written about the low valuations, lack of ownership and the bull market moving towards its recognition point. The recent double bottom in GDX should make one feel more comfortable. Their relative strength in 2011 indicates leadership and potential for a major move higher in 2012.

by Tyler Durden

There was a time, half a decade ago, when contrary to what they declared in polite (and not so polite) public, every young aspiring hedge fund manager on Wall Street secretly hoped to appear in Trader Monthly’s Top 30 under 30. Since then Trader magazine, the symbol of all the excesses of the “zeroes” appropriately went bankrupt, then reappeared once again, though completely stripped of its cachet as the media of choice for Generation XS$. But for the sake of memory lane, and in remembrance of days when it appeared that the flow of money would never cease, and children in their late 20s were disappointed if they did not get an 8 digit bonus, below we present The Decade Wall Street Went Insane – the Zeroes, in which “we get a ringside seat alongside Trader Magazine to some of the biggest parties of the decade, including a Wall Street “Charity” boxing night held at Manhattan’s lavish Hammerstein Ballroom. This 5-part web series pits the fantasy of unlimited growth against the wheeling-and-dealing of Wall Street’s glitzy surface. We urge any #OWS fanatics with heart conditions to skip this if at all possible.

From the introduction:

At the turn of the millennium, Randall Lane, former head of Forbes’ Washington bureau, knew what this decade would be about. He started Trader Monthly — a slick glossy magazine that was to become the GQ of Wall Street. It portrayed a glamorous world of yachts and private jets, fine wines and lavish mansions. Meanwhile, trading floors were functioning like giant casinos, and the banking community was gambling with the average Joe’s savings.

 

Lane and his company got caught up in the madness. They had front row seats to the vast wealth of Wall Street — and they dreamed that some crumbs would fall their way.

 

A morality tale uniquely fitted for our times, “The Zeroes” cuts to the heart of what drove America to believe in dreams too good to be true.

Below we present the first 3 parts of the series.

Part 1

Part 2

Part 3

h/t Stock_Bitch

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Source: JT Long of The Gold Report   (10/26/11)

The end of 2011 is a golden opportunity to participate in an anticipated upside for mining equities, says Tocqueville Asset Management Senior Managing Director John Hathaway. We caught up to him at the Casey Research/Sprott Inc. Summit “When Money Dies” for this exclusive interview with The Gold Report. Hathaway predicted that once investors realize higher gold prices will stick, they will take a chance on the big upside waiting in the junior and senior space.

The Gold Report: In your recent article “A Golden Mulligan,” you called gold mining equities “a rational way to participate in what appears to be the end game for paper currencies on an attractive risk-adjusted basis.” After trailing the metals prices substantially since 2010, why do you think they are ready for a turnaround?

John Hathaway: Gold mining stocks have underperformed for a number of reasons. Gold ETFs created competition for gold stocks even as it made owning physical metal more attractive. Also, as gold flirted with $1,900 an ounce (oz), investors may not have priced that into the stocks as they weren’t convinced it would stick. Now that we have had a correction, investor analysis will show that the average price over time, as opposed to variable spot prices, is steadily rising—proof that industry profitability should also be on the rise. The best is yet to come for gold mining earnings as confidence in government monetary policy continues to erode.

TGR: We have seen a lot of volatility lately. What price do you predict for gold going into 2012?

JH: From years of experience, I have learned never to combine a price prediction with a specific point in time. The gold price will continue to rise until the fiscal and monetary policies of Western democracies undergo severe alteration in the direction of sanity.

TGR: What role do operating costs play in equity price challenges?

JH: Some companies have cited increased operating costs as a limiting factor in stock price growth, but the facts don’t support that argument. Energy prices, one of the most variable costs in gold production, are almost half of what they were four years ago. The same is largely true in everything from steel and chemicals to labor. Margins have steadily increased since 2008 and, unless declines in head grades or increased resource nationalism take their toll on future mine profitability, that margin expansion trend should continue. One of the biggest factors weighing on mining stock prices is probably investor risk tolerance. It goes without saying that mining stocks are riskier than physical metals and a lot of investors are looking for a safe haven right now.

TGR: At the end of September, the Tocqueville Gold Fund reported a three-month average return of -8.49% compared to -13.87% for the S&P 500 and a three-year average annual return of 32.24% compared to 1.23% for the S&P 500. Your top 10 holdings include (5.43% of assets) Goldcorp Inc. (G:TSX; GG:NYSE), (3.75% of assets) Randgold Resources Ltd. (GOLD:NASDAQ), (3.33% of assets) Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), (3.07% of assets) Royal Gold Inc. (RGL:TSX; RGLD:NASDAQ) and (2.98% of assets) IAMGOLD Corp. (IMG:TSX; IAG:NYSE). What will be the catalyst that gets investors looking at mining stocks again?

JH: I think the release of third-quarter earnings will amaze people. I am very bullish on the future of the price of gold and gold equities. Equities represent extraordinary opportunities because they offer organic growth in resource production and bumps from merger activities that aren’t possible holding inert metal.

Ratio of Gold Stocks to Metal Price Near All-Time Low

XAU & HUI as ratios of spot gold ($/oz)

Chart: Toqueville

TGR: How will companies that are not making profits at $1,900/oz be profitable going forward?

JH: If a company can’t make money at $1,300/oz gold, it shouldn’t be public. Companies have to find a way to make a profit. An example is Osisko Mining Corp. (OSK:TSX) (which is one of the top 10 in the Tocqueville Gold Fund at 4.49% of assets). It had a $200 million market cap five years ago when we invested; the market cap is now $5 billion. It has a large, low-grade deposit and the price could rise further as they ramp up production.

TGR: You mentioned seniors as a bright spot in the investing scene. Please explain the rationale for your portfolio diversification between bullion, small-, mid- and large-cap companies.

JH: I have about 7% invested in bullion because it is an anchor of value. Physical gold helps protect against currency depreciation. I have about 10–20% in small-cap companies, 20–30% in mid-caps and 30–40% in large caps. The percentages can vary as the valuations change even though we don’t trade very often. Turnover is usually less than 10% in a year.

Big caps benefit most from high gold prices because they are actually producing and selling the metal today. It therefore offers compelling valuations, attractive current returns and virtually a free ride on future gains. We own 11 companies accounting for about 40% of global gold production.

TGR: Are higher dividend payouts going to be the rule going forward?

JH: I hope so. Newmont Mining Corp. (NEM:NYSE) (another Tocqueville Gold Fund top 10 holding at 4.74% of assets) took the lead and linked its dividend to the gold price in April when gold was trading at $1,458/oz. For each $100 increase or decrease in the gold price, the dividend adjusts $0.20 a share. We expect similar announcements to follow from other producers.

TGR: For those who choose to invest in physical gold, where is the best place to keep it? In the U.S., out of the U.S.?

JH: Any good vaulting service will work. Where it is physically located doesn’t matter as long as it is secure, accessible and not in a bank.

TGR: Thank you for sharing your insights.
[Listen to John's eye-opening speech at the Casey/Sprott Summit When Money Dies – plus the presentations of nearly 30 other renowned financial experts – from the comfort of your home. More than 20 hours of audio recordings on CD or MP3, including the experts’ top stock picks. Learn more.]

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Courtesy of Mish 

Courtesy of Mish

Inquiring minds are interested in the terms of the European Stability Mechanism (ESM) accord scheduled to replace the EFSF. The following video highlights the key sections of the proposed treaty.

Link if video does not play: Treaty of debt (ESM) – stop it now!

There are comments on The Telegraph article A German view of the bailout deal which is where I found the video.

Key Details of ESM Accord

• Article 8 says “Authorized Capital stock 700 billion Euros”
• Article 9 says “ESM members irrevocably and unconditionally undertake to pay capital calls on them within 7 days”
• Article 10 allows the ESM board of governors to “change the authorized capital and amend article 8 accordingly”
• Article 27 says ESM shall enjoy “immunity from every form of judicial process”. Thus the ESM can sue member countries but no one can challenge it. No governments, parliament or any other body or laws apply to the ESM or its organization.
• Article 30 says “Governors, alternate governors, directors, alternate directors, the managing director and staff shall be immune from legal process with respect to acts performed by them (…) and shall enjoy inviolability in respect of their official papers and documents”

There are no independent reviewers and no existing laws apply. Thus Europe’s national budgets will be in the hands of one single, unelected body that is accountable to no one and immune from all legal actions.

Is this the future of the EU or will the German supreme court and other governments put an end to it?

Mike “Mish” Shedlock