Precious Metals Entering, Stocks and Bonds Exiting Bull Market

By: Jeb_Handwerger

Summary
A)Stocks have been in an uptrend for more than five years and the Dow Jones Industrial Average has more than tripled since 2008 lows.
B)I am concerned that these gains are overinflated and pumped higher through these policies of the Central Bankers and stocks are way overvalued and extremely overbought.
C)Because we have not seen a meaningful correction in the Dow in more than seven years, the chance of a significant bear market remains higher than ever.
D)I believe the Dow-Gold ratio is about to turn in favor of precious metals in a big way.
E)The Fed raising rates could be good for precious metals as investors may finally rotate out of overvalued stocks in search for equities backed by precious metals.

Stocks have been in an uptrend for more than five years and the Dow Jones Industrial Average (NYSEARCA:DIA) has more than tripled since 2008 lows. Smart investors are getting nervous as they realize that no market goes straight up forever. The question now is not if but when will the next bear market in equities occurs. It does not take a PhD rocket scientist to observe the record gains in the US stock market for a lengthy period of time without any major corrections. It begs the question is any of this through the use of record low interest rates and quantitative easing since the start of the credit crisis to achieve this?

I am concerned that these gains are overinflated and pumped higher through these policies of the Central Bankers and stocks are way overvalued and extremely overbought, not reflecting the real economy which to me is the worst it has been in a long time. Unemployment still remains high, small business growth is almost non-existent and government spending remains out of control. Interest rates are going negative and the appetite for precious metals is rising.

Because we have not seen a meaningful correction in the Dow in more than seven years, the chance of a significant bear market remains higher than ever. I believe the US stock markets are at dangerous overbought levels and we should now be hedged with precious metals and mining stocks which are generally considered counter cyclical to equities.

I believe the Dow-Gold ratio is about to turn in favor of precious metals in a big way. I am focused on mining companies that are backed with assets rather than pipe dreams like so many tech stocks (NASDAQ:QQQ). While the lemmings were chasing stocks in 2015 I continued to build positions in deeply discounted mining companies with near term production, top notch management teams and in mining friendly jurisdictions. Now in 2016 although stocks remain high, the miners (NYSEARCA:GDX) have outperformed. This may be just the beginning because I expect even greater capital rotation into precious metals and junior miners when stocks begin crashing.

The Fed raising rates could be good for precious metals as investors may finally rotate out of overvalued stocks in search for equities backed by precious metals or gold (NYSEARCA:GLD), silver (NYSEARCA:SLV) exploration which has finally turned the corner. Interestingly, since the Fed started raising rates at the end of 2015 the junior miners (NYSEARCA:GDXJ) have had a huge uptick in price appreciation indicating a lot of capital coming into the junior miners. I expect great gains especially as we may have ended one of the deepest and longest downturns in the mining sector ever.

It appears that gold broke its downtrend and 200 Day Moving Average in early 2016 forming a bullish golden crossover in February. Then in June gold broke 2 year highs and has since consolidated to the breakout point at $1300. It's quite normal after making such bullish breakouts to hold at that level before the next leg higher. This summer gold has taken a breather pulling back to uptrend support. It may still base until the Fed decision next week providing what may be looked back upon as a secondary opportunity for those who missed the Brexit breakout in June.

Gold and silver both have rising 50 and 200 day moving averages which are bullish showing an upward trend. Notice rallies have been on increasing volume showing possible accumulation. It broke out into new 2 year highs in June following Brexit and has since consolidated returning to the breakout point. This past week it made a weekly bullish engulfing pattern which may signal a short term reversal to the breakout technical target of $23.50. The move may accelerate higher after the Fed announcement next week.

Now during this pullback in the junior miners follow companies that may be on the verge of a re-rating either through discovery or development. They could be takeout targets as they move closer to production for a mid tier producer who is falling short on gold reserves. Remember production is expected to drop in the next 18-30 months. New gold resources will be critical to the survival of these producers.

Right now, I have been mainly focused on near term producers especially in North America on the verge of a Feasibility, Construction or Mine Finance, but still have a few explorers which may be finally hitting some major discoveries in North America. These drill results are some of the events that could turn around a company and create value. Near term gold producers in North America with moderate costs are hard to find as there have been at least three junior Canadian companies either at production or near production which were taken out by larger entities. I like near term producers with also the ability to grow and discover new high grade gold zones.

Make sure to check out sponsorship and look to see if insiders control at least 25% of the stock. Ideally it's nice to see some institutions or NYSE listed producers as insiders. Make sure to ask if the company is drilling and if there are drill cores being assayed. Take a look at some of the most prestigious gold funds and look at what juniors management is buying. If that is the case that means there can be a near term event to rerate the company. I also like juniors who acquired Mill complexes which could be reopened during the bear market. The majors such as Barrick (NYSE:ABX) had to sell some of their top assets at the bottom of the market when they needed cash. Some of these assets may have permits, bonds and possibly tax loss benefits if they can be restarted. Look for management with prior track records of success both with junior companies and the major producers. Have they sold companies in the past for premiums? Have they directed restarts, mining operations and drilling programs before?

In conclusion, most investors know little about investing in juniors. Going through a record long and deep bear market has taught me plenty. Now in what could be a new bull market stick to some of the top jockeys, geologists, mine engineers and financiers. Look for pullbacks to add to high quality positions in the junior mining sector which has finally begun a new bull market.

By Jeb Handwerger

Disclosure: Author owns no stocks mentioned.

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