I have received several emails recently inquiring about my thoughts on the recent move out of gold ETFs and into Bitcoin, which has increased since the beginning of 2024 along with rhetoric of Bitcoin replacing gold as a safe-haven.
While it is true that investor capital has been flowing out of gold ETFs and into bitcoin, it is also true that all parabolic rises in anything eventually crash.
I learned this the hard way in the wake of the dot-com bust in the early 2000s, which led me to the precious metals sector. What goes up comes down, and what goes down eventually goes up. That is just the law of the market.
Berkshire Hathaway’s cash pile rose to a record $167.7 billion at the end of 2023. But its founder Warren Buffett does not know what to do with it right now, while the world’s most astute investor does know to avoid parabolic markets like the plague. After all, the Sage of Omaha has famously said, “Be fearful when others are greedy, and be greedy when others are fearful.”
This phrase is the antithesis of what the average investor has been doing thus far in 2024, despite the myriad of potential Black Swans lurking in an increasingly dangerous investment climate.
When looking at the chart of SPX, the world's most closely followed index has been going straight up almost without interruption since a major low last October. The last time we saw a similar move was from the pandemic low in March 2020 to the high in January 2022.
Also, since January 2022, central banks have been adding record amounts of physical bullion to diversify from their holdings in the debt-soaked world's reserve currency. While the Peoples Bank of China, formally the largest buyers of U.S. dollars who recently became the largest buyers of bullion, have been swapping U.S. Treasuries for gold.
As for the S&P 500, it most likely has a bit further to go but the market has become extreme overbought, while being historically overvalued with sentiment levels at previous major tops.
All they talk about on CNBC is the A.I.’s, which could very well top out later this month. Back in 1999-2000 all mainstream financial media talked about was the dot-coms.
The Magnificent Seven rally, or Six after the Tesla bubble has already popped, fits with the dot.com rally of 1995–2000 that also topped in March 2000. Nasdaq did not return to its 2000 highs until 15 years later.
Nvidia appears to be today’s Cisco, which later collapsed 90% while I became financially independent after loading up on quality precious metals juniors from 2003 to 2005.
Could this be Nvidia's fate, along with the gold sector rising again in similar fashion, twenty years later? Only time will tell, while the circumstances are eerily similar during a volatile U.S. election year that is shaping up to bring us more financial uncertainty. And gold loves financial uncertainty.
Stock prices and cryptocurrencies are divorced from any reasonable valuation metrics, while the same can be said regarding gold stocks' undervaluation in relation to the price of gold.
What lies behind an overvalued stock is an economic entity incapable of generating enough earnings to justify that stock price. What lies behind a cryptocurrency, such as Bitcoin, is nothing other than a belief that someone else will accept it as payment for goods or services. Or simply, buy it for a higher price. Both rely on arguments devoid of substance and economic actors believing in things they cannot prove through rational argument.
Governments are planning to swap all physical money for 100% digital to end hoarding of cash and to be able to increase tax enforcement as well as to reduce the underground economy - i.e. drugs to prostitution.
With this in mind, could it be that governments are allowing Bitcoin to trade for the sole purpose of misleading people into thinking cryptocurrency is somehow better than cash?
Gold has been and always will be the ultimate safe-haven of choice. Just ask any major central bank, as their purchases continue to set records driven by a desire to mitigate risk associated with the U.S. dollar's dominance in foreign reserves.
The global central bank shift towards gold is seen as a critical hardening of currency in an uncertain global financial landscape, while Bitcoin is a trading vehicle and nothing more.
With Bitcoin up nearly 50% in February and parabolically rising along with Nvidia, the poster-child of A.I now trading at 40x earnings, undervalued and oversold gold stocks have remained off investors radar.
Meanwhile, major miners full-year 2023 financials continue to focus on balance sheet health and share buybacks amid rising costs. With investors continuing to pile into A.I. and Bitcoin, the mining sector continues to underperform despite gold prices remaining elevated well above the key $2000 per ounce level.
Although Newmont Mining (NEM) recently reported solid Q4 2023 profits, the world's largest gold miner was punished by the market for cutting its dividend by 37.5% to US$1.00 per annum due to the $600M increase in the dividend (calibrated at $1.60) from new shares issued in the Newcrest deal. After number two gold miner Barrick (GOLD) announced a $1B share buy-back program earlier in February, Newmont announced it will do the same last week as its share price trades at 5-year lows.
This major share buyback strategy at multi-year lows is similar to the marketing strategy used after Newmont closed its Goldcorp deal in early 2019. This helped to bottom out the stock, which then proceeded to triple by Q1 2022.
As gold ETF outflows continue to move into Bitcoin, gold stock shorts have become emboldened despite the gold price closing well above the important $2000 level for a fourth consecutive month on Thursday. Gold stock shorting also increased into a significant mining sector bottom in January 2016, which was also a very turbulent U.S. election year.
The closely followed HUI:Gold ratio moved below 0.10 this week, and is coming closer to its all-time low at 0.09 reached at the depths of a major 4-year gold stock selloff into January 2016, and the Covid spike low in March 2020.
Note that each time 0.09 was reached, a sharp reversal ensued to begin a gold stock mean reversion which saw many juniors move up 3x-5x within 6-months.
Furthermore, the GDX:GLD ratio is at 2 SD deviations from the mean, while quality junior valuations in relation to the gold price have never been more attractive for such a long period of time than over the past 12-months.
In 2015, extreme undervaluation lasted 6-months before the mean-reversion began in January 2016. The complete lack of interest evidenced by historically low volume in quality junior gold stocks right now is what you see at major accumulative sector bottoms.
Considering the above, a reasonable argument can be made that gold mining stocks, as a group, are deeply depressed, hated, and cheap right now. At least, on an intermediate-term basis they are cheap relative to gold bullion, and general equities.
To become a successful gold stock speculator, one must accumulate positions when quality juniors are on sale with sentiment at rock bottom. After doing so, one must also be able to accept paper losses of 20% to 50% before the upswing of 150% to 300% once the mining sector pendulum inevitably switches from black-bearish to newly bullish.
Most mainstream investors cannot convince themselves to buy gold stocks after a major jump in price, waiting for some sort of retracement that comes too late for them to buy on the cheap. I would rather be a bit too early, than fail to miss the coming advance.
Bull markets always begin with a short-covering rally, joined by sidelined value investors waiting for a momentum change signal to come into an undervalued and forgotten sector.
With precious metals stocks trading at deeply depressed levels, unless the bears can force the gold price below $2000 soon, a mean-reversion snap back rally can begin at any time once a major player begins covering large gold stock short positions to book outsized gains.
In anticipation of the incredible gains the junior sector will begin to experience once the gold price prints a technical breakout above $2100 on a monthly closing basis, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
