On Tuesday, Sept. 1 (one week ago), your editor qualified his general market bearishness with a bullish gold stock slant. To quote last week’s missive, “On a historical basis, September is far and away the worst month for stocks. But it is also the best month of the year for gold stocks...”
Again, that was on a Tuesday. Starting Wednesday, gold stocks (and gold too, with silver in its wake) went absolutely crazy.
In other notable news, the sharp move upward in gold stocks was confirmed by eye-popping share volume. More than 20 million shares of GDX traded hands on Thursday, a veritable tripling of average daily volume over the past few months.
Heavy volume is notable because it underscores the legitimacy of a move. When volume is light, it’s possible that bored traders are pushing the market around, or that a single aggressive fund is making a one-off move or rebalancing a portfolio.
When volume is thunderously heavy, in contrast, it means there was an exceptional amount of participation – which further increases the odds that the range-expanding move was based on something real.
So why did this crazy breakout happen? Taipan Daily can hazard a guess... or actually, more than a guess. That’s because your humble editor more or less anticipated this little upside bonanza for Macro Trader members, and made the table-pounding case accordingly (with direct instructions to load up on GDX calls).
What follows is a recap of the “tactical view” section of a recent Macro Trader weekly briefing, as delivered to Macro Trader members on Aug. 27, 2009.
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Back to Bullish on Gold Stocks [excerpt from Aug. 27 Weekly Briefing]
The major tactical shift this week [the week of Aug. 24 – 28] is a return of bullishness for gold stocks. Macro Trader has been neutral on gold and gold stocks for a while as they have mostly chopped and slopped around.
But now the stars seem to be aligning for gold stocks, for reasons we will now highlight.
First up: This past weekend, a Fed official stated outright that rates would be kept low through the downturn – and the Fed openly seeks positive inflation. As Reuters reported,
“Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.
"I don't think markets have really digested what that means," St. Louis Fed President James Bullard said in an interview.
“The Fed's strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn't happened, Bullard said.
“The St. Louis Fed official's comments suggest the Fed will be in no hurry to raise rates...”
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The Fed has basically said to the markets, “WE WANT INFLATION” at a time when the health of the consumer is still a grave concern. As far as printing press concerns go, they are gonna let that sucker rip... and the news that Ben “Helicopter” Bernanke is to be reappointed further supports the positive outlook for gold stocks.
Not only do gold stocks have the Fed squarely in their corner, they also have the potential to benefit from a return of economic gloom. Part of the reason gold stocks have languished is because investors were off bidding up more speculative stuff, like junky consumer retail. When the reality of bank distress and consumer malaise starts to sink in, heavily invested money managers could start looking to rotate their cash into safer areas of the market as an alternative to going flat.
A third supporting element for gold stocks is the return of serious debt jitters. The potential for a $9 trillion deficit in 10 years and a $1.5 trillion deficit in 2010 is starting to catch the market’s attention. (Nor is it just the United States who is spending taxpayer money like crazy.)
And finally, gold stocks have been reporting on the strong side of earnings expectations – always a good sign. This confluence of factors merits a significant concentration in gold stocks heading into the end of the year.
Give a Man a Fish...
So there you have it. The primary drivers for an upward push in gold stocks – as Macro Trader laid them out a week or so in advance of lift-off – can be summarized thusly:
A Federal Reserve aggressively committed to inflation...
A return to economic gloom as reality sinks in...
A transition from junky, “speculative” stuff to more solid climes...
Heavily invested money managers looking to rotate assets into “safer” areas of the market...
The return of serious debt jitters...
And, finally, a strong and solidifying trend in gold miner earnings.
Your humble editor doubts Macro Trader members will mind this sharing of the wealth, seeing as how they all received prompt instructions to aggressively purchase GDX calls mere days before launch.
Of course, we don’t get the timing this spectacularly right every single time. (Boy, wouldn’t that be nice!) But it is in fact true that vetting and targeting this type of “big picture” opportunity is exactly what the “Macro” style of trading is all about.
The way to make a fortune in markets – or one tried and true way, at any rate – is to make large, concentrated bets in a particular sector or industry at the right time, and to then add to that position intelligently over time as profits mount. This is not nearly as simple in practice as it sounds (otherwise a lot more investors would be rich).
In addition to identifying these types of “big picture” opportunities, another thing Macro Trader seeks to do is “demystify” the trading process through clear instruction and comprehensive trading tutorials, as delivered to members via regular special reports and flash-based installments of the Macro Trader Chronicles.
Give a man a fish, and he will eat for a day. Teach a man to fish, and he will sit in a boat and drink beer all day. (Wait, what?) In all seriousness, Macro Trader's twofold goal is not just to point out where the big fish are jumping – as we recently did with gold stocks – but also to teach you just how to reel those catches in (and parlay them into a fortune over time).
Okay, that feels like enough shameless plugging for the first day back from a long weekend. Tomorrow we’ll discuss why this explosive move in gold stocks could be not just a flash in the pan, but the beginning of an epic bull run. Stay tuned!
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