Miners coiling for a big move

Volatility has collapsed in the miners. This kind of volatility coil usually precedes a big move.

Contrary to what most investors believe the initial move out of a coil tends to be a "false" move about 70% of the time. After the initial break the larger and more sustained move is usually in the other direction.

Precious metal investors should be hoping for a break lower. That would give investors not only a better entry but put the odds in their favor that price will soon be moving up.

Of course one could always buy into a flashy bear market rally if they believe CNBC and think the bear is finished.

Personally I would rather buy an oversold correction in a bull market than an overbought bear market rally.

The negatives are starting to build against this market rally continuing much further. I'm going to go over those negatives in tonight's report.

Moe Ronn & John I. Que

Today I'm going to print an excerpt from last nights report. I think it's appropriate right now.

"At this point I think it’s probably time to talk about taxes. As far as I can remember I’ve never really discussed the topic of taxes but that doesn’t mean it’s not an important one. I think you will see by the time I’m finished that it is a very important one.

Let’s jump in by creating two fictional characters Moe Ronn and John I. Que. They both believe the Dow:gold ratio is heading down and want to invest in the precious metals bull market. However, they go about it in very different ways.

Moe wants to trade mining stocks over the next several years. He has a stake of $500,000. He jumps in and out of trades making up to 1000 trades per year. Sounds impossible doesn’t it? But I guarantee there are many traders that do that or even 5 times that amount in a year. Right off the bat you are throwing away, conservatively, $7,000 to $35,000 to your broker. (There’s nothing I hate more than making my broker rich)

Now let’s say Moe manages to turn a profit with all of this trading of say $50,000 (hey it is a bull market and hopefully even Moe can make money in raging bull market). Now lets say Moe has other income that put him in the 33% tax bracket. Moe’s $50,000 is going to turn into roughly $33,000. So Moe turned his $500,000 into $527,000 after taxes and broker fees the first year by trading like a banshee.

Now while Moe was frantically jumping in and out of the market John bought a basket of undervalued miners, stuck them in a separate account and forgot about them. John paid his broker conservatively $70- $100. At the end of the year John’s account is up 100% (impossible you say. Take a look at mining stocks and juniors for the last several months)

At the end of the year John doesn’t pay any taxes on his gains because he hasn’t taken them yet. So John turned $500,000 into $1,000,000 (minus the $70-$100 brokerage fees. John’s broker doesn’t like him very much, by the way).

The next year Moe continues his frantic trading regimen again managing to eke out a 10% gain. After taxes and broker fees his account has grown to roughly $555,000.

John is still holding but this time he’s up conservatively 200% (the gold bull is really kicking into high gear now) So his $1,000,000 is now $3,000,000. No broker fees this year.

Keep in mind that while Moe is sitting in front of his computer every day with a bottle of Pepto Bismol, John is out playing golf or rock climbing if he’s not quite as intelligent about his hobbies as he is about his investing.

So now let’s say we come to the third year of the bull market. All the signs are there that the top is close. The Dow:gold ratio is approaching 1:1. Everyone and their cousins are buying gold coins. Moe has had a banner year and is up 30% (we are going to assume that Moe can spot the top and get out before losing all his profits) Roughly speaking Moe came away from the greastest bull market of our time with $660,000 after taxes and fees.

John on the other hand also had a banner year, his account was up another 200%. He now has $9,000,000. He incurs another $70-$100 in brokerage fees to sell his positions and a 15% tax on his capital gains which leaves him with $7,725,000.

Now let’s assume that Moe could some how match John’s buy and hold strategy by trading (he really can’t but I just want to make a point). The first year after taxes and broker fees Moe is left with $810,000. The second year after taxes and broker fees Moe’s portfolio has grown to $1,880,000. Finally after another banner year Moe is rewarded for all his time spent in front of his computer with a grand total of $4,340,000.

I’ve rounded the numbers and calculated taxes solely off the highest tax bracket so the actually numbers will be slightly higher but you get the picture. Trading as opposed to investing in this bull market is going to drastically reduce what one is going to make out of what will probably be the greatest opportunity any of us will ever see in our lifetime.

The loophole is there for anyone who wants to keep most of their profits. Or you can give away a big chunk of your earnings to the government. The same government, by the way, that destroyed our economy and will probably end up destroying our currency.

I got to say I’m leaning more towards letting the government fend for itself and keeping as much as possible."

Platinum still acting strong

It seems like everywhere I look I see predictions for gold to head back down to $600-$700.

Now I'll be the first one to admit that anything is possible but I must say all this negativity just tickles me pink. This is exactly what we need to see for gold to continue higher.

The first chart is the 50 and 200 EMA for gold. What do you think, is this chart going up or down?

Take note that just like the first phase of the gold bull the 50 is again back above the 200.

Next we have a chart of Platinum. It led the precious metals bull during the first phase and it has now rallied back above the Feb. highs. If Platinum is leading again, then I would expect the rest of the metals complex to follow shortly.

Gold is still in the process of putting in the B wave correction. I'm expecting that to bottom with the soon to be due weekly cycle low.

The junior sector is now coming alive with many juniors exhibiting breakout rally days on huge volume similar to many of the energy stocks in 02 & 03.

Gold has broken out above the 1980 highs of $850. That is a 28 year consolidation by the way. WD Gann pointed out that often the size of the consolidation will determine the magnitude of the rally once an asset or commodity breaks out of that consolidation.

Look at what happened to oil once it finally broke thru the $40 ceiling.

So like I said, anything can happen, but at the moment I don't see anything to suggest that the current pullback isn't just a normal B wave correction in an ongoing monster bull market.

Tick, tick, ticking away

The 200 DMA of the daily cumulative tick is again at overbought levels that during this bear market have led to at least short term declines.

I went over several intermediate term implications in this weekends report also. The bottom line is we need to see some kind of corrective move soon if this rally is going to continue.

Beware the technicals

I continue to see investors try to trade precious metals based purely on technicals. I still believe this just isn't possible as these markets are too thin, especially silver.

I think gold is now entering the final stages of the B wave decline. This is the period when the gold bull is going to try to shake off all the weak riders before the next leg up.

Take a look at the first chart of silver. Technically it looks like a complete breakdown. The technicals would obviously keep any sane investor from buying here right? This thing was obviously going much much lower.

However, anyone watching the COT reports at that time would have noticed that the commercial traders were the most bullish they had been in four years. Smart money knows you can't trade silver off of technicals. Smart money buys value.

At that time, the smart money was snapping up silver as fast as the retail crowd wanted to unload it to them.

Now look at the second chart. Who came out the winner here the technical traders or the value investors?

In my last post I pointed out just how cheap mining stocks are right now. Well silver is every bit as cheap if not cheaper than mining stocks. (what does that say about silver miners?)

I think silver is poised for an explosive move higher once gold's B wave ends and the C wave starts.

However don't get fooled by technicals. I wouldn't put it past silver to do something drastic to get all the the weak hands to cough up their shares to the smart money just like it did in 07.

Margin of safety

Historically a Gold:XAU ratio of 5 or higher has been a sign that mining stocks are too cheap.

I often field questions from investors worried that the B wave decline isn't over yet. My response is "so what". Gold could drop to $800 and the mining stocks would still be too cheap. As a matter of fact the XAU would have to rise to $160 just to get back to historically cheap valuations if gold were to drop to $800.

The bottom line is that investors now have a huge margin of safety in mining stocks even if gold's B wave has further to go. They should continue higher even if gold drops a bit more.

In case no one has noticed that is exactly what they have been doing for the last month.

Bull market anyone?

Gold is the only asset that is still in a bull market. Notice the 50 day moving average is rising and has crossed back above a rising 200 DMA.

The 50 DMA is rising and has now crossed back above the 200 on silver also. It will still require a bit more work but I expect the 200 DMA to turn back up on silver to.

Both the XAU and HUI 50 DMA are rising sharply and on the verge of crossing back above the 200 DMA.

An investor can either fight with the bear and scratch out a living trying to short stocks or they can get on board the only bull market left.

I expect it to be one of the most powerful bull markets that any of us will ever see by the way.