Aussie dollar at five-month high… Record high bearishness for silver… Jeff nails another precious metals trade… 'Mining sector looks as bullish as ever'… Another vote for Porter's quiz…
In last month's True Wealth, Steve Sjuggerud reiterated his call to buy the Australian dollar. (He originally made the recommendation in the December 2011 issue.)
Steve noted investors were fleeing to the ultimate "safe haven" asset – U.S. dollars... Despite the incredible value in U.S. stocks and real estate, they preferred to collect 1.6% in 10-year Treasurys.
The crowded dollar trade was creating a "never-before-seen" opportunity in the Australian dollar. He called it the perfect True Wealth investment – cheap, hated, and in an uptrend. Plus, the Australian dollar yields 4%. And it's much safer than the U.S. dollar (as we explain below). Steve wrote...
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... Australia's government is rich – because it actually owns all its natural resource rights. (And Australia is chock-full of valuable natural resources.) Also, as a country, Australia will be net-debt-free by 2020. Contrast that with the U.S., which is ringing up multitrillion-dollar deficits yearly. |
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... money flows where it's treated best... And that's the Aussie dollar. The U.S. dollar pays 0% interest today – while the Aussie dollar pays 4% interest, making Aussie dollars a much better value than U.S. dollars. If money returns to where it's treated best, it will flow to Australia again. I believe that's starting now... |
In the July issue of True Wealth, Steve reiterated his recommendation to buy the CurrencyShares Australian Dollar Trust (NYSE: FXA), a $619 million fund whose holdings are 100% Australian dollars.
In addition to having better fundamentals than the U.S. dollar, the Aussie dollar was crushed during the first half of this year. Then, it bottomed in June. Take a look at this chart...
The Aussie dollar was also "more hated than ever." Investors had larger bets against the currency than at any other time in history – negative sentiment was at an extreme.
Today, the Reserve Bank of Australia, Australia's central bank, announced it would hold interest rates steady at 3.5%, as expected. The central bank also said it believed the Chinese economy was turning around... And it noted positive economic signs in Europe.
Australia's economy depends on resources, so it relies on demand from China more than most countries...
The Aussie dollar jumped as high as $1.06 on the news... its highest point since March.
Steve's recommendation – the CurrencyShares Australian Dollar Trust (FXA), originally recommended in the December 2011 issue and re-recommended in the July 2012 issue – was up slightly near $106. Readers are up 8% since the original recommendation, including a healthy 3.8% yield.
Hopes of new money printing have lifted stocks over the past few weeks... The S&P 500 is up about 4% since anonymous Fed sources whispered to the Wall Street Journal that it might need to "spur activity and hiring" and the European Central Bank President Mario Draghi promised to do "whatever it takes" to save the euro.
But precious metals haven't followed suit. These assets are typically thought to rise when governments are busy printing large volumes of paper currency. Despite the central banks' promises to print and print... gold and silver have hardly budged.
In fact, some investors are reaching extreme levels of bearishness when it comes to precious metals. Brett Eversole, an analyst with our True Wealth Systems trading service, told DailyWealth readers last Friday...
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Silver traders are near all-time short levels today... In fact, we've only seen this extreme level four other times in the last seven years. Every time was a great opportunity to buy silver. |
Brett provided a chart showing exactly what he means...
In the chart, the black line shows the price of silver since 2004. The blue line displays the silver-futures positions held by big speculators, like hedge funds – so-called "non-commercial" traders. These participants are in the market simply to make money by betting on commodity price movements. (Another group – the "commercials" – includes folks who produce or consume the metal. They're tracked separately.)
When the blue line is at the bottom of the range (and crosses below the horizontal line marking the 11,000 threshold)... it means speculators are bearish.
And as Brett's chart shows... buying silver when the sentiment is negative has produced great results. (We've highlighted the gains with green arrows.)
As he wrote...
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If you bought silver the last four times it reached today's extreme, you'd be up an average of 20% over the next three months. All four trades were good for double-digit gains... Importantly, three of these four trades signaled the beginning of a fresh, longer-term uptrend in silver. Those signals led to even larger gains over the following months. |
In the August 1 Digest, we told you our option-trading guru, Jeff Clark, was also bullish on silver. The day before, he sent an urgent update to S&A Short Report readers saying the chart pattern showed silver was ready to break out. From the update...
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Yesterday, silver popped above the down-trending resistance line. That's an upside breakout... and it brings the next resistance level at about $30 per ounce into play. It's not a guaranteed move, though. Nothing in the markets is ever guaranteed. But the odds have shifted in favor of the silver bulls. If silver can add to yesterday's gains – or at least not drop back into the triangle pattern – we should see higher silver prices for the next several weeks. – July 31, 2012 S&A Short Report |
Jeff recommended buying calls on Pan American Silver. The company has more than three times its market capitalization in proven and probable silver reserves. And it trades for around five times earnings.
But Jeff liked the stock's chart pattern (the so-called "technicals") the best... Shares looked poised to jump.
Since the recommendation, silver has increased from $27.64 an ounce to $28.08 – a modest 1.5% increase. But Pan American Silver jumped nearly 7%. The calls Jeff recommended are up 40% in just seven days. But Jeff thinks readers will make triple-digit gains on the trade.
We'll add Pan American Silver to Jeff's long list of precious-metal winners... Jeff has expertly traded the precious metals market for the past two years. Just since May, S&A Short Report readers have made 100% in one week trading GDX, 95% in one week on Seabridge Gold, and 77% in less than a month on Gold Fields.
And his track record was amazing in 2011... He made 142% in seven days on the SPDR Gold Shares Fund, 100% in 22 days on Seabridge Gold, and 103% in 22 days on Gold Fields... Just to name a few. He also closed six other precious-metals trades for gains between 47% and 91%.
This morning, Jeff sent another precious metals update to S&A Short Report subscribers. He's bullish on gold stocks.
We've excerpted a large portion of Jeff's latest update. We think this information is too valuable not to share. As you'll see below, all the conditions for a big gold-stock rally are converging...
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The mining sector looks as bullish as ever. |
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Last week, the precious-metals sector bullish percent index (BPGDM) generated a buy signal. It has continued higher since then. Here's an updated look at that chart... |
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Remember, buy signals occur when the BPGDM dips into oversold territory below 30 and then turns higher. While we managed to book a few profitable trades on the two previous signals in April and May, neither of the buy signals gained much traction. BPGDM wasn't even able to climb out of oversold territory. But for reasons I mentioned last week, I think this current buy signal will be a big winner... and mining stocks should outperform the rest of the market. |
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This week, we have two more indicators that argue for higher gold stock prices. First, there's the following chart that compares the action in gold stocks to the action in gold... |
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For most of the past year, gold stocks have lagged the action in gold. So this ratio chart has been falling. For a few weeks in May, though, gold stocks outperformed the metal. They've been outperforming for the past two weeks as well. |
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The best time to own gold stocks for the intermediate term (several months) is when the stocks are outperforming the metal. In other words, you want to own gold stocks when this chart is rising. That's the case today. |
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We also have this bearish development in the U.S. dollar index... |
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The U.S. dollar just broke down from a bearish rising-wedge pattern (the blue lines). At a minimum, the greenback should fall toward the first red support line at about 81. But there's a pretty good chance the dollar will give up all the gains it's made since March and drop all the way back down to just below 79. |
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A falling dollar is typically bullish for gold. And a rising gold price is typically a good thing for gold mining stocks. |
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So it's time to add even more gold exposure to our portfolio... |
Based on the technicals, Jeff says the options he recommended could return between 186% and 357%. If his history recommending precious-metals trades is any indication, he's likely right.
New 52-week highs (as of 8/6/12): Franco-Nevada (FNV), Anheuser-Busch InBev (BUD), Monsanto (MON), Integrys Energy Group (TEG), Chevron (CVX), Target (TGT), and Philip Morris International (PM).
In today's mailbag, another vote for Porter's quiz... Is it the correct one? Weigh in before Friday... feedback@stansberryresearch.com.
"I'm not going to try to regale you with my meager financial analysis but I think there are three important criteria immersed in that chart. You're looking for a company that will participate early if the price of gas/BOE moves up. But in order for a company to leverage itself to obtain that economy of scale by having a low lifting cost, they will have acquired debt. So in order to survive the market slump, the company will have to be an earner and have a strong cash position to service that debt load.
"Its a toss up who has the lowest lifting rate, ECA or CHK, but clearly CHK has a suffocating debt load. With $13+ billion in debt and cash on hand of $438 million/.68 cents per share on over $20 debt per share, they may not make it without a taker over bid. ECA is in much better shape with a low lifting rate and about half the debt of CHK but still has a low cash position and cash flow. The market is pricing ECA at 2X book and on your chart it is at a premium. I think they are pricing next years NGL increase into the stock early. I expect them to pull it off but they are late to the party compared to Devon Energy-DVN.
"DVN has a slightly higher lifting rate but has a very strong cash position and earnings of $5.54 billion before EBITA against $10.6 billion in debt. That means they can whether the storm and service the debt with $17 cash per share on hand as it stands now. The stock trades at almost book and 2.35 times sales and I think there will be a lot of room here for growth when the prices move up.
"I didn't consider anything above the diagonal line since I didn't think it would be high enough quality.
"I cast my vote for Devon Energy." – Paid-up subscriber Dan
Regards,
Sean Goldsmith
New York, New York
August 7, 2012