"The way to make money is to buy when blood is running in the streets." --John D. Rockefeller

MONEY COMING OUT OF SAFE TIME DEPOSITS WILL FIND ITS WAY INTO THE SHARES OF COMMODITY PRODUCERS (May 3, 2013): One of the most important and least appreciated developments of the past several months has been the dramatic exodus from bank accounts, money market funds, and other safe time deposits. No doubt this is due to the fact that they generally pay interest of one percent or less, and are therefore yielding less than the inflation rate. Around the world, investors are unhappy with negative real yields. They have therefore been eager buyers of real estate, high-yielding stocks and REITs, and bond funds of all stripes, while shunning commodities and the shares of their producers.

Once money comes out of safe time deposits, it doesn't usually quickly go back in. Investors who have recently taken the emotional plunge to invest in fluctuating assets aren't necessarily pleased with the accompanying volatility, but have concluded that it's better than having their money "just sitting there doing nothing". As long as high-dividend securities like XLU, XLP, VNQ, and IYZ remain in strong uptrends, while the S&P 500 and the Dow Jones Industrial Average continue to repeatedly set new all-time highs, investors are unlikely to consider alternatives. However, the outperformance by high-yielding assets has been diminishing in recent weeks, with many such sectors likely soon initiating downtrends. When this happens, there will be trillions of dollars in these assets owned by investors who will become discontent with losing money and will desire something different.

If cyclical shares continue their rebounds from their lowest levels in nearly four years, then they will likely become increasingly attractive as a potential source of substantial percentage gains. These include many mining, energy, and agricultural companies and related assets such as steel manufacturing. It would also include emerging-market equities, especially in countries with a high percentage of their GDP which is associated with the above industries. Exchange-traded funds of stocks in these countries include Brazil (EWZ), Russia (RSX), South Africa (EZA), Peru (EPU), and Colombia (GXG). Many shares of commodity producers have lost more than half of their value from their respective 2011 peaks, and therefore have tremendous upside which could be achieved without having to set new all-time highs or to exhibit anything resembling bubble behavior.

Eventually, there will be notable fund flows back into safe time deposits. However, that isn't likely to occur until at least 2014. As previously popular high-dividend stocks go progressively out of favor, some investors will become increasingly eager to switch into the shares of undervalued assets which could enjoy additional double-digit gains, rather than putting their money back into the bank and earning one percent or less. Looking at all transitions from multi-year equity bull markets to their subsequent bear markets over the past century, it is common to see a progressive rotation out of defensive high-dividend stocks and into commodity and emerging-market shares while this transition is underway. The most recent example is the second half of 2007 and the first half of 2008.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I just completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, COPX, VGPMX, FCG, GLDX, SIL, ZJG (Toronto), BGEIX, and GDX.

"In the business world, the rear-view mirror is always clearer than the windshield." --Warren Buffett

BUY COMMODITY SHARES LOW, SELL HIGH-YIELDING ASSETS HIGH (April 8, 2013): There exists an all-time record disparity between the shares of high-yielding assets and those of commodity producers. While everyone wants to buy the former and unload or even sell short the latter, it is essential to do the exact opposite.

During the past couple of years, bank accounts, money market funds, and other safe time deposits have been paying one percent annualized interest or less. Therefore, people are deciding in droves that they "need income" and have gone on a quixotic quest for yield. Whether encouraged by their financial advisors or not, this has caused the prices of high-yielding assets such as utilities, REITs, telecommunications companies, household consumer names, and similar assets with above-average yields to double in price or more since July 2009. Because everyone wants to own these income-producing securities, they have become dangerously overvalued, and yet are ironically perceived as being the safest equities. The bubble in these assets is no less dangerous than similarly overpriced peaks for technology shares in early 2000 or U.S. residential real estate in 2006.

While the media have been trumpeting new all-time highs for many benchmark equity indices, they have ignored the important fact that the valuations of several sectors have slumped all the way back to their levels of July 2009. These include the shares of many mining and energy companies, along with industries like steel manufacturing which are closely related to commodity production. Most investors, being bombarded with media coverage which is dominated by Cyprus or how close the Dow Jones Industrial Average is to a new all-time high, aren't even aware that these bargains exist. Insiders know exactly what has been going on: they have been aggressively accumulating the shares of commodity producers with a ratio of seven to one of top executives' buying to selling for many subsectors on the Toronto Venture Exchange.

There are numerous quantitative indicators signaling that this disparity has become irrationally extended. The traders' commitments for copper futures show commercials sporting a net long position which is closely approaching its highest level in a decade. The commitments for the Canadian dollar recently reached their highest level in more than six years. Both copper and the Canadian dollar have a strong positive historic correlation with the future behavior of the shares of commodity producers.

During the first week of April 2013, gold mining shares plummeted all the way back to their lowest prices since the spring of 2009. GDX is a fund of large- and mid-cap gold mining shares which touched 33.71 on April 4; the last time it had been so low was on May 4, 2009. Brokerages have been rushing to downgrade their forecasts for precious metals and their shares, and often for other metals and energy commodities. The respected Daily Sentiment Index showed both gold and silver tied with all-time record lows with only 3% of traders being bullish.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I also bought many funds of general equities near all of their important low points in 2012, which I have been progressively selling since January 28, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, VGPMX, COPX, GLDX, FCG, SIL, BGEIX, GDX, and VFWPX.

"You have to pretend that your life is a financial pleasure even when your autographs are bouncing." --Kinky Friedman

THE SHIFT INTO COMMODITY SHARES HAS BEGUN AND WILL ACCELERATE (March 11, 2013): Most market analysts have been paying too much attention to well-known benchmark averages, such as the S&P 500 and the Dow Jones Industrial Average. Because of this, very few have noticed the unusual disparity between the behavior of high-yielding assets, such as utility shares, REITs, telecommunications giants, and other financial advisor favorites which have soared in recent years, versus commodity producers whose shares have struggled to achieve modest gains and which have generally underperformed most broad-based equity indices.

We have finally begun what could be a historic shift from the incredibly popular high-yielding names into companies which produce steel, generate energy of various kinds, or mine for metals and related raw materials. Gold mining shares in particular had slumped all the way back to their lowest levels since July 13, 2009 last week, and remain dramatically undervalued by all historic measures. There has also been notable buying of gold mining shares and other energy producers, especially among mid- and small-cap companies listed on Canada's TSX Venture Exchange and elsewhere. During the past few weeks, there is increasing evidence of higher lows and more frequent recoveries from early selloffs for the shares of commodity producers, while high-yielding assets have more often retreated from early morning gains.

One key feature is how momentum players, who constitute a substantial percentage of active traders, will change their behavior if this shift becomes more pronounced. Many of these traders and other chart followers will tend to buy anything which has recently gained about 20%. This had benefited many of the top-performing equity sectors, which have now probably achieved most of their total increase and are unlikely to climb an additional 20%. The most oversold sectors, including mining and energy names, are therefore poised to be the next names which could gain 20% from their recent deep bottoms, and could thereby become momentum-player favorites.

Confirming evidence of this shift can be seen in the traders' commitments for the Canadian dollar, which showed commercials establishing their most extreme long position in the loonie since March 2007 before it enjoyed a historic surge to more than 1.10 U.S. dollars. Whenever the Canadian and Australian and New Zealand dollars are climbing, this coincides with a rally for commodities and the shares of their producers--partly because all three of these countries have unusually high ratios of commodities to people. Too many speculators have been betting against these commodity-country currencies, making such an overcrowded trade increasingly likely to be busted. I expect to see all three of the above currencies gaining several cents versus the U.S. dollar during the next several months.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I also bought many funds of general equities near all of their important low points in 2012, which I have been progressively selling since January 28, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, VGPMX, GLDX, FCG, BGEIX, GDX, and VFWPX.

"A hike in the minimum wage is not far from the front burner for the Clinton Administration, but it's not even near the stove for the Republican majority." --Donald H. Straszheim

COMMODITY SHARES WILL PROGRESSIVELY OUTPERFORM GENERAL EQUITIES (February 18, 2013): For most of 2013, the shares of commodity producers had been consistently retreating while the S&P 500 and other well-known general equity indices were rallying to their highest levels since 2007 or even reaching new all-time peaks. During the past few weeks, however, there has been a reversal of fortune in which one commodity-related subsector after another has been starting to outperform. Looking at a daily chart of XME shows this large-cap collection of energy and mining companies to have established an important rally continuation on January 30, 2013. KOL, a fund of coal mining shares, began to resume its uptrend on February 7.

Gold mining shares have been a notable exception, slumping almost all the way back to their lows of May 2012--which were very close to their depressed levels from July 2009. It is rare to find any equity group which has made virtually no net progress in more than 3-1/2 years. Almost everyone has been forecasting additional weakness for gold and silver and their shares, especially in the short run, which makes gold and silver mining shares especially compelling since the financial markets almost never reward any nearly unanimous consensus.

What would be a fundamental reason for the shares of commodity producers to shine brightly during the next half year or so? The prospect of rising inflation is a common theme during any era of stagnation, especially whenever a bull market is maturing. As worldwide stock markets stop routinely surging higher, the few assets which are able to achieve double-digit percentage gains during the next several weeks will stand out in sharp contrast to almost everything else which is mostly moving sideways. The shares of commodity producers will likely rebound strongly merely to compensate for their irrationally oversold conditions; as this occurs, momentum players will notice their top-performing behavior and will eagerly buy them in anticipation of even greater gains. Compared with other equity groups, the shares of commodity producers can become huge winners by climbing halfway from their current levels toward their 2011 peaks.

The last major multi-year equity bull market began in October 2002 and ended at various points in 2007 and 2008. During the final months of 2007 and the first several months of 2008, the shares of commodity producers enjoyed dramatic increases in their share prices. GDX, an exchange-traded fund of large- and mid-cap gold mining shares, surged from its August 16, 2007 bottom of 32.76 to a March 14, 2008 top of 56.87, which along with its 74.5-cent dividend on December 24, 2007 generated a total gain of nearly 76%. Coal mining shares and emerging markets which correlate closely with commodity production were also among the most reliable bull-market performers in late 2007 and early 2008. These shares ended up plummeting during the second half of 2008, but not before first establishing important historic highs.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I also bought many funds of general equities near all of their important low points in 2012. From my largest to my smallest position, I own GDXJ, KOL, XME, REMX, SLX, VGPMX, VFWPX, FCG, GLDX, TNRPX, VINIX, GDX, BGEIX, VEMPX, RERGX, TRIEX, and ACTIX. On January 28 I sold all of my RSX, TAN, and NLR; I sold EWZ on February 1. Since January 28, I have gradually sold 90% of my general equity holdings in VFWPX, VEMPX, VINIX, RERGX, TNRPX, TRIEX, TRSPX, and ACTIX.

"Wealth: any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband." --H. L. Mencken

GOLD MINING SHARES ARE SET TO REPEAT THEIR BEHAVIOR OF 2006-2008 (January 29, 2013): During 2006, gold mining shares and their funds including GDX slumped to a deep bottom, rebounded, and then retested that bottom with a higher low before recovering again. In August 2007, gold mining shares slid again, nearly revisiting their lows of 2006. Most investors became strongly gloomy toward gold mining shares, especially since the broader equity market at that time had been setting new all-time highs every few months. Many investors concluded that gold mining shares were "hopeless". Then, from August 2007 through March 2008, while most equity subsectors moved up and down with little overall change, gold mining shares rallied strongly. Beginning in March 2008, gold mining shares then plummeted, with GDX losing more than 72% of its value from top to bottom before being among the first equity subsectors to complete its bear-market bottom near the open on October 24, 2008.

Why is this relevant for today? It's because the behavior of gold mining shares in 2012 was almost identical to the activity in 2006, with a slump to a deep bottom, followed by a partial recovery, and then another pullback to a slightly higher low. Just as in 2007, the following year--in this case 2013--has experienced a renewed plunge to yet another higher low just above the May and July 2012 nadirs. Many investors in gold mining shares today, as in August 2007, have become frustrated from seeing many other equity subsectors including the Russell 2000 reaching all-time highs, while the shares of precious metals producers have been badly lagging.

What is likely to occur in 2013 and beyond will be a repeat of 2007 and beyond. As most equity subsectors fluctuate back and forth with some volatility, some new all-time highs, but little overall net change during the next several months, gold mining shares will rally strongly as they had done from August 2007 through March 2008. It will be important to participate in this uptrend, as the total increase from bottom to top could be 50%. It will be equally essential not to become too greedy and to hold on too long, because the subsequent downtrend ending perhaps in 2014 or 2015 could be roughly as severe as the 2008 collapse.

The financial markets will always act in whichever manner will harm the greatest number of investors. Now that so many diehard gold bulls and other participants have bailed out of their holdings in gold mining shares, the fewest people would benefit from a powerful move higher. Once everyone gets excited and jumps aboard the bandwagon later in 2013, the greatest number of participants would be punished by a subsequent plunge, so that is what must happen thereafter. In 2014-2015, gold mining shares will likely once again be among the earliest equity subsectors to complete their next bear-market bottoms, perhaps as much as a year or more ahead of well-known general equity indices including the S&P 500 index.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, KOL, VFWPX, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, and GDX. On January 28 I sold all of my RSX, TAN, and NLR, and one fourth of my VFWPX, VEMPX, VINIX, RERGX, TNRPX, TRIEX, TRSPX, and ACTIX.

"The most exciting phrase to hear in science, the one that heralds new discoveries, is not 'eureka' (I found it) but 'that's funny'." --Isaac Asimov

INCREASING DIVERGENCES WILL SOON CONVERGE (January 3, 2013): There has been an important intensification in the degree to which numerous key assets have been diverging in recent weeks. TLT, a fund of U.S. Treasuries averaging 28 years to maturity, has plummeted to its lowest level since May 10, 2012. Usually, when investors are fleeing U.S. government paper, they also sell the U.S. dollar--but the U.S. dollar index today climbed to its highest point since December 7. The S&P 500 today rose to its most elevated mark since October 5, while VIX, a well-respected gauge of fear based upon options volatility for the S&P 500, similarly slumped to its lowest point since October 5.

Gold mining shares remain among the least popular equity subsectors. GDXJ is a fund of 80 junior gold mining companies which has climbed more than 18% including reinvested dividends from its May 16, 2012 bottom, but has lagged nearly all other industry groups since the middle of November. Part of the weakness for gold mining shares is due to the strength in the U.S. dollar, as the two have a well-established inverse correlation because gold is essentially a currency which competes with all fiat currencies. However, most of the weakness in gold mining shares is due to investors selling them out of disappointment over their underperformance. Other cyclical equities, including companies involved with metals mining or energy products, are close to their highest prices since the early spring of 2012 and have climbed by double-digit percentages from their intermediate-term bottoms of November 16, 2012. As the U.S. dollar index eventually resumes its downtrend which began on July 24, 2012, gold mining shares will likely converge with other commodity-related companies. If all commodity-related subsectors regain their peaks from February-March 2012, then gold mining shares will climb more than twice as much as other cyclical assets, potentially gaining 50%.

It is likely that the recent downtrend for gold and its shares will soon transform itself into a rally. In the early stages of this rally, most other equities will probably retrace some of their recent sharp gains. Afterward, nearly all equities will climb together until the S&P 500 achieves a new all-time peak above its October 11, 2007 top of 1576.09. However, the eventual zenith for the S&P 500 won't be a new high if you adjust for inflation. This will be similar to the way in which the 2007 peak for the S&P 500 was above its 2000 top, but was not higher if you adjust for inflation. The Russell 2000 has been outpacing the S&P 500, which is a sure sign that the stock market is far from done with its bull market. When the last long-term bull market ended in October 2007, the Russell 2000 was already forming a bearish pattern of lower highs. That is how we can be sure that the current global stock-market uptrend remains intact.

There has been a lot of talk about the implications of the recent increase for U.S. taxes. The most important feature of this agreement is not that it was done in a bipartisan manner, but that so many critical issues were completely ignored. There has been no discussion of spending cuts, and a lot of pork was included in the legislation. Instead of addressing important issues about whether various kinds of deductions such as the mortgage interest write-off should be a part of the tax code, these considerations were completely swept aside in favor of raising marginal rates especially for investment income. The new 23.8% tax rate for long-term capital gains is the highest since 1996, while the 43.4% short-term capital gains tax rate hasn't been experienced since 1980--when Jimmy Carter was in the White House. Discouraging investment by raising taxes on interest, dividends, and capital gains, while doing nothing to address spending or to reduce wasteful deductions, will prove to be a serious mistake.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, RSX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, TAN, GDX, and NLR.

"The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore." --Vincent van Gogh

GOLD MINING SHARES ARE THE LAST GREAT BARGAIN OF 2012 (December 20, 2012): Since November 16, 2012, nearly all cyclical equities have been rallying strongly, even those which had slumped to their lowest levels since the summer of 2009. There is one important exception: gold mining shares, which today traded at their lowest prices since August 15, 2012 and which have been in downtrends for more than three months. Funds of such shares including GDX, GDXJ, and GLDX have been among the weakest equity subsectors in recent weeks. Of the above, GDXJ is my favorite one: it is a fund of 80 junior gold producers which had bottomed at 17.37 on May 16, 2012 and which traded as low as 19.85 late this morning. Many investors have sold these shares primarily out of disappointment with their performance, which is almost always the best time to buy anything especially whenever it has been in an extended downtrend.

The most important factors impacting the prices of gold mining shares of course include the prices of gold and silver which have been notably depressed. However, another critical element is the U.S. dollar which has a strong inverse correlation with the yellow metal and its shares. The U.S. dollar index earlier this week dropped to its lowest point in three months. Meanwhile, the S&P 500 and other funds of commodity producers have been climbing energetically in recent weeks; these have a long-term positive interrelationship with gold mining shares. Thus, GDXJ is not only undervalued in an absolute sense, but it has fallen far out of line with its peer group. As it inevitably catches up, it will likely end up gaining about twice as much in percentage terms as many of my other favorite cyclical equity funds which are listed below and which I have discussed in detail in previous postings (visible below) during the past several months.

In early 2008, many investors believed foolishly that outperforming emerging markets including Brazil and Russia could continue to rally while U.S. equities retreated. This "decoupling" theory proved to be nonsense; eventually, the above markets plummeted far more than the S&P 500 in order to correct proportionately for their temporary outperformance. In August-September 2011, many others thought that gold mining shares could keep climbing while other equities slumped. This also proved to be spectacularly wrong. Those who believe that there is a logical "reason" for gold mining shares to act differently from other shares of commodity producers aren't properly respecting the historical record. I wouldn't sell shares of coal mining companies and similar assets which could gain 20%-30% during the next several months, but I think that gold mining shares will end up rising by 40%-50% in order to compensate for their recent lagging behavior.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, RSX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, TAN, GDX, and NLR.