Gold mining shares tend to be among the earliest assets to bottom in advance of a bull market, and to complete a top prior to a bear market. On May 16, 2012, which was just over two weeks ago, gold mining shares completed important bottoming patterns and have since been forming a strongly bullish sequence of higher lows. Unlike most equity subsectors, the shares of many commodity producers have been trading at or just above their lowest levels since the summer of 2009, and had been among the most notable losers in percentage terms during the past few months. Therefore, especially given their tendency to move in advance of nearly all other risk assets, they are telegraphing that stock markets around the world are setting themselves up for a powerful rebound.
The traders' commitments are barely known by most investors, but are currently sending unambiguous warnings of upcoming market behavior which is exactly the opposite of what you hear every day. Commercials are futures traders who are most closely connected with any given asset because of their professional responsibilities. With gold, for example, a commercial is a jeweler, fabricator, or producer. Commercials have recently gone heavily short U.S. Treasuries, while simultaneously reducing their short positions in gold and silver to multi-year lows and going long copper at their most extreme extent in several years. Most importantly, commercials have established new all-time record long positions in the euro and in the Swiss franc.
If there were ever an asset which is detested around the world, it would have to be the euro. Taxicab drivers in Mongolia are certain that the euro is set to collapse. Just when everyone is convinced that the shared European currency must move lower because of Greece or some other European issues, it is ready to enjoy an amazing surge higher by at least 10%, and perhaps reaching 1.40 U.S. dollars during the next several months. The Swiss franc is an even safer choice, since the Swiss government can choose to remove their euro peg at any time if they believe that the euro is headed for real trouble.
Everyone today wants to own the U.S. dollar and especially U.S. Treasuries. Several major brokerages recently raised their price targets for Treasuries while lowering their projected yields. Everyone who wanted to buy Treasuries has now done so, leaving this overpriced, overbought, and overloved asset ripe for a dramatic downward move. Investors should be selling U.S. Treasuries and other safe-haven assets, while aggressively accumulating the shares of commodity producers which could gain 30% to 50% by the end of the summer.
Disclosure: I am currently long GDXJ, KOL, XME, VFWPX, VGPMX, RERGX, RSX, EWZ, SLX, and GDX, in that order, with by far my greatest concentration in GDXJ. I recently sold all of my HDGE for an average profit of 16.1%.
