January 2014 Rally as the start of a Bull Market
Almost every analyst in the gold community has been declaring the December 2013 lows the bottom for mining shares, and the January 2014 rally as the start of a bull market. We see this view as wishful thinking and premature. Gold bulls make the following supporting arguments:
1. Gold stocks have rallied 15+% from the December lows (we say: this is undeniable fact, but we see this 15+% up move more as a bear market rally and bear market rallies can fall apart quickly. Moreover, even if we are wrong, odds of a runaway bull market at this time are low, and we will find a more favorable risk/reward setup in which to make the change to a more bullish posture).
2. The big money is made being contrarian and sentiment is poor (we say: a) yes, bull markets are born in despair, but poor sentiment is merely a necessary condition, not a sufficient one, b) how bad can sentiment be when almost every analyst in the gold community is bullish and c) our own market based measurements show sentiment is actually a bit frothy.
3. With S&P500 upward momentum now broken, and a bear market in stocks commencing, the precious metals complex will enjoy a bull phase (we say: we are not enamored with common stocks either, but that is a big assumption. More importantly, however, is to recognize the precious metals complex does not always move inverse to the stock market. Sometimes it moves inverse (as it's doing right now), and sometimes it moves with the broad market. Sometimes gold stocks and gold do not even move together. We see the precious metals complex as uncorrelated to other asset classes, and thus evaluate on its own)
4. With gold stocks down 65-80% from the 2011 highs (depending on your index, opportunity to buy cheap (we say: cheap can get cheaper, bottom fishing requires a more refined process)
5. After a bad 2012 and a horrific 2013, gold stocks are due for a good year (we say: yes. Eventually. But things may get worse before they get better)
