Tag Archives: Capitulation

Capitulation in Gold (Continued….)

Continuing from where we left off in the capitulation series, a case study, http://csinvesting.org/?p=11351

Gold-COT (1)

Silver-COT (1)


The above charts show the massive swing in sentiment as speculators moved from long to short expecting gold to fall INEVITABLY to $1,000 or so the pundits say:

What's uglier than gold

Demand for gold bullion remains stronger than the supply offered through the futures market–the co-basis is rising:


Meanwhile, could divergences be developing in miners vs. gold? Note prior bottoms in 1986 (bear market rally) and 2000, the beginning of a major rally.

bear divergence



Mining stocks shunned


This post is not a recommendation but compiling the case study of capitulation in gold and associated miners. Remember Why Gold Mining is a Tough Business_Pollitt (a MUST read!) and Why-is-gold-mining-such-a-crappy-business Summary and…

ray-dalio (2)


http://thefelderreport.com/2015/07/21/its-time-to-get-greedy-in-the-gold-market/  John Chew: Don’t ever just concentrate in one gold stock since the company and operational risks can be high.  SDGJ by Sprott offers diversification and sensible companies. Sprott Junior ETF Mining. Why even consider investing in such a bad industry? Because of price and the counter-cyclical nature of these stocks. You buy when the industry is losing money and hated and sell when the pundits recommend it and the trend is forever extrapolated higher.  There is no law that miners won’t go lower; miners are extremely volatile moving up and down 10% in one day.

What Happens When You Buy Assets Down 80%? farber

We’ve done a lot of articles on value and drawdowns on the blog before (search the archives).  I was curious what happens when you bought the US equity sectors back when they were really hammered (French Fama to 1920s).

Average 3 year nominal returns when buying a sector down since 1920s:

60% = 57%

70% = 87%

80% = 172%

90% = 240%  The average of 80% to 90% down is a triple.


Average 3 year nominal returns when buying an industry down since 1920s:

60% = 71%

70% = 96%

80% = 136%

90% = 115%


Average 3 year nominal returns when buying a country down since 1970s:

60% = 107%

70% = 116%

80% = 118%

90% = 156%

Capitulation IV; Analysts Like to Herd; Agony and Euphoria

Miner Sentiment

Bloomberg hating on gold. “Looks like a short”, “Nothing uglier”, “Not even an asset”…AFTER miners drop 90%.

What's uglier than gold

“The Direxion Daily Gold Miners Bear 3X Shares, or DUST, is up a whopping 99 percent in July.” via @

Grant on gold July 22 2015 Zweig   The same analyst who suggested buying miners within 1% of the all-time top in Sept. 17, 2011 now says gold is a “doorstop” in July 17, 2015.  NOW, he tells me!  Journalists chase price and sentiment.


Goldman sees gold to $1,000 (July 2015) and Goldman sees gold at 1840 by end 2012  Note a pattern?


Media piles on late in trend:

Perhaps today the absurdity has reached the apex of its crescendo with this utterly ridiculous “letter to gold bug” published by Marketwatch:   It’s time to surrender and let the yellow metal fall to its bear market low

Better analysis: Gold Warns Again and Heavy wears the crown

yen and gold

Amazon Beats


amzn 1 yr

How analysts react after Amazon reports–follow the herd recommendations regardless of price. Analysis?


The headlines reported that AMZN’s sales were up 20% year over year for Q2 and that net income had swung from a loss of $123mm to a profit of $92 million yr/yr for Q2.  While those numbers are what they are, sales growth from Q1 to Q2 was a mere 2.9% – pretty much in-line with the rate of inflation.

The media propagandists attributed AMZN’s highly “surprising” quarter to big gains in its AWS business segment, which is its cloud-computing business.  However, if we drill down into the numbers made available in its 8-K, we find that the AWS segment represents just 7.7% of AMZN’s revenue stream vs. 6.6% of revenues in Q1.   Sure seems like a lot of manic hype over well less than 10% of AMZN’s business model.

As it turns out, AMZN’s AWS business model, like everything else it does, is seeded in low quality sources of revenue that will ultimately prove to be unsustainable.  Why?  See this comment sent to me by someone who read my Amazon research report and who used to specialize in high tech accounting for Silicon Valley start-ups:

I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO…Amazon Web Services is growing by leaps and bounds and a significant amount of those $’s are coming from venture backed start-ups. Almost the entire Silicon Valley and other startups outside the Valley use AWS. Venture backed startups have exploded just as AWS revenues have exploded…That segment of their business will get walloped which right now seems to be a main source of their operating income.  

Read more: Dot con

Notice the difference between mining stocks and Amazon–Deja-Vu of the late 1999’s/2000.  Remember the music Sugar Ray

amzn fomo


Capitulation Part II


Gold-Miners-Compound-Return (1)

An Epic Bear Market in miners

Mining securities are not the thing for widows and orphans or country clergymen, or unworldly people of any kind to own. But for a businessman, who must take risks in order to make money; who will buy nothing without careful, thorough investigation; and who will not risk more than he is able to lose, there is no other investment in the market today as tempting as mining stock.” – Charles H. Dow (1879)

dust gdxj

There is NO REASON to own gold! (NOW, they tell us!)

No hope for gold holders

Global dollar stress might be causes gold price crashes.

The “price action” for gold is bad!  The price of gold went down.

dollar mg

Why not be happy and say that the dollar buys you more gold because of this:


The holders of physical bullion are not selling, but futures traders are–see the red line rising which is the co-basis.  If I hold gold in stock, but sell futures to lock in the price, then co-basis represents the difference between the bid price for spot and the offer price for futures.   Leveraged futures traders are selling futures but bullion holders are not de-stocking (selling).  The selling in gold futures has brought epic extremes in prices of miners relative to gold/silver. EPIC quantitative easing may be a factor.

Video: Sellers in action:SELL ‘EM!

BAML commodities



Does Gold represent good “value?”

Gold to S&P 500

Ratio gold to sp

Only you can answer that question. Don’t confuse gold (money) as an investment. If you couldn’t find a margin of safety in the current stock market, you might own gold because you believe gold relative to dollars is safer, holds purchasing power better, more stable, etc.

See Value Investors Hate Gold

For those technical wizards out there, note that silver did not “confirm” the price decline in gold yesterday.


Just remember (thanks www.monetray-metals.com)


Buffett Investment Lesson; Gold Capitulation Part 2


RISK: My grandfather invested his fortune in Russian bonds. This was before the Russian Revolution. At the time, he was told he couldn’t lose money. Because the bonds were pegged to gold. So there was no currency risk. And these were bonds of Russian railways, which were the most solid businesses in the world, and they were guaranteed by the Tsarist government. No currency risk. No default risk. No business risk. They were as close to risk-free as you can get. But when the Bolsheviks took over they seized the railways. They stopped paying the bonds. And they executed the Tsar and his family.”

It didn’t make any difference if the bonds were pegged to gold or not. They were worthless. It just reminds you of how things can go very bad in a way you don’t expect. Who would have imagined a communist revolution in Russia? (Could a Dictator take over the U.S.A.?)  www.acting-man.com

Buffett Image

The 1975 Buffett memo that saved WaPo’s pension

Found here:Warren-Buffett-Katharine-Graham-Letter on Pensions 1975

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time — Buffett was 45 when he wrote it and years away from attaining the investment fame he has today — his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient. Full article: http://finance.fortune.cnn.com/2013/08/15/warren-buffett-katharine-graham-letter/?iid=EL


Gold and Gold Stock Capitulation (GLD represents gold while GDX represents an index of major gold producers and GDXJ represents junior gold miners). Note the date of the low prices in End June/Early July. We last mentioned capitulation here: http://wp.me/p2OaYY-25W


Paulson’s Investors help form a bottom in Gold: http://www.acting-man.com/?p=25354#more-25354 (a suggested read)

Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:

“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,”according to an e-mailed response to questions.”

CSInvesting Editor: As mentioned before, I have been unable to find attractively priced franchises so in the past four months I have bought “quality” miners and related companies like RGLD, SLW, FNV, AUY, AEM, NGD, EGO, etc.  I place the word, QUALITY in quotes because those companies are not franchises and each struggles with the cyclical risks of their product–metals. So beware, I am biased to seeking out information that bolsters my bullish outlook like Commercial Hedgers having a low short position:


and extremely negative speculative sentiment–a contrary signal.



  • A very seasoned mining executive I’ve known for years (www.grandich.com)  sent me the following email, along with the latest World Gold Council report. He made a very keen observation is his email. Here it is:

“As an aside FYI, attached is the WGC’s first ½ 2013 report  – skip to page 14 and look at the highlight yellow I put in. Of ~2000 supply and demand tonnes  , ~578 tonnes are sold by ETF’s. If ETF’s sales were zero there would be a 29% supply shortfall. Total mine production is 1377 tonnes, ETF’s sold 42% of all mine production first ½ this year.    My math is that if the ETF’s get cleaned up and go to 0 sales, we are looking at quite a gold supply problem. Old fashioned thinking I know, but alas, I am just a simple guy.”

We have a very serious mine production shortfall that has been masked during the gold raids and sell-offs. I think it will get exposed going forward.

I need evidence against my thesis, so please send any negative information against owning precious metals miners and gold. I am reading:

Gold Bubble Book

Next week, I will post a valuation on Royal Gold (RGLD) so get a head start and visit the websites of Franco-Nevada (FNV), Silver Wheaton (SLW) and Sandstrom Gold (SAND) to learn about this business.


Search for Panic/Capitulation: Hui-Gold Index at 16.8

gold miners

Just as I seek panic and capitulation as a place to find value among the carnage, the Colonel loves the smell of napalm.