Have You Heard This Word Before? By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The smart money is bullish on gold, and we should be too…
- The gold mining gap is a huge opportunity…
- The top Power Factor gold stocks…
- You’re about to get very familiar with a new word…
The smartest money in the market is getting more bullish on gold… Smart money is big money. It’s the traders who understand the market better than anyone else. Think about the bond traders… the market makers… the commercial producers who need to secure materials. These people have spent every waking moment of their career studying market mechanics. It’s their job to understand money flows and supply/demand dynamics better than me or you or 99% of other investors. Thankfully, we don’t need to spend years learning their craft to make money ourselves. We have the data to see what they’re doing. And right now, the data is showing us that the smart money is starting to shift in the gold market. Take a look at this chart of gold futures (thin blue line), along with an indicator at the bottom showing the net positioning of various classes of gold traders in green, purple, and red: 
This data comes from the CFTC’s Commitments of Traders report. Here’s how we can define each “class” of trader at the bottom. - The middle purple line is small speculators – individual retail investors like you and me. Relatively speaking, this is the “dumb money.” These are the folks who aren’t completely dedicated to the gold market and base their livelihood on how it operates. Not to mention, their exposure is a rounding error compared to the other two classes.
- The green line is the large speculators – traders like hedge funds that trade gold for profit. These guys are smart… ish. Their goals are to simply profit on gold moves. Their level of understanding is higher than retail, but it’s lower than the true smart money. They’re also trend followers, which makes sense from a trading standpoint… but they aren’t the leaders.
- The line we really want to watch is the red line – the commercial traders. These are the guys who trade the gold market to keep major gold businesses running. They understand gold better than anyone. They’re the smartest money in the gold trade.
Looking closely at the chart, you might notice that commercial traders typically have a negative net position in gold futures. That’s because these traders aren’t speculating on the price of gold so much as they’re selling gold futures to hedge against price declines. They do this because they know how the gold market works. They have to, because their job is to secure physical gold supply. They aren’t playing around. The big thing to watch is when the red line starts to rise. That means the smartest money in the gold market is getting less short gold. I’ve plotted a few vertical lines where this has happened in the past few months. You can see that with a few weeks’ lag, reduction in net short positions from commercial traders tends to foretell big gold price increases. They just got a little less short a few weeks back as the price of gold fell. That, along with the clear uptrend in gold prices, tells me gold is setting the stage for another rally. So how do we take advantage? Gold miners are an interesting opportunity right now… Take a look at this chart of the VanEck Gold Miners ETF (GDX), which is the blue line below, compared to gold prices in red: 
Since 2017, gold miners have broadly underperformed the metal itself. The reasons for this are manyfold: - Gold mining is a highly capital intensive business.
- Many businesses secured assets at inopportune times and inflated prices, such as in 2011.
- Rising interest rates have weighed on capital-intensive businesses of all types over the last couple years.
But one trend is reversing at least one of these main headwinds – the Federal Reserve’s interest rate reduction campaign. As the Fed lowers rates, the cost to borrow will gradually decline. This helps out small caps, as we’ve shown you before… and that naturally extends to other leveraged businesses like gold miners. Technically speaking, too, gold miners and gold itself are seeing the widest performance gap in many years. As gold prices rise, gold companies become inherently more profitable… and while the space is still risky, the opportunity to profit if and as the gap closes is as good as it’s ever been. Just think: GDX barely notched a new 10-year high back in October, as gold prices set a new all-time high around the same time. The miners are well behind, and the fiscal winds are blowing in their favor. The question then naturally becomes, how do we find the best ones? The Quantum Edge score comes to mind… The Quantum Edge score is Jason Bodner’s proprietary approach to distilling the most powerful moneymaking factors in the market into an easy-to-use system. Power Factor #1 is sales and earnings growth. That’s what you want to see in any kind of business. Power Factor #2 is institutional support. By that, we mean money flows from the deepest pockets on Wall Street. Money flows like these naturally lead to share price appreciation, which is what we all want to see in the assets we own. Hunting for quality in the gold mining space is no easy task. As we covered, the business is tough. But the Quantum Edge score makes sorting the wheat from the chaff in any industry a breeze. I plugged the top 5 holdings of the GDX ETF into the Quantum Edge scoring app in TradeSmith Finance. And what came back surprised me, but not in the way you might guess: 
Of the top 5 holdings in GDX, only one of them, Agnico Eagle Mines (AEM), flagged as a buy. It has a rock-solid Technical score of 75 – which represents institutional money flows and positive price momentum. And it has a similarly solid Fundamental score of 76.5 – indicating strong sales and earnings growth. Altogether, AEM gets a Quantum Score of 75.9 – right in the sweet spot where the system considers it a buy: 
The chart looks great, too, with AEM outperforming gold prices all year long: 
In fact, the company’s had a streak of positive earnings surprises stretching all the way back to the Q4 2021 earnings report. Earnings surprises are another strong factor – they mean the company continues to trounce Wall Street’s expectations of business performance. Strong buys in the mining sector are rare… so if you’re looking to play the gold stock catch-up trade, don’t ignore this signal. Switching gears, I learned a new word recently… Writing TradeSmith Daily is my job, but writing and reading have always been my passion. I love nerdy stuff like new words and learning where they came from. My friend and colleague Luke Lango, senior analyst at InvestorPlace, taught me a new word recently: “Auspex.” Do you know it? I didn’t. But I do now, and I love what it means. The word dates back to ancient Rome, and it was the name for a practice of divination that revolved around the movements and behavior of birds. The Latin avis (bird) and specere (to look) form the word. Over time, it came to refer more generally to someone who’s good at uncovering hidden truths or forecasting what could happen in the future. Don’t worry. I’m not about to say we’ve found a way to predict the future. We’re better than that. But Luke did name his latest trading strategy Auspex for good reason. It uses a quantitative algorithm to identify the fastest-moving stocks in the market. These are the stocks everyone wants to own but few manage to find until they hit the mainstream media headlines. Luke found that by rejecting the 99.9% of stocks that make up the stock market and instead focusing only on the 10 top movers at any given time – with some rational constraints – you can beat the pants off any buy-and-hold strategy you’ve ever seen. Think of it like this… The cumulative return for the S&P 500 for the past 20 years, through thick and thin – crashes, bear markets, bull markets, bubbles, and everything in between… is about 664%. Very respectable returns. But Luke’s simple-but-extremely-effective Auspex strategy makes the past 20 years of stock market performance, which have multiplied your money more than sevenfold… look like a sideways line. 
Luke’s Auspex strategy beat the market by more than 29x over the same span. That was the backtest. But Luke’s also been live testing the strategy since July. And it’s beaten the market every month since then… including last month, which saw one of the best monthly returns for stocks in years. You can see how Auspex is the best possible name for this system. It watches the top “birds” of the markets – the fast-moving high fliers… and rides them into the proverbial investment heavens. By the way, the system is simple. You’re holding just 10 stocks and rotating them once per month. No leverage or funny business required. It’s just about being in the right names at the right time. Luke’s holding a webinar next Wednesday, Dec. 11, that’s all about Auspex, how he built it, and how you can start getting the monthly list in your portfolio when it launches. The next round of stocks drops at the start of January. Ask me, you want a slug of cash playing this strategy on the side. History shows it has an edge worth taking advantage of. More details right here. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
No comments:
Post a Comment