Reminder of our blog last weekend following another week of explosive rallies in gold stocks

Initially posted 11 Aug 13

The song by the Carpenters, “We’ve only just begun…” was, somewhat coincidentally, playing this week on my car radio whilst I was driving into the office (I guess that reveals the type of radio stations I listen to – yes, I am a big 60’s, 70’s and Motown fan in particular!). I thought it somewhat prescient however given what has been happening in the precious metals sphere this last 2 weeks.

We launched our Titan funds to the wider investing public over 4 weeks ago now and by far the most interest we have seen has been in our Global Macro fund. The Precious Metals fund has been the “forgotten aunty” at the party, which, together with the points we relay below, we believe continues to shore up our bull case on this sector. Ironically, in our first month of investing as a regulated entity, the Precious Metals and Natural Resources funds have been the standout performers.

As ever, like Japan last year which we highlighted right at the outset of its stunning rally (and called the reversal almost to the day, see here – http://www.spreadbetmagazine.com/blog/japanese-equities-dont-miss-the-train.html , here – http://www.spreadbetmagazine.com/blog/sbm-v-john-piper-evil-knievil-its-time-for-a-tactical-short.html and here – http://www.spreadbetmagazine.com/blog/the-japanese-bubble-reaches-new-technical-extremes.html), when the train first leaves the station, sentiment is so poor that very passengers jump on board.

 We believe we are now out of the station in relation to the Precious Metals train and hope that what we have tried to do with this site over the last 18 months, namely illustrate that proper research, controlling leverage and looking for real value is the only way to perform over the medium term has had an effect on our readers and that they are positioning ahead of the crowd.

Let’s take a look at the Junior Miners ETF chart below which is a good proxy for risk in this sector:-

This is, to us, a constructively bullish chart that shows the real “risk” spectrum of the prec metals sector rising from its multi year lows and forming consecutive higher lows together with the RSI crossing back up above the key 50 level. If you take a close look at the chart you will see that this particular sectoral ETF has not closed above its 37 day ema for a number of consecutive days for over 10 months now. In the last 2 trading days it has managed this feat. Watch this closely over the next couple of weeks and in particular the 43-45 level for our real starting gun confirmation on this rally.

Here are the reasons why we remain resolutely bullish this sector and here’s a link to our last disclosed asset class positioning too – http://www.titanip.co.uk/wp-content/uploads/2013/07/PREC-METALS-PDF.pdf

1. Short interest in gold and silver remains at multi year elevated levels, albeit down from the peaks seen just over three weeks ago. This still provides much fuel for an upside rally and this week, we wouldn’t be surprised to see silver take out $21 and gold the $1340/50 level.

2. The almost complete lack of interest by retail investors in investing in the sector (and as we have seen in a minute form withour own fund) is telling in its own right… There is absolutely no speculative positioning in this arena from what we can discern and this is a comforting place to be as a bull.

3. This website has explored the curious physical v paper disconnent between gold with continued demand for the “real” asset relative to selling of the paper asset. The Chinese and Indians in particular have ramped up demand and we produced this feature earlier this week that, if true, would absolutely ignite the yellow metal – http://www.spreadbetmagazine.com/blog/is-china-preparing-the-world-for-the-next-gold-standard.html

4. As with the VIX index in which there seems to be a lack of “fear” in global markets, even though we are now almost 5 years into the bull run, and yet with ever rising risks of either asset spillover of inflation into the real world, or an earlier withdrawal of QE, we find this perplexing… If there is a shakeout in the markets over the next couple of months we would expect gold and silver to benefit as, per 1 & 2 above, the “margined, hot money” is not in here as forced sellers and so gold and silver could benefit on a run to safety.

5. The fundamental case for gold remains categorically intact – it was reported earlier this week that there has been almost $20bn of asset write downs in the gold mining sector this last 6 months and this will act as a suppressant on supply over the medium term. With many mines uneconomical at $1200-1300/oz, particularly in Africa, this will, in unision with the rising demand from the jewellry at the current price levels, act as a support on prices and we fail to see how the price could slide on a sustained basis below the $1000/oz. The speculative selling that needs to be done, has been done in our opinion and with stories out at the end of last week that the Japanese domestic debt pile has reach over 100 quadrillion yen, we remain fearful of how all this ultimately ends…

Finally, take a look at the silver price here, and which has also recaptured its 37 day ema and looks to be about to bust through a flag formation that targets $23. This type of technical picture is about as bullish as it gets short term. Here at Titan, we remain positioned to enjoy a continued rally.

Richard Jennings, CFA. Titan Investment Partners