Theme and Background
This chapter begins with economic historian John Kenneth Galbraith’s observation that “financial memory does not exceed 20 years,” noting that nearly two decades have passed since the global financial crisis. Current market manias (MAG 7, cryptocurrencies, AI revolution) resemble historical episodes such as mortgage-backed securities (2007) and the internet bubble (late 1990s), characterized by extreme concentration, leverage, and delusional extrapolation. The author argues that market euphoria is about to reverse and recommends defensive positioning, including high allocations to cash and gold.
Core Thesis
The author’s core investment argument is: Gold mining stocks remain severely undervalued and underweighted, and their divergence from gold price trends is unsustainable; mining stocks are likely to continue outperforming all other S&P 500 sectors. Counterintuitive judgments include: despite strong year-to-date performance in gold prices and mining stocks, investor participation is extremely low (GDX shares have fallen 32.86% since 2020), and this “lack of interest” is precisely a signal of upward momentum. The author believes that current market valuations are extreme (S&P 500 forward P/E of 22.3x, above the 5-year average of 19.9x and 10-year average of 18.4x), a bear market may be imminent, and gold and mining stocks are the best hedge against financial disorder.
Key Arguments and Data
- Divergence between gold prices and mining stock performance: Over the past five years, gold prices have risen 85.47%, while gold mining stocks have only gained 51.82%, indicating a significant lag.
- Soaring profit margins: Industry margins have surged from $647 per ounce in Q1 2024 to approximately $1,700 per ounce in Q2 2025, a 168% increase.
- Extremely low investor participation: GDX shares have fallen 20.37% year-to-date in 2025 and 32.86% cumulatively since 2020.
- Actions by leading companies: Newmont announced a $3 billion stock buyback (July 2025), and Agnico Eagle’s CEO stated, “We’d rather return money to shareholders” than chase marginal deals.
- Extreme market valuations: S&P 500 forward P/E of 22.3x (5-year average 19.9x, 10-year average 18.4x); price-to-sales ratio of 3.29x (highest since 1990, exceeding the internet bubble peak); free cash flow yield of 2.76% (near the post-Lehman low of 2.71%); dividend yield of 1.23% (below the historical record of 1.26%); cash levels falling to 3.9% (near the lowest since 2010 at 3.5%).
Comparative Data Table:
| Indicator |
Current Value |
Historical Average/Comparison |
| S&P 500 Forward P/E |
22.3x |
5-year avg 19.9x, 10-year avg 18.4x |
| S&P 500 Price-to-Sales Ratio |
3.29x |
Highest since 1990, exceeding internet bubble peak |
| Free Cash Flow Yield |
2.76% |
10-year avg 4.19%, near post-Lehman low of 2.71% |
| Dividend Yield |
1.23% |
Below historical record of 1.26% |
| Cash Level |
3.9% |
Lowest since 2010 at 3.5% (February) |
| Gold Price 5-Year Gain |
85.47% |
Mining stocks only gained 51.82% over same period |
| Industry Margin (per ounce) |
~$1,700 (Q2 2025) |
$647 (Q1 2024), up 168% |
| GDX Share Change |
-20.37% YTD 2025 |
-32.86% cumulative since 2020 |
Companies/Assets Involved
- Newmont Corporation: Industry leader, with $3 billion in after-tax proceeds from asset divestitures over the past year, announcing a $3 billion stock buyback in July 2025. Bullish.
- Agnico Eagle Mines Limited: CEO Ammar Al-Joundi stated, “We’d rather return money to shareholders” than chase marginal deals, implying strict capital discipline. Bullish.
- Wesdome Gold Mines Ltd., Alamos Gold Inc., Kinross Gold Corporation, Dundee Precious Metals Inc.: These companies disclose per-share information (earnings per share, cash flow, reserves, production) in investor presentations, representing a shift toward shareholder accountability in the industry. Bullish.
- VanEck Gold Miners ETF (GDX): Used as a measure of investor participation, with shares continuously declining, but the author views this as a signal of opportunity.
Investment Implications
- Strongly bullish on gold mining stocks: The author believes the current combination of “extreme investor disinterest” and “strong fundamentals” is rare, and mining stocks are likely to continue outperforming all S&P 500 sectors (as they have over the past 12 months).
- Recommend significant overweight in gold and mining stocks: The author argues that a 2%-3% allocation to gold is merely “dozing off” and insufficient to weather the impending bear market. A substantial increase in exposure to precious metals mining stocks is advised to leverage their effect on rising gold prices.
- Beware of market reversal: Based on signals such as extreme valuations, euphoric investor behavior (e.g., the “buy the dip” consensus), and high retail participation, the author believes a bear market is imminent, with gold and mining stocks serving as the core of defensive positioning.
Theme & Background
This chapter focuses on the current state of extreme valuation and heightened speculative sentiment in the U.S. stock market, comparing it with typical signals preceding historical bubble bursts. The author argues that despite the market's strong rebound after "Liberation Day," multiple indicators (such as the Buffett Indicator, the proportion of stocks with EV/Sales exceeding 10x, and zero-day options trading volume) have reached or surpassed historical extremes, suggesting the market may be on "thin ice." Meanwhile, although gold is viewed by some investors as a "crowded trade," actual allocation levels are extremely low, and the author believes gold has not yet fully priced in the risk of a stock market decline.
Core Views
- Market valuation has entered a "playing with fire" zone: The total market capitalization of the FT Wilshire 5000 Index is approximately $62 trillion, equivalent to 208.1% of U.S. GDP, exceeding the 200% danger line Buffett warned about in 2001.
- Current speculative frenzy shows structural similarities to the 1929 and 2007 bubbles: Signals such as the issuance of Bitcoin trusts, zero-day options trading volume accounting for 61% of total S&P 500 volume, and a surge in insider selling all point to a market top.
- Gold is not a "crowded trade": Although 41% of fund managers consider gold crowded, actual allocation is only 3.5%; GDX shares have been declining since 2020, indicating investors remain averse to gold stocks.
- Goldman Sachs has turned bullish on gold as a bond substitute: Goldman Sachs' co-head of commodities research explicitly stated that bonds can no longer hedge equity downside risk and recommended replacing bonds with gold as a safe-haven asset.
Key Arguments & Data
1. Extreme Valuation:
- The proportion of global stocks with EV/Sales exceeding 10x has reached an all-time high, surpassing the 2000 dot-com bubble and the 2021 "meme stock" frenzy.
- Cites former Sun Microsystems CEO Scott McNealy's classic 2002 argument: Buying a stock at 10x revenue requires using 100% of revenue for dividends over 10 consecutive years to break even, assuming zero costs, zero expenses, zero taxes, and zero R&D—this is absurd.
2. Speculative Behavior Signals:
- Zero-day options (0DTE) trading volume accounts for 61% of total S&P 500 volume, a record high, with retail investors comprising over half.
- Insider selling activity has significantly increased (per Kobeissi Letter data).
3. Gold Market Divergence:
- Despite gold prices surging to $3,500/oz in April 2025, GDX shares have fallen 32.86% since 2020, indicating extremely low investor participation.
- Goldman Sachs notes that during 12-month periods when both stocks and bonds deliver negative real returns, gold or oil consistently provide positive real returns.
4. Historical Comparison:
- The boom in Bitcoin trust issuance is likened to the investment trusts of the 1920s and the mortgage securitization of 2007—complex structures, high leverage, and questionable underlying asset quality.
| Indicator |
Current Level |
Historical Comparison |
| Buffett Indicator (Market Cap/GDP) |
208.1% |
Near 200% in 1999-2000 when Buffett warned of "playing with fire" |
| Global Stocks EV/Sales >10x Proportion |
All-time high |
Exceeds 2000 dot-com bubble and 2021 meme stocks |
| Zero-Day Options as % of S&P 500 Volume |
61% |
All-time high |
| Fund Manager Gold Allocation |
3.5% |
41% consider it "crowded," but actual allocation is extremely low |
| GDX Share Change (Since 2020) |
-32.86% |
Continuous decline, indicating investor avoidance |
Companies/Assets Involved
- Strategy (formerly MicroStrategy): Emphasized Bitcoin as the core of shareholder value creation in its Q2 2025 earnings call and issued a Bitcoin trust. The author views this as one of the signals of market frenzy.
- Goldman Sachs: Co-head of Commodities Research Daan Struyven explicitly recommended replacing bonds with gold as a safe-haven asset in a May 2025 report. The author believes this view has significant influence over trustees managing trillions of dollars in assets, but investment reactions have yet to begin.
- GDX (VanEck Gold Miners ETF): Shares have been declining, reflecting investor aversion to gold stocks. The author considers this divergence unsustainable.
Investment Implications
- Maintain high vigilance toward the stock market: Current valuation and speculative indicators have surpassed historical bubble peaks. It is recommended to significantly reduce equity exposure and increase allocations to cash and gold.
- Gold is the most undervalued safe-haven asset today: Although gold prices have retreated from the April 2025 high to the $3,200–$3,400 range, the author believes the risk of a stock market decline has not yet been priced in. Goldman Sachs' endorsement could act as a catalyst for institutional inflows, and given gold's extremely low market liquidity, even a small rebalancing of funds could have a disproportionate impact on gold prices.
- Focus on value recovery in gold stocks: Gold miners' profit margins have risen from $647/oz in Q1 2024 to approximately $1,700/oz in Q2 2025 (a 168% increase), but stock prices have lagged far behind gold prices. If a stock market decline triggers capital rotation, gold stocks may experience a catch-up rally.
Theme and Background
This section revolves around John Exter's "Liquidity Pyramid" model, pointing out that the current global financial system, due to excessive expansion of derivatives and debt, has rendered the liquidity at the top of the pyramid (risk assets) illusory. The author argues that when confidence reverses, liquidity will rapidly vanish, and value will return to physical assets (especially gold). The core background is the contradiction between the market's over-reliance on high-risk assets and the underestimation of gold's liquidity.
Core Thesis
The author explicitly concludes: Gold and gold mining stocks are currently at extreme undervaluation levels, while the market's liquidity illusion for risk assets is about to burst. The counterintuitive aspects are:
- Despite a significant rise in gold prices, the valuations of gold mining stocks remain at "bargain basement" levels.
- The author believes that if liquidity assets flow into gold, gold prices could double within 1-2 years, and the profits of many mid- and small-cap mining companies would then exceed their current market capitalizations.
Key Arguments and Data
- Liquidity Paradox: The author revises Exter's model, proposing that "where there is liquidity, there is no value; where there is value, there is no liquidity." Currently, high-risk assets (such as stocks and cryptocurrencies) appear highly liquid, but once confidence reverses, liquidity will vanish instantly.
- Potential Upside for Gold: The author argues that if liquidity assets (such as cash and bonds) shift toward gold, gold prices could double. This judgment is based on the current extremely low allocation of gold in investor portfolios (no specific figure given, but implying "token exposure").
- Valuation Gap in Mining Stocks: The profit potential of mid- and small-cap mining companies is severely underestimated. If gold prices double, their profits could exceed current market capitalizations, implying multiple-fold upside in stock prices.
Companies/Assets Involved
- Physical Gold (Bullion): The author is strongly bullish, recommending allocating a "meaningful proportion" of liquid assets to unleveraged physical gold.
- Gold Mining Stocks (Precious Metals Equities): The author "unabashedly pounds the table" for these, especially mid- and small-capitalization miners, arguing that their valuations are severely undervalued.
Investment Implications
- Immediately Increase Gold Allocation: The author advises investors to shift a "meaningful proportion" of their liquid assets into physical gold and gold mining stocks, rather than holding only token exposure.
- Beware of the Liquidity Trap in Risk Assets: The current market confidence in the liquidity of high-risk assets is an illusion; investors should reduce over-reliance on assets such as stocks and cryptocurrencies.
- Gold Mining Stocks Represent the Biggest Value Opportunity: The profit elasticity of mid- and small-cap mining companies is enormous. If gold prices double, their stock prices could far exceed current market capitalizations, making them a high-risk, high-reward defensive allocation.