I've spent the
past couple of weeks learning a new skill - making charts using Microsoft
Excel. This article will use my new skills to compare gold's current
C-wave development with gold's great parabola that concluded
on January 21, 1980, as well as examine the historic relationship of
gold with gold mining stocks using both the BGMI (Barron's Gold Mining Index)
and HUI (Amex Gold Bugs Index). Then we will conclude with some charts of
miners that appear to have not only explosive future earnings, but also
explosive future price appreciation.
The
upper portion of this chart is the great 1977-1980 gold parabola that blew up
on January 21, 1980.
The
lower portion of the chart uses the Excel spreadsheet to recreate this
parabola (in blue). The red line is the price of gold from the beginning of
the current C-wave (April 16, 2009). The green line is essentially a
duplication of the conclusion of the great 1980 parabola 'glued' onto the
current gold price.
I
am showing you this in the context of historical perspective and not in the
context of price prediction.
Honestly,
I shudder to think what it what take for gold to now double it's current price of $1857 to
over $3700 in the next 10 weeks. But I do recognize that it is
possible - particularly because, as we observed in 1980, it has
happened before.
I
can
indeed think of several realistic mechanisms to make this happen
as 'historically contemplated' on this chart (think Bernake and QE 3, Europe and sovereign defaults, Comex futures short squeeze of exciting proportion, and
other possibilities including war and so on).
The
mining indices we are familiar with, such as the HUI (Amex Gold Bugs Index)
and XAU (Philadelphia Gold/Silver Sector Index), believe it or not, have not
existed for all that long. The HUI dates back to mid-1997 and the XAU only to
mid-1995.
Fortunately,
there is an index of precious metal mining stocks that predates both the HUI
and XAU - and it is the BGMI (Barron's Gold Miners Index). Data and charting
of this historical index is available online (BGMI link
HERE) and dates back to 1939.
This
next chart shows you both the BGMI price action to the present day, as well
as a log-scaled chart that suggests the relationship between this index of gold miners to the ever changing price of gold.
The
lower portion of the chart suggests that a BGMI/Gold ratio at or below 1:1
has been consistent with the beginning of huge gold miner stock rallies,
particularly since 1978. Unfortunately, I did not design both of these
charts ('glued' one atop the other) with the identical time frame -
which means that 1.0 readings on the lower chart do
not line up precisely with the rally origins in the upper chart.
But
hey, I warned you I am just learning how to do this stuff.
At
any rate, using this metric it appears the gold miners are seriously oversold
and likely to rally hard. The current reading
is well below 1:1.
If
you would like to study the BGMI in greater detail, Mark Lundeen
has authored a number of outstanding analyses which include: 1, 2 and 3.
Let's
turn now to the HUI index and see if it too is suggesting a bullish future
for the miners.
The
HUI index consists of 16 miners that are not equally weighted within the
index. I have noted these miner's ticker symbols in the upper left corner of
the chart.
The
immediately striking observation one makes is that gold tends to be priced at
2 times that of this index. (ie.
if gold is $1000, the HUI would be close to $500).
Then
we notice that at the beginning of gold's secular bull market in 2001, the
miners were way out of whack - with gold comparatively selling at a 4-5X
premium to the gold bugs index. This led to a miners
rally that nearly tripled their value in less than 16 months.
The
HUI miners bottomed ahead of gold, reaching a closing price of just
$35.99 on November 14, 2000. As of this date September 11, 2011, the HUI
index has gained 17 times it's
value in November, 2000 ($628.34 vs. $35.99).
By
the way, gold bottomed on April 5, 2001, 5 months following the miner's
low, with a closing price of $255.45. As of this past week, gold has
appreciated over 7 times it's
value since making it's secular market low in April 2001 ($1857 vs. $255).
The
other thing we notice about this chart is that since 2008 the mining index
has not been able to get back to it's
more 'balanced' 2X relationship with gold. At present gold is selling for
about 3 times the price of the index. Will the HUI index now rally more
fervently than gold to close this oversold difference? I don't know.
I
can observe that while miners rallied strongly higher during the final 3
months of gold's 1980 parabola (gaining 50+%), they were no match for
the rocket launch of the precious metal itself, as gold literally more than
doubled in this time period. However, once gold and the miners peaked
and then spent 3 months working off a severely overbought
status with a sharp 25-35% correction, the miners proceeded
to literally double in the following 6 months as gold made a failed
attempt to reach the parabolic high.
Finally,
let's take a look at the daily/weekly charts of three miners with big
earnings.
I
am particularly indebted to the outstanding resource produced by Bill Matlack of Scarsdale Equities and published this past Friday at www.Kitco.com
I
studied about 200 miner charts to select these three to show you. There are
more than three that interest me, of course, but I will need to get to them
another time.
This
is Claude Resources Inc. (CGR). The earnings data, past and
estimated, is noted on the weekly chart. The right side of the chart is the
daily view of CGR.
Next
up is Great Panther Silver (GPL). The earnings data is
on the weekly side of the chart as well as the daily side.
And
finally, my personal favorite, Minefinders Corp (MFN).
The float is small at 84Million shares, gold and silver mines producing in
'safe' Mexico, and the projected earnings are simply breathtaking. Any stock
that can go from .09 per share to $1.76 in just three years deserves a good
hard look. (!)
And
which of these stocks do I own?
Not
one. But that may change this week.
Good
trading to you.
John Townsend
John Townsend invites you to
visit his website at www.theTSItrader.blogspot.com. He usually offer a few posts each day on
his market observations, often comment on the particular stocks he is
currently trading, and tries to show ways to use the True Strength Index
indicator to make some sense of where the precious metals and their miners
are heading. Please do not hesitate to contact him.