The gold stocks fared horribly in the heart of the stock panic when
fear was the most extreme.
Despite the HUI’s excellent performance during past stock bears, gold-stock traders didn’t have the fortitude
to ignore the stock panic. Its
unbelievably intense fear spilled everywhere, including into gold. But even relative to the
then-prevailing gold prices (low $700s) in late October and November, the HUI
was radically oversold.
We were aggressively buying and recommending gold stocks right then in
the heart of the panic, both as long-term investments and short-term
speculations. It certainly
didn’t feel good to buy anything then, as most gold-stock analysts
predicted accelerating plunges as far as the eye could see. Yet as a contrarian I knew that such
extremely bearish sentiment was an anomaly that couldn’t persist for
long. We had to fight the crowd
as always, which is how the biggest profits are won.
But even beyond the excessive fear, there was a big fundamental reason
to buy too. The HUI was driven so
low it was back to mid-2003 levels.
Yet back in mid-2003, gold was only in the $350s! It was ludicrous fundamentally for the
HUI to be trading as if gold was less
than half the price it was trading at even in the panic’s darkest
days. And indeed the gold stocks
soon soared out of these radically oversold levels.
The HUI recovered rapidly with gold in late November and
December. By the end of 2008, it
had already literally doubled from
its panic low of just 9 weeks earlier.
Entering 2009 at 300, hope was starting to return to the embattled
gold stocks. But then a peculiar
event happened that short-circuited the HUI’s meteoric rise and led to
great consternation among gold-stock traders that persists to this day.
Despite gold rising on balance in January and February, the HUI was
largely flat. By late February
gold had surged 12.7% higher in 2009 due to heavy buying by the GLD gold ETF. Yet the HUI was only up 4.6% over this
span, dramatically lagging gold.
Traders feared something was structurally wrong with gold stocks, or
that they were anticipating a coming sharp decline in gold on the inevitable stock-market recovery.
Neither was the case though.
The real problem the HUI suffered in January and February was
sentiment among gold-stock traders.
Because the general stock markets were falling relentlessly, traders
feared a renewed panic. Never
mind that gold-stock earnings and hence stock prices are ultimately driven by
gold, stock markets be damned, the stock fear again spilled over into gold
stocks. Thus the HUI was torn
between following gold higher in early 2009 or selling off with the general
stock markets.
Gold became a bit overbought and did indeed correct in late February, well before the stock markets
bottomed. And the HUI sold off
sharply. With this index down
8.8% for the year on March 9th (the day stocks bottomed) while gold was up 4.5%, traders again assumed
something was drastically wrong with this sector. But it was just excessive stock-market
fear bleeding into gold stocks, not unlike what we saw in the panic.
In mid-March the HUI surged again as the Fed announced it was
monetizing long-term US Treasuries, creating new dollars out of thin air to
fund Washington’s enormous deficit. By early April, the HUI was up 126.4%
since its late October panic low. Meanwhile gold was only up 26.6%, so
over that particular span the HUI indeed leveraged gold’s gains
beautifully. Sentiment was
improving, but then another exogenous event crushed it again.
In early April, gold fell sharply on rumblings out of the G20 meeting
in London that the IMF would sell some of its massive gold hoard. Gold fell on the rumor, and dragged
the HUI down with it. When the
dust settled, it was clear the IMF gold-sale proposal was merely an old one
that had been on the table for years.
I analyzed this whole episode in the new Zeal Intelligence.
Still, it crushed gold-stock sentiment again.
Thus by early May, the HUI was trading dead flat at the same 300 level
where it had entered 2009. It is
no wonder sentiment was so poor, with former gold-stock traders not
interested in coming back in and first-time gold-stock traders slowing to a
trickle. Those still interested
in this sector had largely assumed a wait-and-see approach. A flat HUI over 4 months where gold
rose modestly was not encouraging.
Despite all this, take a look at the HUI’s trend in the chart
above. Even with all these
psychological headwinds, the HUI has been rising
on balance since early December in a nice orderly uptrend. Its support held strong on 3 separate
occasions across 3 different months.
Viewed as a whole instead of getting mired down in the pullbacks, the
HUI’s uptrend has been largely textbook-perfect over the last 5 months!
This reminds me of gold’s seemingly hopeless quest from early
2002 to mid-2005 to break above the critical level of 350 euros. For several years, every time gold
challenged €350 it promptly failed and fell back down. European investors used this to assert
that the gold bull we contrarians were riding in the States was merely a US
dollar bear in disguise. Yet they
weren’t considering the whole counsel of the chart.
Euro gold wasn’t hitting new highs, true, but its well-defined
secular support in euro terms was moving up relentlessly. Euro
gold was basing at ever-higher lows! With rising support corralling gold
ever tighter under its fabled €350 resistance, it was only a matter of
time until €350 fell and the glorious second stage of gold’s bull was ushered in. Of course €350 was soon exceeded
and gold has never looked back.
The point of this reminiscence is that traders who do not consider the
broader trend risk missing the boat when the big gains come. Since December, the HUI has been
consistently carving higher highs and higher lows in a nice orderly
uptrend. Other than moving up
more slowly than enthusiasts would like, there is nothing wrong technically
with the HUI. It is climbing
gradually, basing, and will probably eventually break out to the upside just
like euro gold and yield massive gains.
And considering the stock markets’ extreme behavior over this
span, the HUI’s conservative uptrend is even more impressive. From early December to early March,
the S&P 500 shed 25.6% of its value and once again the silly depression fears loomed.
Then from early March until this week, the S&P 500 soared 35.9% in
a mighty rally (just returning to its early December levels this week). Yet through all this, incredibly
chaotic markets, the HUI stoically climbed higher on balance in a nice tight uptrend.
If these aren’t bullish HUI technicals, I don’t know what
are. Despite all the worries out
there, gold stocks are carving higher highs and higher lows in a very
difficult market environment.
Traders sitting on the fence fretting about the gold stocks are
already missing out today. And
once sentiment inevitably turns, as greed tends to flare up in this sector
from time to time, the HUI will rocket out of this strong base.
Because of some of the 2009 episodes mentioned above where the HUI
underperformed gold, a lot of traders are worried that something is wrong
with the gold stocks. Indeed, if
the gold stocks weren’t reflecting gold on balance, I would agree. But note in the first chart above that
the HUI did indeed follow gold nicely over this span, leveraging its gains
considerably. Its day-to-day
price swings also mirrored gold’s well as usual.
But rather than just eyeballing a chart, there is a more precise way
to measure the HUI’s progress versus gold’s. It is the HUI/Gold Ratio. This HGR is just what it sounds like,
dividing the daily HUI close by the daily gold close and charting the result
over time. When the HGR rises,
the HUI is outperforming gold as it ought to. When the HGR falls, gold is
outperforming the HUI (usually because gold isn’t falling as fast as
the HUI such as during the stock panic).
So
the HGR trend helps measure gold stocks’ health.
The blue HGR line shows how radically oversold the HUI was relative to
gold during the stock panic. At
worst, the HUI approached 0.20x the price of gold in late October. Unbelievably gold stocks had briefly
fallen to April 2001 levels relative to gold, not long after the massive
gold-stock bull started! This
very chart led us to aggressively buy and recommend gold stocks during the
heart of the stock panic.
In late November and December, the HUI rallied so fast that it far
outperformed gold as reflected in the fast-rising HGR. But after peaking just above 0.34x in
mid-December, the HGR largely flatlined.
In other words, the gold stocks were merely pacing gold’s gains
instead of leveraging them as they ought to. This was the beginning of a long HGR
consolidation (shaded dark blue above) that lasted until April.
It was definitely discouraging that the HUI wasn’t rising faster
than gold in 2009. These
lackluster relative gains were another major brick for the wall of
worries. If the HUI
couldn’t leverage gold’s exciting run back up to $1000 in
February, would the gold stocks ever leverage gold again? What was wrong with them? Of course their problem was the fear
bleeding over from the very weak general stock markets ahead of their major
March low.
With the HGR largely hovering between 0.32x and 0.34x, it was clear
the HUI’s performance was substandard. Gold stocks are vastly more risky than
owning gold itself, so if they are not amplifying gold’s gains at all
then it is wiser to simply hold gold.
The myriad of operational and geopolitical risks individual miners face,
which can crush them, are actually bullish for gold itself since they reduce
its mined supply.
But once again, some perspective is in order. Like the whole €350 resistance
episode taught, it is best to consider a trend as a whole rather than lose ourselves
in a fraction of the overall price action. Note above that the HGR, since late
November, has actually been climbing on balance. We’ve seen higher highs and
higher lows. While not as pretty
and well-defined as the HUI technicals themselves, there is no doubt this is
an uptrend. Despite perceptions,
the gold stocks are gradually
making up lost ground relative to gold!
And they have a long way to go yet. For 5 whole years before last autumn’s
stock panic, the HGR carved a tight secular average of 0.511x. This is as good of estimate for fair value of gold stocks as you can get. At $910 gold, an HGR of 0.51x implies
a HUI level of 465. This is
almost 40% higher than where the HUI was trading this week! I fully expect this HGR gap to close,
the HUI will rise to reflect prevailing gold prices.
And it has already started.
The HUI is the red line in the chart above. And the yellow line is a hypothetical
HUI at the historical average 0.51x HGR.
The gap between the actual HUI and where gold suggested it should be
was massive during the stock panic, the HUI traded at only 41% of its
gold-implied level! Yet since
then, this gap has gradually closed.
This week the HUI was trading at 72% of its gold-implied level.
With the HGR in an uptrend and the gap between today’s HUI and
the historical-HGR-implied HUI closing, the HUI’s technicals relative
to gold are also bullish.
Unfortunately most gold-stock traders today don’t see this
because they are too busy losing the forest for whatever particular tree
happens to be worrying them at the time.
But the charts don’t lie, the HUI’s technical behavior in
an absolute sense and relative to gold is definitely bullish on balance.
You may be reading this and thinking, “Man! I wish I had bought gold stocks during
the stock panic.” The bad
news is that opportunity is long gone.
The good news is that the anomaly the panic wrought is only about half
undone so far. You can still buy
gold stocks today and catch the second half of the HUI’s reversion back
to more normal levels relative to gold.
And if gold rises farther as the massive fiat-dollar inflation makes
virtually inevitable, or greed again erupts in gold stocks, all the
better. The HUI’s gains
going forward will be much bigger.
Our Zeal Intelligence newsletter subscribers received this critical
information over 6 months ago right in the heart of the panic. Despite writing these free essays, we naturally
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The bottom line is the HUI technicals today are definitely
bullish. This index itself has
been rising on balance in a nice uptrend since the panic abated, despite the
wildly chaotic general stock markets.
And the HUI is even gradually regaining ground relative to gold. This technical perspective reveals the
overwhelmingly apathetic-to-bearish sentiment plaguing gold stocks today is
totally without merit.
While all commodities stocks are continuing to recover from their
brutally anomalous lows driven by the stock panic, gold stocks’ march
back to normalcy is certainly among the slowest. Far from being a problem, this is a
great opportunity. It is giving
traders ample time to add exposure to a sector likely to soar once sentiment
shifts towards bullishness. And
with gold moving higher, this catalytic spark grows more likely all the time.
Adam Hamilton, CPA
Zealllc.com
May 8, 2009
Read
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