Gold stocks continue to face
a stiff psychological headwind. As measured by their flagship HUI index, they
were ripped to shreds in late 2008’s brutal stock panic. In only 13
trading days, the HUI plummeted 49%! Many gold-stock investors simply gave up
after seeing the HUI hit its worst levels in over 5 years.
But stock panics are
exceedingly-rare events, 2008’s was the first true panic since 1907 just over
a century earlier. While extremely challenging
psychologically, it was ultimately nothing more than a short-lived anomaly.
Yet tragically, I suspect the majority of investors who fearfully dumped gold
stocks in the panic have not returned. Languishing in zero-yielding
cash, they have missed one of the best runs of this entire bull.
Emerging from such
ridiculously-oversold lows, the HUI skyrocketed 237% higher by early December
2009. While it has been in correction mode since, as of this week it was
still 181% above its panic lows. Former gold-stock investors who missed a
rally of this magnitude have set themselves back years, it is
very sad. But thankfully, it is not too late to redeploy. The post-panic
gold-stock recovery isn’t over yet.
What supports such an assertion?
The levels of gold stocks relative to gold before, during, and
since the panic. At Zeal we were aggressively buying and recommending elite
precious-metals stocks in the heart of the panic,
our subscribers have already earned legendary gains in this post-panic
recovery. And the very same HUI/Gold Ratio analysis that led us to buy back
then continues to look very bullish today.
The HUI/Gold Ratio is exactly
what it sounds like, the daily close of the HUI gold-stock index divided by
the daily gold close. If this HGR is charted over time, it reveals
where the HUI tends to trade relative to gold. And make no mistake, gold
is and always has been gold stocks’ primary long-term driver. The
higher the gold price, the larger the profits for mining gold. The greater
gold-miners’ profits, the higher their stock prices are bid. This
relationship is simple and ironclad, gold ultimately drives gold stocks.
And the HGR action since the
panic not only shows why the HUI rallied so mightily out of that fear-laden
anomaly, but why its post-panic recovery is probably only about
half over today. In these charts, the HGR is rendered in blue and
superimposed over the raw HUI in red. This analysis illuminates why some of
the world’s best hedge-fund managers have started to make big
bets in gold stocks.
For 5 years prior to late
2008’s stock panic, gold stocks as measured by the HUI had a
well-defined secular relationship with gold. The HUI generally meandered in a
horizontal trading range between 0.46x and 0.56x the price of gold, as this
HGR chart clearly shows. Sometimes when gold-stock investors got over-excited
the HGR would briefly exceed its 0.56x resistance. And other times when
they grew too scared it would temporarily fall under its 0.46x
support. But for the most part, this HGR trading range held strong.
In the financial markets, the
longer any particular relationship holds true the more likely it has an
intrinsic fundamental underpinning. And this is certainly the case with gold
stocks and gold, since the metal drives the miners’ profits. And 5 years
is an awfully-long time, well into the secular time range. Between mid-2003
and mid-2008 prior to the panic, the HGR averaged 0.511x. Daily HUI closes
generally meandered around just over half the prevailing gold
price at any given time.
But starting in summer 2008,
the catastrophic impact of the bond panic followed by the stock panic is
readily apparent. As investors panicked, the HUI just fell off a cliff
relative to gold. The plunging bond and then stock prices led to a massive
rush to park capital in US dollars and short-term Treasuries to weather the
storm. The resulting gigantic US dollar rally was the largest ever witnessed.
It hammered gold which flamed unbelievably-intense fears in gold stocks
leading to their epic rout seen above.
The HGR plummeted to April 2001
levels, which was insane. This made no sense at all fundamentally, even at
the time. Despite what the blood-drenched tape was communicating about gold
stocks, did the price of gold no longer matter for them? Would
something else now drive their profits going forward? Of course not!
Fear was wildly overdone, but the core fundamentals of gold mining
hadn’t changed one bit. This led us to buy aggressively and recommend
the same in the dark heart of that stock panic.
The day after the HUI hit its
panic low of 152 on October 27th, 2008, I pointed out this ridiculous anomaly
to our Zeal Speculator
subscribers. Though the HUI was trading at levels it hadn’t seen since
gold was in the $350s, that day the gold price was over twice as
high ($732). So I recommended buying the GDX gold-stock ETF
right then. The HUI/Gold Ratio was so far out of whack that it would have
been foolish not to buy gold stocks.
This is relevant now because
the exact same HGR-based rationale for being aggressively long gold stocks still
exists today. Sure, they are nowhere near the once-in-a-lifetime
bargains we saw during the stock panic. But nevertheless, the average HUI
“valuation” relative to prevailing gold prices remains far below
its pre-panic levels. And since the anomalous panic lows, we’ve
seen a gradual normalization. On balance the gold stocks have been
relentlessly recovering relative to the gold price.
Check out the HGR in the
chart above. After plummeting under 0.21x in the stock-panic abyss, this
ratio steadily climbed to 0.42x by early December 2009 before this latest
healthy HUI correction. This week it was sitting around 0.38x, just over
halfway between its panic lows and pre-panic average. Is
there any reason why this post-panic gold-stock recovery should suddenly stop
now, at such low levels relative to history, after the HGR has already been
recovering for over a year? Certainly not that I can discern.
The price of gold still
drives the ultimate profits of the gold miners today like it always has
throughout history. And also as always before, any individual-company’s
profits ultimately drive its stock price. If it can grow profits,
investors will inevitably bid its stock higher. Gold miners are earning
far-higher profits today around $1100 gold than they were making in late 2007
(a year before the panic) at $800 gold. Inevitably investors will
recognize this, which is why major hedge funds are getting bullish on gold
stocks.
So this post-panic gold-stock
recovery makes perfect fundamental sense. And there is no reason for gold
stocks to stop advancing until they regain their historical levels relative
to gold. At the HGR’s secular average for most of this pre-panic bull
of 0.511x, this week the HUI ought to have been trading near 572. This
is an additional 34% higher from today’s levels, suggesting new
investors today can easily expect such gains as the post-panic normalization
continues.
This next chart zooms into the
gold-stock recovery to date. Again the HGR is rendered in blue and
superimposed over the HUI in red. I added an additional series in yellow, a
hypothetical HUI. This is where the HUI would have been trading since the
panic if it had regained its historic HGR average of 0.511x. The difference
between this line and the actual HUI is quite telling. The gold-stock recovery is indeed
alive and well.
At its panic nadir in October
2008, the actual HUI was only trading at 41% of where the average-HGR HUI
would have been. By the secondary panic low in early March 2009, this gap had
closed dramatically to 57%. This was actually a big bullish tell at the time.
Over that seriously-depressing span between October and March where the
S&P 500 ground another 20% lower, the HUI actually rallied
82% higher!
This massive positive
divergence should have been missed by no one, but as far as I know we were
almost unique in talking about it last March. It proved how ridiculously
and unsustainably oversold the gold stocks had been in October 2008, and
foretold how powerful their resulting recovery would be regardless of
general-stock-market fortunes. Were your financial advisors pounding the
table to get you buying gold stocks in March 2009 when general fear reigned?
By early December 2009 as the
latest major gold upleg peaked, the gap between the actual HUI and the
average-HGR HUI had closed to 82%. The HUI was trading at 82% of where
secular pre-panic averages suggest it should have been. This was double
the anomalous lows it had seen just over a year earlier. And even at the
bottom of this latest healthy 28% correction in early February 2010, this
relationship had only retreated to 68%. There can be no doubt at all that the
post-panic gold-stock recovery is proceeding nicely.
This is also apparent in the
HGR’s uptrend rendered above. After a fast initial recovery out of the
panic depths, the HUI started normalizing relative to gold in a well-defined
uptrend. Prudent investors and speculators like our subscribers bought
precious-metals stocks aggressively whenever the HGR neared support and fell
to lows. The HUI naturally flows and ebbs relative to gold, seeing
periods of outperformance (gold-stock uplegs) followed by periods of underperformance
(gold-stock corrections).
Buying low and selling high
is the key to multiplying your wealth in the financial markets, and in
gold-stock terms this means buying when the HUI is low relative to gold.
And provocatively, that is certainly the case today. And not only compared to
the HGR’s secular average, but relative to this in-progress gold-stock
recovery as well. Gold stocks have just been hit hard by a double
whammy, a gold correction immediately followed by a general-stock-market
pullback.
In early December after
rocketing 15% higher in just a month, gold was overbought and needed to
correct. As always in gold corrections, the HUI fell faster than its primary
driver. Yet as you can see in the chart above, the HGR remained above its
recovery support line. Gold stocks were faring great. But then in
mid-January, the general stock markets started to retreat in their first
meaningful pullback since last summer. The S&P 500 (SPX) only gave back a
rather modest 8%, but it still spooked excitable gold-stock traders.
The HUI fell rather
dramatically over this SPX-pullback span, down 15.4% to the SPX’s 8.1%.
Gold only lost 6.6%. While frustrating for some gold-stock investors, this is
just par for the course in the gold-stock world. Gold stocks have always
attracted a paranoid fringe of highly-emotional traders. After actively
trading this sector for a decade, I’m amazed how virtually anything
can freak them out. A fly sneezes, they rush to sell gold stocks. Their
hyper-emotionality is great for us though, it creates outstanding buy points.
Since these weak hands sold
so frantically on that mild SPX pullback, the HGR plunged well below its
post-panic-recovery support line. In late January it actually hit the same
levels last seen in early July! At the time you could buy gold stocks and
silver stocks as cheaply as last summer, a heck of an opportunity. So again
we bought aggressively and recommended our subscribers do the same. And even
today, 6 weeks after those HUI-correction lows, the precious-metals stocks
still look really cheap relative to gold.
At an HGR of 0.38x this week,
the gold stocks remain well below their pre-panic average of 0.511x of
course. But they are also under the HGR’s recovery support line, which
is now near 0.41x. To merely get back to this support, the HUI would have to
rally 8% from here. And as mentioned, to get back to its pre-panic average it
would need to run 34% higher. And these metrics are based on a couple of
pretty conservative assumptions.
First, they assume the gold
price will stay flat. But gold’s intrinsic supply-and-demand fundamentals
remain super-bullish and this metal is entering its seasonally-strong spring-rally
timeframe. In addition the US dollar’s bear rally
is rolling over, which is very bullish for gold. I suspect we will see a
strong gold rally in the next couple months, and if you plug a higher gold
price into the HGR equation you naturally get a higher HUI target. And the
HGR average itself is conservative too.
Periodically bull markets
witness an intense flare-up of excitement and greed. We haven’t seen
such an episode in gold stocks since early 2006, almost 4 years ago, so we
are certainly overdue. In April and May that year the last time investors got
excited about gold stocks, the HGR averaged 0.552x. And I have no doubt
we’ll see widespread gold-stock excitement again, especially given the
increasing hedge-fund interest in this deeply-undervalued sector. Plug $1200
gold (a trivial 7% rally from here) into a 0.55x HGR, and you get a 660 HUI
target. This is 55% higher than today’s levels!
Now making specific price
predictions is a fool’s errand, no one can see the future. As a mere
mortal bound by the chains of time, I have no idea how big the HUI’s
spring rally will ultimately prove. But I do know, beyond any doubt, that
gold stocks remain way undervalued relative to gold and that they have been
steadily recovering relative to gold since the panic. There is no reason to
expect this trend to cease.
If you’ve been out of
gold stocks since the panic, it certainly isn’t too late to get back
in. While you missed the low-hanging fruit off the panic lows, there are
plenty of gains left to ride. If you’ve never invested in gold stocks
before, now is a great time to start given their technical levels within
their ongoing recovery. And if you are paying for gold-stock advice but
weren’t aware since the panic of this HGR recovery
and its implications, you’ve been robbed. Bad advice from superficial
analyses has vast opportunity costs.
But good advice based on
thorough analysis is priceless, which is why we are hardcore students of the
markets at Zeal. We study gold stocks, and commodities stocks in general,
from many different fundamental, technical, and sentimental perspectives and
then integrate all this work into a coherent and actionable whole. The
current issue of our acclaimed Zeal Intelligence
monthly newsletter is full of fascinating gold-oriented analysis including a
look at who the big hedge-fund gold-stock buyers are and which gold stocks
they are buying. Subscribe today
to learn much and mirror our latest gold-stock trades!
And this week we just
published our latest comprehensive fundamental report. Over the last several
months, we painstakingly researched a universe of nearly 400
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their projects towards becoming operating gold mines in the near future.
Making the transition from
explorer to producer is quite rare, so these are very impressive
companies. We profiled each fundamentally in a comprehensive new 26-page
report, the result of hundreds of hours of world-class research. Since gold
juniors are likely to far-outperform the majors in this continuing gold-stock
recovery, now is a great time to learn about the best. Buy your new report today!
The bottom line is the
gold-stock recovery is very much alive and well. Despite facing the
proverbial wall of worries, the HUI has rallied tremendously off its
ridiculous panic lows. And even more importantly, it has steadily regained
ground relative to gold. Nevertheless, even today it still
remains very undervalued relative to gold. Gold stocks have only recovered around
halfway to their pre-panic levels relative to gold.
It is kind of funny, as elite
hedge-fund managers who weren’t the least bit interested in gold stocks
prior to the stock panic are increasingly comprehending this sector’s
exceedingly-bullish outlook. Yet many, if not most, individual investors who
were heavily long gold stocks prior to the panic have yet to return. If you
are in this camp, I encourage you to stop worrying and start investing. Great gains remain to be won.
Adam Hamilton, CPA
Zealllc.com
March 19, 2010
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