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Though I favor
physical Gold held outside the banking system that can't get MF Global'd over those paper Gold derivatives known as Gold
stocks, there are times when a speculative opportunity presents itself that
cannot be ignored (at least not by me). Now is such a time in Gold stocks. In
my last post, I welcomed a new cyclical Gold stock bull market. I continue to
believe a new cyclical Gold stock bull market has already begun and we are
now completing (if we haven't already) the re-test of the mid-May, 2012 lows.
What comes next? The launch!
Here's a 6 month daily chart of the GDX ETF thru Friday's close to show you
my thoughts:
It is important to understand that fundamental valuations and
"bigger picture"/longer term technical analysis both support a
bottoming process here. My last post discussed some of
these factors. And here is yet
another important fundamental piece of data courtesy of the Tocqueville Gold
Fund 2nd quarter 2012 investor letter (there
are many other great data points at this link and the chart below is
apparently courtesy of BMO Capital Markets):
The dark blue line in the chart above demonstrates that the price of
senior Gold mining stocks relative to their current year cash flows is at
levels last seen at the depths of the 2008 crash and the beginning of the
current Gold stock secular bull market at the end of 2000. The Gold stock
bears keep screaming about the rising costs of Gold mining. They are right
about rising costs, but they neglect to mention the other side of the
argument, which is more important: margins are RISING
for large cap Gold miners, not falling, because the price of Gold is rising
faster than costs are. And we are entering another coordinated global
recession (no, there won't be any decoupling this time, either), which means
the price of general commodities (like oil) should fall relative to Gold.
This will further improve margins for Gold miners.
We have seen several bottoms in Gold stocks in
the past that resemble the current set-up. Here are some examples of
the "bottom, re-test, launch" sequence
that I believe is repeating right in front of our eyes. First up, the 2004
bottom, using the HUI Mining Index ($HUI):
Next up, late 2008, also using the HUI mining index:
Or even way back in 2000 to start the secular Gold stock bull market using
the XAU mining index:
Could this time be different? Sure, anything is possible in markets.
But given the low valuations in Gold stocks by multiple measures, recent 40%
bear market in Gold stocks (2nd worst of the last 12 years in percentage
terms and longer than average duration), and suicidal sentiment in the PM
sector, the odds are now heavily favoring the Gold stock bulls here. Here is
a chart of the "bullish percent index" for the GDM (the index that
backs the GDX ETF) over the past 6 months to also show how beaten up the
senior Gold stocks are ($BPGDM):
Gold stocks are a speculation for me while physical Gold is my way of
protecting my savings from the ravages of a financial and bureaucratic system
out of control. Until the Dow to Gold ratio
gets to 2 (and we may well go below 1 this cycle), it is silly to be overly
bearish on the precious metals sector. While traders bicker over whether Gold
is about to break up or down right now, they miss the "forest": by
the time we reach December 31st, Gold is likely to be up in percentage terms
for the year, which would mark its 12TH YEAR IN A ROW. Is Gold a bubble or
are there just a lot of sour grapes out there from those that have either
missed the move so far or are desperately trying to prevent the inevitable
"official" return of Gold as the anchor for a new international
monetary system?
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