Gold, which was a
scoffed-at pariah not too many years ago, suddenly finds itself on
the verge of being almost sexy again. With this metal now
challenging its all-time nominal high from January 1980, I am
hearing from more ordinary non-market-following folks who are newly
interested in gold investing.
And why not?
Despite its higher prices of late, gold?s global supply-and-demand
fundamentals
remain dazzlingly bullish. Worldwide investment demand far exceeds
the ability of
miners to ramp up their production. And if you adjust gold?s
early 1980 high by CPI inflation, it works out to
about $2300
in today?s dollars. So most of gold?s bull probably remains
ahead of us, not behind us.
After having
studied and traded this bull since its birth in early 2001, I remain
convinced that quality gold stocks are the most profitable way to
play it. Gold miners have extraordinary
profits
leverage to gold. Ultimately a given percentage increase in the
gold price translates into a far higher percentage increase in
profits. And over the long run it is profits, and the prospects for
future profits growth, that drive stock prices.
During its bull to
date since April 2001, the Ancient Metal of Kings has powered 225%
higher. This is very impressive, not to mention vastly superior to
the S&P 500?s modest 29% gain over the same period of time. But
meanwhile the HUI gold-stock index has rocketed 1167% higher since
November 2000! The staggering returns in gold stocks have utterly
crushed those of gold itself.
Trading gold
stocks has proven very lucrative for us at Zeal and our
subscribers. Since its debut in August 2000, our monthly Zeal
Intelligence newsletter has launched and closed 55 gold-stock
trades. Including all of our losses, the average annualized
realized gain across all of these ZI gold-stock trades has run
74%. So trading gold stocks has been very, very good to us and
fortunes have already been won.
As a speculator
and student of the markets, trading is my passion. I love it. So
over the years as I have actively traded gold stocks, I have used
and developed various tools to help game the timing. In order to
buy low and sell high, you have to have some idea of what ?low? and
?high? are at any particular point in time.
The latest great
buying opportunity for gold stocks was during their irrational
mini-panic in mid-August. At the time I wrote about
how bullish it was
since the selling was just plain silly. Since those mid-August
lows, gold is up 28% and the HUI 52%. We aggressively started
adding fresh gold-stock trades right after this scare and most are
already up 50% to 90% as of this week, still unrealized of course.
So after such a
big and fast surge in gold stocks, is this run over? Is it too late
to add new gold-stock positions? I don?t think so. True, the easy
low-hanging-fruit gains off the irrational panic lows have already
been won. If your market advisor wasn?t telling you to back up the
truck to buy gold stocks in the last couple weeks of August, you
ought to get a new one. But these already-witnessed gains don?t
necessarily mean this upleg is mature yet.
In order to offer
my case here, I updated some of our trading charts already explained
in other recent essays. This was a nostalgic exercise for me, as my
original essay
in this series was published in June 2003 when gold was trading just
over $350 and the HUI near 150. While the charts and indicators of
choice have changed over the years, their overall utility in gaming
gold-stock probabilities has not.
My first exhibit
on why it is probably not too late to trade gold stocks in this run
was discussed in depth in mid-September. All bull markets advance
in fits and starts, surging higher in mighty uplegs and then
drifting lower in corrections. This two-step-forward-one-step-back
modus operandi keeps sentiment balanced. Over time tradable rhythms
tend to develop, the
HUI upleg cycles
in the case of gold stocks. Examining these helps us understand
what is possible and probable in any given gold-stock upleg.
What a magnificent
1167% bull run, eh? Seeing this gorgeous chart has to make
mainstream investors weep. While their capital was stuck grinding
sideways in the worn-out market-darling stocks left over from the
1990s bull, brave contrarians were earning fortunes in this new
2000s bull. As a sector, the gold stocks certainly have to be among
the best-performing in the world since their late-2000 secular
bottom.
Since the HUI is
to gold stocks what the NASDAQ is to tech stocks, I use it as a
proxy to analyze this sector as a whole. So far we have seen seven
major uplegs and seven major corrections, all labeled above. The
eighth major upleg, which was born in mid-August during the
irrational mini-panic, is already underway. In order to get a
better handle on what is possible and probable in this eighth upleg,
we can look at the seven that came before it.
All seven of these
completed major HUI uplegs have averaged gains of 94% over 8
months! This is why gold stocks are such a traders? paradise. Our
current upleg 8 is only up 52% so far over 3 months. So it looks
pretty immature compared to the average gold-stock gains we have
seen since this bull began. Interestingly if you take the average
94% gain and apply it to the mid-August closing HUI low, you get a
target HUI level over 580.
So if our current
upleg proves to be merely average, this index ought to challenge 580
before it gives up its ghost. Obviously this is a long way higher
yet even from today?s levels. Thus from this HUI-upleg-cycle
perspective, it doesn?t look too late at all to buy gold stocks for
this upleg. No your gains won?t be as great as if you had bought in
mid-August when few others wanted to, but they should still be
excellent nevertheless.
But I have a hard
time envisioning this particular HUI upleg merely being average with
gold on the verge of hitting its highest nominal levels in history.
Nothing on the planet is a more powerful seductress for investors
than rising prices achieving all-time records. The higher gold goes
in this run, the more investors worldwide are going to start paying
attention to it for the first time. And they will pour increasing
amounts of capital into gold stocks to ride this trend. So I really
doubt today?s HUI upleg will end up being just average.
Most investors
today have no idea how tiny the gold-stock sector really is, despite
its phenomenal gains. As of October 31st, the total market
capitalization of all the elite gold stocks in the HUI was
just $142b! On this same day, the company Google alone had a market
cap of $217b while the entire S&P 500 weighed in at $14,004b. So if
mainstream investors start chasing gold stocks with real capital,
this tiny sector should just explode higher. It could make
our bull-market gains to this point seem modest.
Obviously it is
impossible to game just how high the HUI would soar if new gold
records drive major new mainstream investment. But interestingly
there is another way to look at the HUI upleg cycles. Throughout
this bull, the HUI has seen an alternating pattern of giant massive
uplegs followed by modest consolidation uplegs. The massives
catapult gold stocks to dazzling new bull highs and then the
consolidations gradually get traders comfortable with these
once-inconceivable new levels.
Uplegs 2, 4, and 6
rendered above were massive, and they had average gains of 136%.
The recent upleg 7 was a consolidation upleg lasting long enough to
make 310 to 360 look like a normal basing level. So today?s upleg 8
is on deck to be massive again. If it proves to be just an average
massive, we are looking at a potential HUI level over 700
in this upleg!
So with the HUI
upleg cycles arguing for the next major interim highs to hit between
580 to 700 even without mainstream investors migrating into
gold stocks, it doesn?t look like today is too late to add new
gold-stock positions. Compared to such targets, today?s 450ish HUI
looks like a bargain. When gold stocks run, they tend to run big.
The second exhibit
on why it is probably not too late to trade gold stocks for this
upleg is a Relative HUI chart. This is based on my
Relativity
trading theory, dividing a price by its 200-day moving average
and then gaming the resulting horizontal trend channel. As any bull
flows and ebbs, it stretches above its 200dma in uplegs before
returning to it in corrections. This provides a technical measure
of just how far above its 200dma the HUI can surge when traders get
excited during massive uplegs. This red rHUI line effectively
renders the HUI as a constant multiple of its 200dma, creating a
horizontal trading range.
The same uplegs
numbered in the first chart are also numbered here for
comparability. Since today?s upleg 8 is due to be massive, the
relative HUI highs in massive uplegs 2, 4, and 6 are of particular
interest. As you can see above, they were 1.829x the HUI?s 200dma,
1.554x, and 1.476x respectively. This averages out to 1.62x, but I
have long used 1.50x as the rHUI topping zone to be conservative.
What this means is
the HUI doesn?t tend to get radically overbought, thus in danger of
its upleg burning out, until speculators and investors drive
gold-stock prices high enough fast enough so the HUI stretches more
than 1.50x above its trailing 200dma. Until today?s upleg crosses
this crucial bull-to-date threshold, we cannot argue that it is
overbought for a massive upleg.
At best as of the
middle of this week, our new upleg 8 only hit 1.298x the HUI?s
200dma. So even though this upleg has been fast and furious since
mid-August, it hasn?t even come close to looking extremely
overbought from a Relativity perspective yet. While it is obviously
far better to buy gold stocks when the HUI is close to its 200dma
rather than well above it like today, they can still be added as
long as the index doesn?t look too overbought technically.
And how overbought
or oversold the HUI becomes is easily the most important key to
profitably trading gold stocks. Bulls advance in sentiment waves,
greed-driven uplegs followed by fear-driven corrections. Smart
traders buy gold stocks when fear abounds and few others want to
buy, like in mid-August. Then they sell when greed grows extreme
and everyone wants to buy, like during the May 2006 top where I
warned of a sharp
imminent correction.
While the extreme
fear surrounding gold stocks in mid-August has largely been driven
out, we haven?t seen any extreme greed yet. Instead of virtually
everyone being super-excited about gold stocks, claiming they are
heading for the moon, most contrarians still seem to be fairly
cautious today. They continue to worry, despite abundant historical
evidence to the
contrary, that the gold stocks will get hammered in a
general-stock-market selloff.
With the wall of
worries still very much intact, and gold-stock traders nowhere close
to being euphoric today, greed has not yet reached enough of an
extreme to trigger a major interim high. As long as greed remains
in check, this gold-stock upleg ought to run higher. The lack of
universal greed and euphoria now, as evidenced by the rHUI and other
technical indicators, also suggests that it is not too late to add
gold-stock trades today.
On a final note on
this chart, check out the major basing zones above. Each massive
upleg of this bull was preceded by a long period of
sideways-consolidating prices. These basing zones are critically
important for two reasons. First, the sideways trading bleeds off
the ridiculous levels of euphoria that mushroomed at the previous
massive upleg?s top. Sideways-trending markets rebalance sentiment
because they are so boring that they eventually drive away
previously ecstatic speculators in disgust.
Second, the
major-basing-zone consolidations get all traders comfortable with
new highs. Back in mid-2005 when the HUI struggled to claw back
over 200, 350 looked impossibly high. But after the long
consolidation since May 2006, 350 is now boring and pretty much
every gold-stock trader feels it is normal. So major basing
zones get traders comfortable with newly-high levels that would have
once been considered inconceivable earlier in this bull.
The interesting
part about all of this is the HUI just completed another major
basing zone before it started shooting higher in mid-August. So the
whole technical foundation has already been laid for much higher HUI
levels than we have yet witnessed in this bull. With such a strong
base, the 580 to 700 levels the HUI upleg cycles argue for don?t
seem excessive at all. Massive uplegs to major new highs follow
long consolidations, and this is just where we are today.
Finally I would
like to share the least-important reason to add long gold-stock
trades, the seasonal tendencies of gold stocks. As discussed in
depth in early October,
the HUI seasonals
are not precise enough to be a primary trading tool like the rHUI.
If the rHUI is like the gasoline propelling your car down an
interstate highway, the HUI seasonals are like the prevailing winds
buffeting you. While you can get where you are going without a
tailwind, it is sure pretty nice to have one.
Over their entire
bull since 2000, the HUI seasonals have their strongest tendency to
rally from mid-October to February. Needless to say, we are early
in this very period today. If the HUI lives up to its seasonal
tendency for its strongest rally of the year just getting underway,
we could really have an exceptionally awesome few months ahead in
gold stocks.
Considered in
isolation, these seasonal tendencies aren?t particularly useful.
But when considered in concert with hardcore primary technical
indicators like the rHUI, these strong HUI seasonals add a nice
probabilistic tailwind to this gold-stock advance. While I won?t
trade on seasonals alone, the fact that they are blowing in a
bullish direction works to buttress the near-term bullish case for
the HUI. Even the HUI seasonals argue that this upleg has not yet
matured and fully run its course.
So if you see gold
heading to new highs, and the gold stocks flying, and you want to
ride this upleg, odds are it is not too late to deploy capital.
While your gains going forward won?t be as good as those of the
prudent contrarians who deployed back in late August and September,
there should still be plenty of profits yet to be won in this
upleg. And of course if new all-time nominal gold highs finally
bring in the mainstreamers, all bets are off as this upleg could
vastly exceed anything yet seen in this bull.
While these
prospects really excite me as a long-time investor and speculator in
gold stocks, it also saddens me that this is new information for
many traders. I have been writing about and preparing our
subscribers for this new massive upleg all year. Despite the
increasing general frustration with gold stocks? long consolidation,
we continued to buy on the dips each time the HUI traded near its
200dma. Since we were willing to buy when few others would, we?ll
reap the greatest profits.
But being a
contrarian and fighting the crowd is hard. It inevitably draws
ridicule and derision. So most traders act like weathervanes and
simply reflect the popular sentiment around them. When others are
scared like in mid-August, they argue for far deeper declines and
sell aggressively. When others are euphoric like in May 2006, they
argue for a moonshot and buy aggressively. But buying extreme greed
(buying high) and selling extreme fear (selling low) is a recipe for
disaster that has destroyed much capital even within this gold-stock
bull.
So if this concept
of a new massive gold-stock upleg is new to you, and your capital
wasn?t already deployed and ready for it, join us at Zeal. Our
subscribers were ready and deployed in advance. We are
hardcore speculators who have never and will never care what others
think. We just want to study the markets, conform our trades to the
markets, and win on balance. Popularity be damned. We expected the
correction in May
2006 and we expected this upleg in
late August 2007.
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and multiply your capital before it is too late to buy gold stocks
in this upleg!
The bottom line is
it doesn?t yet look too late though. This upleg remains young and
small compared to its predecessors, it is not technically overbought
yet so greed isn?t excessive, and even the tailwinds of the
seasonals have lined up behind it. And all this isn?t even
considering the impact that a sudden mainstream interest in new gold
highs could have to drive mainstream capital flooding into this tiny
sector.
If you have been
trading gold stocks since the beginning as I have, congratulations
on being a rare contrarian able to fight the crowd. I hope you are
enjoying your greatly multiplying profits! If you are new to
trading gold stocks, welcome aboard! With gold now at just over
1/3rd of its famous inflation-adjusted January 1980 high, odds are
the majority of this gold-stock bull is still yet to come.
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