Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Keeping the Decline in Gold Stocks in Perspective

Commodities / Gold and Silver 2012 May 07, 2012 - 07:55 AM GMT

By: Jordan_Roy_Byrne

Commodities

Best Financial Markets Analysis ArticleAs the gold stocks continue to fall to new lows and struggle to find a bottom, it is important to keep things in perspective. Before we get to the visual comparison with the 1960s and 1970s, we want to touch on the reasons why the gold stocks have underperformed in recent months and years.


First, the sector had a terrific run that would have to be corrected. From late 2008 until the end of 2010, GDX advanced more than 4-fold from $15 to $64. Silver stocks, juniors and mid-tiers had a larger run that lasted nearly 30 months. It takes not months but quarters to correct that type of move. Moreover, GDX has yet to reach the 50% retracement at $41. A 38% or 50% retracement is routine. Furthermore, we’ve shown in recent writings that the current correction in percentage terms is in-line with corrections in past years.

A second reason for poor performance from gold stocks is the strong stock market, which provides competition. If conventional investments perform well then there is less mainstream demand for Gold and gold stocks. After the announcement of QE 2 in August 2010, the large gold stocks advanced for only four months before reaching a peak. Since the announcement, the S&P 500 is up more than 30%. The S&P 500 has had a great run in the past seven months while gold stocks have really struggled. The best general market environment for gold stocks is not one of extreme strength or weakness but one of slight strength or neutrality.

Third, mining is a difficult business in which operational difficulties are not random. Sure, energy costs and overall costs are higher but margins for the able producers are at record highs. The great companies are performing well in this environment, as they should be. The struggles of so many companies within a highly profitable environment is a testament to the overall difficulty of the mining business.

Lastly, we believe the lack of performance can also be attributed to the wall of worry phase of a bull market. Current valuations are a reflection of the wall of worry phase. There are three phases in a bull market. Valuations increase at the start (stealth phase) and at the end (participation phase) but not during the middle, wall of worry phase. Presently, the gold stocks remain in the wall of worry phase. In the previous bull market, the wall of worry phase lasted five years.

Below we plot the Barron’s Gold Mining Index (blue) and the current HUI Gold Bugs Index (HUI). We’ve touched on this in previous writings, but there are noticeable similarities. The HUI had a sharper initial correction but rebounded to marginal new highs. The HUI now appears on its way to forming its first major bottom since 2008. When the BGMI bottomed in late 1971 it had effectively made no progress in six years. The BGMI is currently only marginally above its peak in 2006.

This chart is not to imply that the HUI will follow the exact same path. More so, it is to illustrate the similarities between both markets as they endured the wall of worry period. In previous writings we showed how other bull markets (Nasdaq, Japan) endured their own wall of worry periods before exploding to new highs and then higher highs. From its low in 1971, the BGMI would rise roughly 12 fold in the last nine years of its bull market.

With the current low valuations and extreme negative sentiment combined with the strengthening real price of Gold (implies future margin increases), we have little worry that this sector will explode in the coming years. The last six months have been a difficult period but it is closer to the end than the start of said period. With all of this in mind, it is wise to develop a game plan and a stock list. Scaling into positions (near support levels) over the next several months would be a wise move. For subscribers, we have updated our watch lists and prepared support levels to watch for a potential major bottom.

If you'd like professional guidance in this endeavour then we invite you to learn more about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

Trendsman” is an affiliate member of the Market Technicians Association (MTA) and is enrolled in their CMT Program, which certifies professionals in the field of technical analysis. He will be taking the final exam in Spring 07. Trendsman focuses on technical analysis but analyzes fundamentals and investor psychology in tandem with the charts. He credits his success to an immense love of the markets and an insatiable thirst for knowledge and profits.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in