Wednesday, October 14, 2009
Gold Miners Playing Catch Up
to the Gold price. In other words, if Gold is $100/oz, all other things being equal, Gold miners should be cheaper than when Gold is $1000/oz. Of course, all other things aren't equal, but as a general rule of thumb, using a crude ratio chart of a Gold mining index divided by the price of Gold can be a useful guide when speculating to figure out if Gold miners are relatively over- or underpriced relative to the price of Gold.
This worked out fairly well during the first phase of the secular Gold stock bull market that began in late 2000. Suddenly, however, Gold miners were thrown out with the bathwater during the Great [fall] Panic of 2008. The Gold miner to Gold price ratios fell out of bed and went two standard deviations outside the normal range.
Now, Gold miners are playing catch up. With Gold at new all-time nominal highs and the "real" price of Gold near it's all-time highs for this secular bull market in Gold and Gold stocks, most Gold stocks are below their all-time highs and some far below.
Here's a ratio chart of the stodgy blue-chip conservative Philadelphia Gold and Silver mining index ($XAU) divided by the Gold price on a 10 year weekly chart to show the entire secular bull market so far:
We are almost back to the lower end of the previous "normal" range in this index a year after the crash. I think we'll reach the lower end and eventually re-test and probably exceed the top of the old range once the mania really gets going. But compare this with the juniors and it's a whole different ball game.
Now, I don't have a good chartable junior Gold and silver mining index to use. As a matter of fact, think about that as a contrarian. Really think about that:
AS OF TODAY, THERE IS NO "BLUE CHIP" OR OTHER READILY AVAILABLE ETF OR INDEX THAT CAN BE BROUGHT UP ON MOST CHARTING SITES ON THE WEB. THIS IS CRITICAL TO UNDERSTANDING HOW FAR WE HAVE TO GO IN THE JUNIOR GOLD STOCK MANIA! THERE IS A FUCKING CHART AND ETF FOR EVERY GODDAMN THING UNDER THE SUN! CONTRARIANS, DELIGHT!
Yes, I am aware of a few souls laboring away to create their own junior index (Barbera, Gordon, McEwen, etc.), but try finding these indices on stockcharts.com or Yahoo Finance. Anyhoo, I stand with others who have been in the game longer than I that the Toronto Venture Index ($CDNX), though far from perfect (because it includes non-mining companies and companies who mine things besides precious metals), is a reasonable proxy for junior Gold and silver companies. Again, not perfect, but because this bull market is still so young in the eyes of institutional and retail investors, there is no good and easy-to-chart proxy for the junior Gold miners yet (GDXJ is coming out soon from Van Eck Global - freakin' brilliant timing this firm has!).
Take a look at the $CDNX to Gold price weekly 10 year ratio chart to see the difference in the junior sector:
We will get back to that range at some point during this Gold stock bull market. If you have the risk tolerance and buy a broad basket of junior Gold miners, a 500% gain over the next 3-5 years is not an unreasonable goal in this sector. The pending junior Gold miner ETF (ticker: GDXJ) will provide a liquid way for the public and institutional investors to play this sector, and play they will! We are playing catch up in the Gold mining sector and we are not done yet.
By the way, I understand that people are nervous about the pending resumption of the bear market in general stocks. This is prudent. But Gold stocks are done following the stock market down, other than brief, normal corrections that will sometimes coincide with the steep part of the many pending bear market sell-offs that await general stocks. But take heart in what happened during the worst parts of the 2000-2002 stock bear market. Though Gold stocks took one final vicious plunge with the stock bear market before beginning their new secular bull market in the fall of 2000, they pretty much did their own thing and ignored the stock market after that. Here's a busy chart showing the Gold Bugs' Gold miner index ($HUI) as a green area plot versus the S&P 500 (black linear plot) during the worst plunges in the stock bear market ongoing on that time:
This time won't be different. Last year's highs in the senior Gold stock indices are dead ahead. Gold bulls, enjoy the move.