Gold’s typical autumn
strength has been garnering a lot more interest than usual this year. Since
its late-July seasonal low 8 weeks ago, this metal has rallied over 11%. But
the limelight really didn’t start shifting to gold until last week,
when it started achieving new all-time highs in nominal (not
inflation-adjusted) terms. All this new gold attention is rekindling
interest in the gold miners.
Gold miners’ profits are
driven by the price of gold. The higher it goes, the greater their profits
grow. And in the stock markets, a stock’s price ultimately reflects its
underlying company’s long-term profits. Thus gold stocks follow gold
higher, usually amplifying gold’s gains due to their inherent profits leverage.
This outsized performance compensates investors for gold stocks being far
riskier than physical gold itself.
While these gold-stock
fundamentals are simple and clear, psychology can trump them
temporarily. When traders get excited about gold stocks, they are bid up
much faster than the gold price warrants. And when traders feel depressed
about this sector, it lags gold significantly. Fortunately these
greed-and-fear waves create fantastic opportunities in gold stocks that both
investors and speculators can capitalize on.
Gold stocks haven’t
experienced the greedy crest of a sentiment wave since spring 2006. And then
they were ripped to shreds in the brutal stock panic of late 2008, an epic
fear trough. All of that emotional panic selling drove them to absurdly-low
levels compared to the prevailing gold prices at the time. Ever since then,
they have been gradually recovering. Our subscribers have already realized huge
gains in this gold-stock recovery since I started writing about this
panic-driven anomaly in late 2008.
Despite their big run so far, this
gold-stock recovery is far from over. Even today, gold stocks remain way too
cheap relative to the price of gold, the ultimate driver of their
profits and hence stock prices. This ongoing disconnect is largely due to
lack of interest among gold stocks’ traditional individual-investor
constituency. But thanks to today’s new gold highs, this apathy is
finally giving way to eager interest.
Gold stocks’ post-panic
recovery to date, and the amazing opportunities that remain in the rest of
it, is easiest to understand through the lens of the HUI/Gold Ratio. The HGR
simply divides the daily close in the flagship HUI gold-stock index by the
daily close in the price of gold. Charted over time, this powerful metric
clearly shows when gold stocks are overvalued or undervalued relative to
their primary driver.
In these charts, the HGR is
rendered in blue off the right axes. This is superimposed over the raw HUI
index in red for comparison. This HGR relationship is extremely important for
all gold-stock investors and speculators to understand. Despite the HUI
itself challenging new all-time highs this week, relative to the gold price
this sector remains woefully undervalued today. And that makes gold
stocks great buys!
When this blue HGR is rising, it
means the gold stocks are outperforming gold. Generally this occurs when they
are rising faster than gold itself during a substantial rally in this
metal. A falling HGR means the opposite, that gold is outperforming the
gold stocks. This is most often seen during gold corrections, when the
gold stocks fall much faster than gold, thus the metal effectively performs
better than them.
Prior to the epic discontinuity of
that first true stock panic in 101 years, the HGR had meandered in the
very-well-defined secular trading range you can see above. For 5
continuous years, the HGR usually ran between 0.46x on the low side and
0.56x on the high side. When investors were pessimistic in a gold-stock fear
trough, the HUI traded at 46% or less of the price of gold. When investors
were excited during a gold-stock greed crest, the HUI neared or exceeded 56%
of the price of gold.
While there were occasional
extra-trend episodes where the HGR knifed below its 0.46x support or shot
above its 0.56x resistance, they were rare and short-lived. For those 5
long years that preceded the late-2008 stock panic, the HGR averaged 0.511x
with a tight standard deviation (0.035x). This great longevity combined with
this centrally-clustered dataset implies this relationship is very meaningful
When a trend runs for 5 minutes,
odds are it is meaningless random noise. After persisting for 5 months, a
trend is starting to prove its staying power and importance despite the
ever-shifting vagaries of sentiment winds. But after 5 years,
the probabilities approach certainty that there is a powerful fundamental
driver underlying this price behavior. For this secular gold bull, the 0.51x
HGR average was essentially proven to be fair value. The gold stocks
kept gravitating back to this particular relationship.
If it wasn’t for that crazy
once-in-a-lifetime stock panic and the extreme fear it spawned, odds are the
HGR would have remained largely within this secular trend. But
unfortunately gold-stock traders panicked like school girls during that
hyper-emotional episode. They foolishly allowed themselves to be blinded by
fear, forgetting all their hard-won fundamental knowledge of secular gold bulls.
So between the HUI’s
all-time high of March 2008 and its panic low in November that year, it
plunged a gut-wrenching 71%! Heck, in the last 5 weeks of that span
alone it plummeted 57%! It really felt like the gold-stock apocalypse,
but even at the time it was perfectly clear to hardcore students of the
markets that this selloff was unbelievably irrational. We bought the GDX
gold-stock ETF the day after this low, when I wrote the following to
our Zeal Speculator subscribers on October 28th, 2008…
“I’ve been long gold
since the $250s (early 2001) continuously and I’ve never felt more
bullish than I do today after this nasty financial panic and its resulting
bailout mess. Gold’s fundamentals are stellar. Yet the HUI closed near
152 yesterday, which is end-of-the-world levels as far as I am
concerned. This index hasn’t been this low since mid-2003!
Where was gold trading back then? In the $350s! Is this madness
or what? We have a gold price over twice as high yet stock prices are apparently
discounting mid-2003 gold levels. This is clearly not rational and reflects
the sentimental nature of this stock selloff.”
Ever since, I’ve been doing
my best to make investors and speculators aware of this massive anomaly and
the incredible gold-stock buying opportunities it created. But boy, let
me tell you, it has been an uphill battle.Countless gold-stock traders who
had enjoyed huge gains in the gold-stock bull prior to the panic simply gave
up and walked away. They became ostrich investors, paralyzed by their fear and
unwilling to buy into one of the biggest gold-stock rallies ever seen.
It was tragic, a terrible waste.
And indeed gold stocks recovered
rapidly out of those panic lows. Just 9 weeks later as the sun set on 2008,
the HUI had already rallied 100%. And it continued to advance much
faster than the gold price into September 2009. But at that point it stalled
out, there weren’t enough former gold-stock investors returning or new
gold-stock investors discovering this super-high-potential sector to keep driving
This next chart zooms into that post-panic period chronicling the
gradual normalization of the HGR. In addition to the same data series in the
first chart, an additional one is rendered. While the red line shows the
actual HUI, the yellow one shows a hypothetical HUI based on where it
would be trading at its secular average HGR of 0.51x. The difference between
this hypo HUI and the actual HUI reveals just how undervalued gold stocks
have been throughout their recovery.
In its first year or so of
recovery, the gold stocks rallied much faster than gold driving the
HGR’s volatile initial uptrend. But in September 2009, curiously when
gold first marched decisively north of $1000, gold-stock excitement
peaked. Gold stocks were able to weather the healthy December 2009 gold
correction without much fuss, but once the January 2010 general-stock-market
pullback arrived they crumbled. Gold-stock traders believed the
perma-bears’ misleading and wrong hype that a new stock bear loomed.
Ever since the flagship S&P
500 general-stock index bottomed in early February, gold stocks have again
been regaining ground relative to gold. But their pace has been much slower
in this latest uptrend, leading the HGR to trade in a much tighter and
shallower range. Nevertheless, despite early May’s Flash Crash and
the incredible anxiety generated by the stock markets’ May and June
correction, the gold stocks continued to gradually regain ground relative to
Back in the heart of the stock
panic in late October 2008, the actual HUI was trading at just 41% of where
the gold price suggested it should have been based on the 0.51x
secular-average HGR. By the secondary stock-market low in March 2009 driven
by the Democrat Despair (threatening higher taxes on already wildly-overtaxed
investors), the HUI had still recovered sharply to 57% of where it ought to
And early last December as
2009’s seasonal autumn gold rally peaked, the HUI was actually back up
to 82% of where it should have been based on a 0.51x HGR. The big fear
spike on that initial stock-market pullback early this year drove this metric
back down to 68%, but it has subsequently recovered to 77% this week. I
fully expect the HUI to continue its post-panic recovery, rallying faster
than gold until gold stocks catch up to their fair-value average seen for
most of their secular bull prior to the panic.
For a variety of reasons, I expect
this gold-stock recovery to accelerate in the coming months. Due to big
investment-demand spikes out of Asia, gold tends to be very strong in
September, November, and December (it tends to consolidate a bit in October).
Gold’s seasonals are very favorable for continued rallying in the
coming months. A couple weeks ago I showed technically why gold could
easily hit $1500 by December if it simply follows precedent from its prior
Nothing drives interest in gold
stocks, both from former investors and first-time investors, like new
all-time nominal gold highs. These generate tons of media coverage, and
indeed gold-stock analysis and interviews with gold-stock CEOs are starting
to get more airtime on CNBC in the past week or so. This trend will only grow
as gold rallies higher, increasing investor awareness of gold stocks.
In addition, after 2 whole years
of earning nothing in zero-yielding cash and record-low-yield
Treasuries, investors are growing tired of cowering in fear. They are
gradually starting to understand that the cyclical stock bull (within its
secular bear) is alive and well, that the odds of a new crash or panic are
virtually zero at this stage in stocks’ bull-bear cycles. They are
starting to see through the endless perma-bear hype, and they rightfully feel
guilty and ashamed for ignoring the massive and universal post-panic rallies.
The combination of the fear-trade
waning, trillions of dollars of investment capital languishing idle on
the sidelines in cash, and gold’s strong performance and new records is
an explosive mixture for gold stocks. If anything is capable of reigniting
excitement in this small and long-neglected sector, this peculiar confluence
of events is it. And it won’t take much capital to drive massive
As of the end of last month, the
collective market capitalization of all the elite gold and silver
stocks in the HUI index was just $208b. Meanwhile the broader S&P 500,
which only includes a single precious-metals stock (Newmont), was $9969b.
With less than 2% of stock investors’ capital in gold stocks now, their
potential is enormous. If stock investors decide to allocate 3%, the
HUI will surge at least 50% from here. At a still-trivial 4%, the HUI
would at least double. And even if the mighty GLD gold ETF is thrown in, worth
$54b this week, stock investors’ total allocation to gold remains
Ever since the stock panic,
I’ve believed the HGR would at least return to its pre-panic secular
average of 0.51x. At today’s $1300 gold, this implies a HUI around 665
which is 30% higher than today’s levels. At $1500 gold, a fairly-valued
HUI would trade near 765 which is 50% above today’s levels. And these
projections are very conservative, both because gold’s secular bull
will rally a lot higher in the coming years and the HGR certainly isn’t
capped at its pre-panic average.
Remember that we haven’t
seen any real gold-stock excitement, rampant greed, since early 2006.
That was when gold first punched through $600 and $700 in this secular
bull. At the time, the HGR peaked around 0.61x reflecting
investors’ enthusiasm. At $1300 and $1500 gold, this kind of HGR
reading implies a HUI around 790 and 915. These represent gains from
today of 55% and 80%. Gold stocks’ potential truly is great as they continue
their post-panic recovery.
In addition to gold’s new
record highs drawing attention, the HUI itself will break through its
all-time high of March 2008 very soon. As of the middle of this week, it was
just 1% away! Mainstream investors love to chase momentum as new
records are being carved, and gold stocks are right on the verge of crossing
over into this exciting uncharted territory. This will even generate CNBC
airtime for HUI discussions, something we have rarely seen so far in this
entire secular bull.
And while the large elite gold
miners have great potential as this sector continues to normalize to
prevailing gold prices, the best juniors have vastly more. Junior gold
stocks have tiny market caps, from under $50m to a couple billion for the
handful of largest ones. Meanwhile the 15 HUI-component stocks have average
market caps around $14b, with the larger ones running $30b to $45b. It
is far easier (it takes much less capital) for a $1b company to double,
quadruple, or multiply 10x than a $30b one.
At Zeal our knowledge of the
high-risk-high-reward junior-gold-stock world is unparalleled. This year
alone we spent 9 months carefully researching the entire universe of
early-stage junior golds, advanced-stage junior golds, and junior gold
producers. We gradually whittled down hundreds of juniors to our dozen
favorites in each category. Then we profiled each of these elites in our
famous comprehensive fundamental reports. Many of the juniors detailed in our
past reports have soared to massive gains.
This week, we just finished our
latest 27-page report on our favorite junior-gold-producer stocks. It
is the fruit of several-hundred hours of expert world-class research. Out of
the nearly 100 juniors actually mining gold today (that list on US and
Canadian stock exchanges), we gradually narrowed the field to our dozen
favorites fundamentally. This fascinating new report is now available for
purchase on our website for just $95 ($75 for Zeal subscribers). It is truly
a steal! Buy yours today before gold drives these stocks far higher!
Of course we also publish
acclaimed weekly and monthly subscription newsletters. For over a decade
now, we have been relentlessly analyzing commodities and the stock markets
and recommending high-probability-for-success trades as opportunities arise.
Since mid-2000, we’ve realized 235 gold-stock trades and 104
silver-stock trades in these letters. In Zeal Intelligence, our average
annualized realized gold-stock gain over this entire span (including all
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The bottom line is gold stocks
remain very undervalued relative to the gold price. Since gold drives their
profits, and their profitability drives their ultimate stock prices, this
panic-driven anomaly cannot persist. And gold stocks have indeed been
recovering on balance since that crazy panic. As investors gradually return
to this unloved sector, gold stocks continue to gradually normalize relative
to the price of gold.
And with gold achieving new
all-time nominal highs, and the HUI on the verge of its own, this renaissance
of gold-stock investing can only expand. Investors are tired of the vast
opportunity costs of cowering in cash, and they are looking for performance.
And gold’s seasonal autumn rally is providing it in spades,
increasingly capturing investors’ interest. Capital migrating into gold
stocks is a natural extension of this gold enthusiasm.
Adam Hamilton, CPA
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