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January 07, 2007
It sure has been a week for gold and its shares this first week of
2008. Right from the start gold blasted through its 1980 all time high and
the gold shares exploded to the upside as well thereby finally showing some
signs of strength after failing to out perform gold for quite a while. Now
what can we expect from gold and its shares this year? Is this bull market
coming to an end as many of the gold bears want you to believe? Or are we
nowhere near an end of this bull market yet? Yes, reading gold market
analysis from many different sources can be quite disturbing and confusing
for the average gold investor. Remember the gold pundits declaring the end of
the gold bull market last year when gold hit $680? Gold was supposed to be
overvalued then and bound to correct to $500. Well, obviously the bears were
wrong since gold went exactly the opposite way and challenged its old all
time high by end of last year.
Since gold slashed its old 1980 all time high people are wondering where
to go from here?
Well, it's my strong belief gold will top $1000 this year and a
multiple of that in the years to come. Sure enough there will be corrections
here and there but the thing is that you shouldn't be scared about them since
they could provide excellent 'BUY' opportunities (such as happened on
December 18 last year, see below). The thing is to keep the BIG picture
in mind. It goes far beyond the scope of this article in order to discuss all
critical drivers pointing towards higher gold prices in the years ahead like
inflation, supply/demand and an eroding dollar, but I like to highlight a few
important charts which you should keep in mind each time the gold bears are
preaching a top in gold again.
- DOW/GOLD
ratio says gold bull market nowhere near its end
- Gold's Long
Term Inflation Adjusted Average says gold still cheap
- Gold/OIL
ratio says Gold is a bargain
DOW/GOLD ratio chart
Gold could be topping $1000 this year but more importantly it could
reach a multiple of that in the years to come. The one and only chart you
have to focus on when it comes to the 'BIG' picture is the DOW/GOLD
ratio chart. Although the DOW/GOLD ratio chart isn't of any use when it comes
to short term predictions its works perfectly well when it comes to predicting
long-term trends.
The DOW/GOLD chart is a powerful tool in order to determine major
turnarounds. It's simple, when the DOW/GOLD chart tops you buy gold, when the
DOW/GOLD chart bottoms you buy equities. Once you've established your
position you can ride the wave up or down for at least a decade. The DOW/GOLD
chart flashed a 'buy' for Gold again in the year 2000 and indeed 7 years
later Gold is already 240% off its lows since then. The DOW/GOLD chart tells
you to hold on to your Gold until a new bottom has arrived in the 1 - 5 area.
If it were all that simple why don't we hear that much about it?
Well, as said before the DOW/GOLD chart isn't useful at all in order
to predict yearly price movements. It could very well be that next year will
show a higher reading than this year instead of an expected lower reading
thereby losing confidence as being a reliable indicator. Unfortunately that's
the same analogy as denying that higher temperatures will arrive in summer
based on a single day temperature drop in spring. The problem is that the
DOW/GOLD cycle has a wave length that's so big that we humans have a hard
time figuring out where to position ourselves in this cycle. Nevertheless
many veteran analysts such as Richard Russell and John Hathaway do refer to
this cycle. Indeed history does suggest that the DOW/GOLD ratio bottoms
periodically in the 1 - 5 range. The Dow/Gold ratio topped in 2000 far above
40 and is heading down now (current reading at 15.17).
If the DOW/GOLD ratio can live up to its expectations than we can
expect a new DOW/GOLD bottom later this decade or shortly thereafter.
The DOW/GOLD ratio bottoming in the 1 - 5 range translates itself into
a gold price exceeding $2000.
Long Term Inflation Adjusted Average for Gold
This chart speaks for itself, in order to reach new 'real' all
time highs the gold price should exceed $2000 with ease!
NOTE: The long-term inflation adjusted chart is calculated upon government
issued inflation data. As discussed many times before, inflation data issued
by government are blatant lies. Current inflation numbers are running in
double digit numbers, still government wants us to believe that inflation is
not a problem.
GOLD/OIL Ratio:
There has always been a strong correlation between gold and oil. From
a historical perspective it takes about 15 barrels of oil in order to buy one
single ounce of gold. Now oil prices are challenging the $100 mark and the
end is nowhere in sight. Cheap energy is a thing of the past so what gives?
In order to return to an historical average gold should be catching up on oil
soon. The chart below clearly demonstrates the undervaluation of gold against
oil and the GOLD/OIL ratio chart suggests $1500+ gold as being the norm for
today!
The GOLD/OIL relation is clearly visible in the chart below. There has
always been a strong correlation between gold and oil indeed but gold is
lagging oil tremendously lately. As said above, cheap energy is a thing of
the past so gold still has a long way to go in order to catch up with oil.
No matter how you slice it, gold is way undervalued related to its own
historical averages so yes, gold on its way to $1000 and way beyond is
something we should seriously consider!
So much about the BIG picture. Let's focus now on a short term scale
and see what happened last month. On December 18 we send out our piece 'HUI - Correction over' which was
right on the mark. We suggested a temporary bottom was near based on
the GOLD/HUI ratio. Let's review the GOLD/HUI charts of December 18 vs the GOLD/HUI charts of today and see what happened:
GOLD/HUI ratio chart from 'HUI - Correction over' - December 18,
2007
GOLD/HUI ratio chart now
HUI chart from 'HUI - Correction over' - December 18,
2007
HUI chart now
GOLD chart from 'HUI - Correction over' - December 18,
2007
GOLD Chart Now
Last but not least we wrote on December 18:
In fact nothing has really changed, no uptrend
has been broken and the current AB Flag formation simply has to resolve
itself one of these days. If it can resolve itself to the upside then the HUI
is in for a spectacular move to the upside. END.
Well, the AB Flag formation did resolve itself to the upside and the
HUI exploded in a spectacular way to the upside indeed. Furthermore our $900
gold objective for Q1 2008 (see 'HUI - Too Young To Die - November
18, 2007) is already within reach by now so yes, the year of 2008 could be a
very rewarding year for us gold shareholders indeed. In case gold can manage
to clock $900 indeed before end of Q1 then we could see HUI levels topping
the 500 mark before end of Q1!
NOTE: please visit our charts page HERE for all updated
weekly/monthly charts at golddrivers.
Now the question remains of course how can we profit from a continued
bull run in gold and its shares?
Well, our focus will remain on those companies which are or could be
on the verge of a major discovery since discoveries are paying of
tremendously. The idea is simple, a tiny junior
explorer with a market cap of $50 million making a world class gold discovery
will find its market cap increase by a multiple of 100%. The question however
is which companies to select since only 1 out of every 1000 projects will
make it to a mine.
At golddrivers we track about 700 companies
and our system alerts us on every new potential discovery. In fact our system
alerts us on all drilling results from all companies. These drilling results
can be viewed HERE . Sure
enough these news items shouldn't be considered all as BUY opportunities,
it's just a first filter applied to all company news that comes out.
The next step is to filter out the best discovery news on a
weekly/monthly basis. This feature will be available for our premium members
and Discovery News members shortly. Please be aware that this is an
information service only targeted at the more experienced investor. Members
who aren't comfortable judging Discovery News themselves can rely on
Discovery ALERTS which we send out to our Premium Members. In Q4 2007 we sent
out 4 Discovery ALERTS which yielded an average gain of 75% so far.
So if you are a believer in gold's future then these
are the times to increase your gold share positions since the gold shares are
still selling at fire sale prices. In other words, downside risk is low.
Higher gold prices the years ahead will lift the entire gold share sector but
the most exciting rewards will come from junior mining companies making new
discoveries.
So If you would like to participate in our hunt for
new discoveries you could opt for a free trial subscription
The Free trial includes all GOLDDRIVERS modules like
Discovery News, Charts, TOP-20 Favourites,
Break-out ALERTS and GOLD/HUI analysis.
In case you don't want to opt for a Free trial
mentioned above you can drop a mail HERE as well in
order to join our Free mailing list. By doing so you will receive every now
and then a Free version of the Gold Drivers Report.
Please feel free to drop your comments at:
ehommelberg@golddrivers.com
Best regards,
By :
Eric Hommelberg
Editor, the Gold Discovery Letter, the Gold Drivers Report
www.golddrivers.com
The Gold Discovery Letter track promising junior
companies which could be huge winners before this decade is out. If you would
like to participate you could opt for a free trial subscription (one month) HERE.
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