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In my piece ' I suggested a bottom for the
juniors must be near based on the CDNX/GOLD ratio. Furthermore I suggested
that the next up-leg in juniors could be expected when gold bottoms out and
starts a new up-leg again.
In this short technical piece I want to show a few
charts which do suggest a bottom for gold (and major gold stocks) must be
near indeed. The recent drop in gold has spooked many investors out of their
gold positions but again investors should realize that we've been there
before and nasty corrections like these will happen again and again during
the remainder of this gold bull market.
Now let's start off with the 3 year gold chart. It visualizes
the similarity of the major correction in May/June 2006 and current one:
This chart shows us the severe over-sold condition
in which gold found itself recently. It was its deepest over-sold condition
since June 2006! Since extreme over-sold conditions never persist for a long
period of time a bounce back could be expected which is just what gold is
trying to accomplish now.
That's the long term view, let's zoom in now to the
last few months and see what the technicals are
telling us:
This chart tells us that gold found solid support at
the $850 level indeed and breached its recent down-trend (A-line) to the
up-side. Although encouraging one should note that gold has to breach its
other down-trend line (B-line) as well to the up-side in order to mark a new
BUY.
The HUI is showing off a similar picture as gold so
let's take a peek first at the 3 year HUI chart:
This chart is showing us an extreme over-sold HUI
indeed which has bounced off lately from that over-sold condition.
These charts do look encouraging indeed but how can
we be sure a major bottom has been reached by now?
Well, sure enough no-one can predict the future but
one of my favorite charts does tell me that if we didn't bottom out now
further downside risk seems to be limited to less than 10%!
The chart below shows you the relative HUI chart
which has nailed all major bottoms since the beginning of this bull market in
2001.
The r-HUI chart is gold divided by its own 200 dma.It has proven to be a
reliable indicator in spotting major bottoms for the gold shares in the past
7 years.
This relative HUI chart briefly touched its green
BUY zone recently and bounced off immediately. This could mark the bottom for
the HUI indeed although a brief return to the green BUY zone can't be ruled
out either. The bottom line however is that down-side risk seems to be very
limited here. Furthermore it should be noted that the relative HUI chart
never found itself in the green BUY zone for more than a month. In other
words, if we didn't bottom out now it won't take long before we do bottom.
Also when we take a peek at the short term it seems
we've found another bottom for the HUI. At least that's what the GOLD/HUI
ratio chart is telling us. Over the last two years the GOLD/HUI ratio chart
nailed all the short-term bottoms for the HUI and has done so again last
week:
As you can see the GOLD/HUI ratio reached an extreme
again last week which normally points to a short term bottom for the gold
shares.
What does it mean when the GOLD/HUI ratio hits an
extreme?
It simply means that the gold shares are
tremendously undervalued against gold. It happens all the time, sometimes the
gold shares are too optimistic and they run ahead of gold and sometimes they
are lagging gold tremendously. This becomes clearly visible when you plot
GOLD vs HUI into one single chart, see below:
Clearly visible here is the irrational behavior of
the gold shares in 2003 when they run ahead too far from gold. Right now
we're dealing with a lagging HUI against gold as has happened two times more
last year. The previous two times marked an excellent BUY opportunity for the
HUI
So the charts are pointing here to a short-term
bottom (GOLD/HUI ratio) as well towards a long-term bottom (relative HUI
chart). The setup certainly looks good.
NOTE of caution:
No matter how good the HUI charts look like, all depend
of course on the price of gold coming weeks. We already saw the gold charts
on top of this page showing off the similarities between May/June 2006 and
now but what does the relative gold chart say? Did it flash a major BUY yet?
The r-GOLD chart is gold divided by its own 200 dma.It has proven to be a
reliable indicator in spotting major bottoms for the gold shares in the past
7 years.
The relative gold chart did not end up in the green
BUY zone. Now should we wait until it does? In order to do so gold should
fall below its own 200 dma which
suggests gold prices in the low 800's. I know there are quite a few
gold analysts out there predicting such gold prices indeed but in order to do
so gold should break its strong support level at $850 to the down-side. For
me as an investor it doesn't bother me. Again, the only thing that matters is
that down-side risk has dropped below 10%! Just think about it: when looking
back in 2012 with gold prices at $2000 and more would you regret it buying
gold at $880 in 2008 instead of maybe $820? No, of course not, as the saying
goes " BUY low, SELL high" it's now
the time the add to your existing positions. The risk here is to be out of
the market, not to be in.
Next week part II of 'The Investment Case For Junior Mining Companies' which discusses
the fundamentals/ fears driving the junior sector.
Please feel free to drop your comments at:
ehommelberg@golddrivers.com
Best regards,
Eric
Hommelberg
Editor, the Gold Discovery Letter, the Gold Drivers Report
www.golddrivers.com
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