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- Gold on its way to $1000+ in short term
- FED emergency cut extremely bullish for Gold
- South Africa's
Gold production halted due to Power crisis
This piece was sent out to our members on Friday January 25, 2008
Gold is on a roll these days and marching higher into new record high territories.
Gold's current rise is running on some heavy fuel indeed and it's only a
matter of time before $1000 gold will be hitting the news wires. Gold
surely got a rocket boost from the FED this week since the FED slashed the
FED Funds rate by an unprecedented 0.75 bp in order
to prevent a 1929 style crash. It happened before, back in 1987 Alan
Greenspan’s response to the 22% DOW crash was an emergency rate cut of
60 bp and what happened next wasn't that difficult
to predict. Sure enough the dollar tanked and gold took off but more
importantly the gold shares took off as well and appreciated by 50% in just
three weeks time.
Now fast forward to today, the gold share holders were panicked lately
due the liquidity crisis but investors should realize that gold shares are
tied to the gold price, not to the DOW. Yes, a 400 pt down day for the
DOW will drag the gold shares down as well but that doesn't mean that gold
shares could only appreciate on the back of a rising DOW. Unfortunately this
is what many analysts would like you to believe. Let's face the facts, this
year so far the DOW depreciated by about 7% while the HUI appreciated by 14%.
You get it? Staring at daily movements will get you nowhere so please forget
about the noise coming from those analysts arguing that a decline in the DOW
would be bad for gold stocks.
It goes far beyond the scope of this update to discuss the liquidity
crisis and how governments/central banks will respond, the only thing that
matters is to know that:
- Most
central banks are running their money supply at double digit numbers.
- The Dollar
will be sacrificed (lower rates) in order to avoid recession
- Inflation
is roaring its ugly head
This is all very gold friendly and will speed up gold's ascent to its
inflation adjusted all time high of $2250+.
Now on top of the items mentioned above there came this disturbing
news out of South Africa:
SAfrica gold firms stop
all mining on power crisis
JOHANNESBURG, Jan 25 (Reuters) - South Africa's
three top gold producers suspended production at all their mines in the
country owing to a power shortage that the government on Friday termed
"a national emergency". END.
No matter how you slice it, no mine production from South Africa
translates itself into a severe shortage on the physical gold market for many
weeks to come. Needless to say this puts additional up-ward pressure to the
gold price.
Now higher gold prices down the road, what does that all means for us
gold share holders?
Well, the gold shares are picking up steam lately and the HUI is
trading near new all time highs again. I expect that next quarter earnings
from most producing companies will see an explosion to the up-side thereby
fueling new investor interest.
OK you'll say but what about the junior exploration companies? They
have been trading like if gold was trading at $400 instead of $900, what is
going on over here? Should we sell our juniors and swap them for rock solid
producing entities or is there some light at the end of this long dark
tunnel?
Sure enough I got a lot of questions coming my way asking what to do
with our juniors since the general attitude seems to be that most juniors
will have a hard time surviving the on-going liquidity crisis. The argument
is that due to the liquidity crisis it will be harder and harder for juniors
to raise money and juniors not able to raise money for their exploration
adventures are doomed to file for chapter 11 rather sooner than later.
Although I understand such logic I simply disagree with it. My point is
that it only requires such a tiny percentage of the total amount of invested
money to flow into the gold share sector in order to skyrocket all gold
shares into spectacular new highs. Remember that in 1980 about 5% of all
invested money was in gold and gold shares, we 're
nowhere close to even 1/10 of that today!! You get it? Even a small amount of
money flowing into the gold share arena will blow it up big time. Juniors
sitting on a significant amount of proven resources will do well since
there's a huge demand for new resources by the senior producers. Right now
the huge sell-off among the juniors is driven by fear which has driven the
entire junior sector into extreme over-sold territories. The good news however
is that such extremities never persist for a long period of time and in order
to work off that extremity the gold price has to come down sharply or the
junior sector has to catch up sharply.
Let me visualize the extreme undervaluation by means of a few charts.
Normally when the gold price goes up you would expect the juniors to
go up as well. Now a good tool in order to determine extreme
over/undervaluation of the junior gold shares is to divide the junior index by
the price of gold. Now let's say when gold appreciates by 10% and the junior
index appreciates by 10% as well then the chart will show you a flat line
since the ratio didn't change. Now as long as the line stays flat the juniors
appreciate exactly by the same percentage as the gold price. When the line
turns down the juniors under-perform the gold price and when the line goes up
the juniors do outperform the gold price.
Since there isn't really a junior index I used the CDNX index which
isn't really a perfect match but nevertheless good enough to draw our
conclusions. Now let's take a peek first at the daily CDNX/GOLD ratio chart:
Clearly visible is the extreme undervaluation of the junior shares.
Although the down-trend hasn't been breached to the up-side yet it seems that
we might be very close to a bottom here.
Now when we take a peek at the same chart but on a weekly base then
some interesting things come up:
The weekly CDNX/GOLD ratio chart reveals an extreme undervaluation of
the junior shares against gold not seen before in the entire gold bull market
that started in 2001. As the saying goes 'BUY LOW' and 'SELL HIGH' it seems
that we've arrived at a perfect 'BUY' opportunity here.
Now when we take a peek at the monthly CDNX/GOLD ratio chart we'll see
the extreme under-valuation again but more importantly we'll notice plenty of
room for a giant up-move in the junior shares that could last for more than a
year!!
The most interesting part of this chart is without doubt the almost
identical setup as in early 2003. Now the year of 2003 turned out to be the
best year for the juniors so far and in fact still many juniors are trading
at levels below their 2003 peak! Another beauty
of this chart is that it leaves plenty of room for a giant up-move for the
juniors which could last for more than a year!
So what are we supposed to do from here?
Well, if you are a believer in gold's future then
these are the times to increase your gold share positions. 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.
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discoveries you could opt for a free trial subscription
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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
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