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On October 07 The Gold Report
conducted an interview with me just after gold broke
out to new news above $1030. During that interview I made the case for $1300
gold by spring next year and advocated to be invested in high quality juniors
which are poised for a multi year bull run that could even surprise the
staunchest junior investors. This piece is an update on that interview and
shines a light on how to approach investing in junior gold mining shares.
Gold poised for correction? Not
now!
On October 07 with gold prices
just above $1030 The Gold Report asked me if I had one more final thought for
the reader. I said:
Excerpt TGR Interview October
07, 2009
TGR: Any
final thoughts you'd like to give our readers?
EH: Yes, most likely you'll be hearing bearish gold tunes in coming
months from the traditional gold institutions, saying that gold's rise is not
justified by its fundamentals and therefore bound to fall. They did so in
2003, they did so in 2005 and now they are at it again. The traditional gold
institutions simply don't appreciate the fact that gold is money and how it
has been manipulated over the years. Traditional gold institutions in 2005,
with gold prices at $425, were saying that increased gold production would
bring down gold prices; that certainly didn't boost their credibility. Still
many analysts quote these very same institutions today for the very same
argument— that increased gold production will bring down gold prices in
the years ahead. GATA, on the other hand, said in 2001 that gold was going to
$850 and that central bank selling wouldn't be an issue anymore within seven
to ten years from then. We find ourselves right in the middle of that
projection and gold is trading well above $850 and central bank sales have
dried up completely. You are not going to hear these kind of predictions from
the traditional gold institutions. No one has been right on the money more
than GATA. It's therefore no wonder that GATA's credibility is rising fast.
To give you an example here, the Chinese sovereign wealth fund, which manages
over $200 billion, has held already three teleconference calls with GATA—they
wanted to know what GATA knows. We all know now that China has been accumulating gold for years; we all know now that China wants a new world reserve currency. This, of course,
won't happen overnight, but it's quite obvious that the U.S. dollar as a world
reserve currency is not going to survive. Gold will continue to rise until
something new has been put in place on the monetary front and I think we are
years away from that. So what I'd say is. "Stick to it and stay the
course. “
END.
Well, we are just one month
further now and $50 closer to our $1300 target by spring next year, this
despite the many calls for $680 gold that have been aired since then through
the traditional bear channels.
Now does it come a surprise to
see gold holding up so well after breaching the $1000 mark and marching into
higher grounds?
No, of course not, when The Gold
Report asked me about a potential pull back I said:
TGR: Given
the recent run-ups, would you expect a pullback before the price rises again?
EH: I don't expect a sharp pullback; nothing like the correction last
year. That's not going to happen. Since gold breached the $1,000 mark for the
first time in March 2008, the $1,000 area had been a resistance area. It took
about five attempts to slash the $1,000 mark. A long-time resistance area
becomes a support level once that level has been breached to the upside.
That's exactly what happened a few of weeks ago, when we saw our first weekly
close above the $1,000 mark in history. Furthermore we had our highest
monthly close ever as well and this marks the beginning of a new up leg. The
charts leave no doubt; they point to gold prices of $1250+ within the next
six months. When you analyze the long-term charts you'll notice a pattern of
long consolidation phases followed by sharp up moves. The consolidation
phases last for about 18 months, the sharp up moves last for about six
months, whereby gold can appreciate by 50% or more. We saw it in 2005 when gold
just finished an 18-month consolidation period and then it shot up within six
months from $430 to $730. That move started with a commercial signal failure,
today with record high commercial shorts outstanding we could be on the verge
of a commercial signal failure again
END.
Here we are, gold shooting up by
$40 in the face of all nay sayers just like it did in 2005. The odds of
a massive commercial signal failure are increasing by the day. Certainly the
Indian bombshell of buying 200 tons of IMF gold wasn’t exactly the kind
of news the commercial short traders were waiting for. And yes, the FED
not willing to defend the dollar won’t be giving much comfort either,
and yes, the fact that more and more investors are demanding the real metal
instead of paper gold substitutes like GLD (see also my entire interview with The Gold Report) is
making things worse for the commercial short traders. So yes, we are on our
way to $1300 gold which is consistent with previous patterns of consolidation
phases followed by sharp up moves. The chart below which we’ve
send out to our members on Oct 07 visualizes this pattern:
TA GOLD
CHART – WEEKLY (Oct 07)
Now fast forward to
today with gold clocking $1080. Is it overbought now? Time for a correction?
Don’t think so!
Another chart I would like to
bring to your attention here is the relative gold chart which leaves no doubt
at all. There’s still plenty of upside potential from current levels
before extreme overbought territories will be reached. If gold would
reach the same overbought extremes as it did on the 2005 and 2007 run up then
gold should clock $1285 which again is very consistent with my $1300
prediction by spring next year.
Relative Gold chart
The relative Gold Chart (rGold)
is gold divided by its own 200 dma. It has proven to be a reliable indicator
in spotting major bottoms for gold ever since the gold bull market began in
April 2001.
Since the gold bull
market began in April 2001 gold made two major tops in which it exceeded its
own 200 dma by more than 30%. (rGold value > 1.3). This happened in May
2006 and in March 2008.
On the downside gold
has made some major bottoms in which it dropped below its own 200 dma by 5 -
10% (rGold value 0.90 - 0.95).
The rGold range of
0.90 - 0.95 has proven to be a reliable BUY indicator indeed over the
last 7 years.
The relative gold chart leaves no doubt, gold has plenty of upward potential
before reaching extreme overbought territories.. The relative gold chart
would reach previous peaks (2006/2008) if gold would reach $1285 which is
indeed consistent with my earlier projection of $1300 by spring next year..
Now with $1300 gold in mind for
spring next year and gold prices headed to $5000 or more the years ahead (see
my piece ‘Gold - Last Time to Buy gold below $1000?’,
what could it mean for the junior mining companies? Well, the answer is
“A Lot!” In Part II of this article I will be making the
investment case for junior mining companies which could stun even the most
staunch gold bull out there. Fiction or real possibilities? Well, read on and
judge yourself.
Junior Mining Companies Poised
for Historic Bull Run
It has been quite a year for the
junior mining companies. Investors declared the junior sector for being dead
by end of 2008, institutions willing to finance ongoing exploration projects
were hard to find and hedge funds adopted a new fancy game which was to short
juniors into oblivion. During fall of last year most juniors didn’t see
any up tick in their stock quote at all since shares for sale were hitting
the few willing investors left like a tsunami never ever witnessed before in
the universe of junior mining companies. Many juniors were priced at
bankruptcy levels, levels not seen since the gold bull market began in 2001.
The inevitable result was panic, a real panic which drove most investors (and
gold letter writers) out of the juniors pushing management of most juniors
into a mental state of severe depression.
It became quite obvious during
that time that many juniors couldn’t survive this dark winter without
diluting themselves into worthless penny stocks if they could raise money in
the first place at all.
I always maintained the view,
even during this extreme depressed period of time, that the high quality juniors
would come out as winners eventually. There’s no doubt in my mind that
within a few years from now valuations for the better juniors will stun most
investors, the better juniors will be priced at levels not imaginable today..
The pendulum always swings from one side to the other, in other words, from
overvaluation to undervaluation and back etc…
In February 2009 I published the
CDNX/GOLD ratio chart below.
It’s a chart which represents the performance of the junior sector
against gold. I suggested that we found ourselves in a window of buy
opportunities never witnessed before. The reason was simple since never ever
in history the junior sector had been so depressed as in late 2008. Now
investing is a quite simple game, you buy shares when prices are low (extreme
undervaluation) and sell them when prices are high (extreme overvaluation).
Sounds simple right? But in order to act on this simple thesis you have to
ignore the mass mainstream opinion since the mass is wrong on the market for
more than 90% of the time. The reason for that is shockingly simple,
it’s just a law of nature, you’ll never witness a major low when
the mass is buying like crazy and vice versa. All major lows in financial
history have been characterized by extreme panic selling, it’s just a
matter of waiting patiently until selling panic has reached its climax and
for momentum to be faded away necessary to push stocks further down.
Now who will tell you when
downward momentum has faded away and panic has reached its climax? Well,
nobody will tell you, especially not the mainstream financial media but the
charts will do.
What charts?
When it comes to the junior
sector I’m interested in how the juniors perform against gold. Look,
the juniors sector could improve by let’s say 20% and you’ll say
‘Great”!’. But if this 20% gain has been achieved against a
50% rise in the gold price then quite obviously juniors were not the place to
be from an investment point of view.
So by charting the junior sector
against gold itself one could get a clue of juniors out performing or under
performing gold. The ideal situation would be of course an environment where
gold is on the rise while the junior/gold ratio is on the rise as well, then
a tremendous leverage could be achieved by investing in the better juniors.
Now in order to chart the
juniors against gold one should look at the CDNX index vs gold since the CDNX
(although not ideal) represents most junior mining companies. In order to
identify the major turning points one should filter out all the daily/weekly
noise and concentrate on the monthly chart only.
Now finally let’s have a
peek at the monthly CDNX/GOLD
ratio chart I published in Feb 2009:
CDNX/Gold ratio chart FEB 2009
This chart clearly demonstrated
the extreme depressed levels juniors reached in late 2008 and the extreme
upward potential for juniors for years to come.
Now fast forward to Sept 2009
and see how this chart unfolded itself over the last 7 months.
CDNX/GOLD
ratio chart NOV 2009
This chart clearly
demonstrates a major bottom has been put in place indeed in Dec 2008. Now
what does that mean for coming years?
Well, the key issue here are
major turning points. The gold market began in 2001 and in early 2004 the
junior sector had gone ahead of itself too far too fast. Yes, they became
overbought against gold as shown in chart above. It was a time when most
juniors were trading above the $1 mark (vs pennies today), it was a time when
juniors hitting good drill results easily doubled in value.. We have never
experienced such valuations ever since. So the period 2001 - early 2004 was a
good period to be in juniors. Looking back the year of 2004 proved to be a
major turning point. Despite the rise of gold prices juniors had a hard time
to catch up with gold. After mid 2007 juniors started to decline in value
against gold with a anti climax being reached in Dec 2008. So we had a cycle
here from undervaluation to overvaluation from 2001 to 2004, then the cycle
took us back from overvaluation to (extreme) undervaluation from 2004 to 2008
and now we are almost one year underway in a new up-leg which could lead us
to new overvaluations within a couple of years from now. Overvaluations that
will stun even the staunchest gold bull out there.
Yes, I’m aware that the
juniors were not the place to be over the last 5 years since they are beaten
up to levels not seen since the beginning of the bull market in 2001. But as
the CDNX/Gold chart above demonstrates the bottom has been clearly put in
place in December 2008. From there onwards the only way seems to be up for
years to come. Remember the seventies, investing in juniors could have made
you millionaires by investing a mere $1000 into the best performing juniors.
The thing is like today that the junior sector didn’t wake up until the
final years of the gold bull market. The first 6 years of the seventies
bull market didn’t affect the juniors that much but things started to
heat up dramatically from 1976 onwards. Any company with a name
‘gold’ in it saw its share price appreciating upon exploding gold
prices. Juniors priced at pennies in 1975 went ballistic going into 1980. A
good example concerns Lion Mines which went up from 7 cents in 1975 to $380
in 1980, or what about Warf Resources which went up from 40 cents to $560, or
Steep Rock from 93 cents to $440. These are no misprints, a $50 investment in
Lion Mines would have yielded a profit of $380.000, not bad I guess…
Now you may wonder how come such
astronomical returns are possible? The reason is quite simple, the junior
market is so small that even a tiny inflow of money would have tremendous
consequences for the average junior share prices.. Today, of all invested
money less than 1% is invested gold and its shares and even a much smaller
share in junior mining companies. Once the juniors start rising by multiples
of 100% on a year to year base (as happened since December 2008) in the face
of gold prices heading into new record high territories then people want to
be part of that action and money starts flowing en masse into the junior
sector. Even if a tiny percentage of all investment capital decides to chase
the junior stocks all heck will break loose. It would be like trying guiding
the Niagara waterfalls through a garden hose, needless to say some tightness
will be encountered here and there…
Does it mean to go out now and
buy all companies which have a name ‘Gold’ in it? No, of course
not, there will be big winners in the end but unfortunately many juniors
won’t be going anywhere as well. The thing is that discovery of
economic viable gold deposits is the key which will really launch a junior
company. Now despite the fact over 2000 juniors are trying to convince
investors they will be successful, only one out of every 2000 projects will
ever make it to a mine. To make things even worse, during last decade only a
very few world class gold discoveries have been made so by just randomly
throwing money at juniors you will most likely end up going nowhere..
Eric Hommelberg
Editor, the Gold Discovery
Letter, the Gold Drivers Report
www.golddrivers.com
All
articles by Eric Hommelberg
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