Thursday May 17, 2012
The continued panic about Europe and European banks continues. No doubt both hedge funds and European banks are selling gold. The hedge funds are just short on the break of multiple MAs. The banks are having to liquidate gold just as they did in 2008 to meet depositor demands for their money. Likewise the money demanded is the Dollar, not the Euro. And so the Dollar is up and the Euro down along with gold. We have noted the last few days that the Dollar has approached its recent resistance and gold sports a triple bottom. A final spike down below or above those levels to wash out exisitng positions is not out of the question.
One has to go all the way back to the Fall 2008 lows to find the same irrational undervaluation of the mining stocks to the price of gold and silver that we have now.
GDX versus Gold
Everyone has been dumping mining stocks. And sure enough we have now reached an incredible out of whack valuation, the kind only seen during true financial crises, like 2008. This suggests that the mining stocks are a buy here.
CDE Versus Silver
This ratio has returned to the lows of the past year, and is at least in the ball park so to speak on 2008-2009 valuations.
The idea of using charts, the collective decisions of millions of market participants, is to find such extremes and take advantage of their out of whack valuations. This appears to be such a time. Consider the triple bottom in gold itself.
Gold
Notice that Gold did stay at 1525-1530 very long last Sept or December. It likely won't this time either.
Could this have been it?
Spot Gold courtesy of kitco.com
This is a neat bit of graphic information compiled into one panel. The chart tracks the spot price of gold, this was at 2:56 AM New York EST May 17. The blue line is May 15 registering the low at 1535. The gold line picks up the following day where the blue line closed out. Now, the interesting part is that the black line, the spot price today is already up to 1550! Now look at the longer term charts above. Perhaps we saw the low price for gold the last 48 - 72 hours. If that was the case it is now time to buy some mining stocks.
GDXJ
An old Wall Street saying has it that 'No One Rings a Bell at the Bottom!' The uniform negative headlines for rmining stocks, comments that gold is not a safe haven, gold investors dump stocks, etc along with the multi-year out of favor valuations suggest this is bell ringing time.
I have purchased the miners in my retirement fund as it only allows mutual funds and not exchange traded funds. Otherwise I have recommended Central Fund CEF which owns the bullion in the vault. The extreme valuations shown in the first two charts along with GDXJ trading for less than half its value in March of last year sugges this is the time to buy GDXJ. GDXJ is a fund of some 80+ small gold and silver miners. Other such funds include ASA or GDX a fund of the larger miners. A succession of orders closely spaced seems to be called for here.
Individual mining companies offer similar discounts. The better idea is to buy a fund of mining stocks. anything can go wrong with one company, just ask Ron Johnson at J C Penny or Jamie Dimon at JP Morgan.
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