Too Early to Take Profits in Gold

K-Ratio Predicts Higher Gold Stock Prices

Based on the recent large rally in the gold stocks, is it time to sell and take profits? The K-Ratio, a time tested method for timing the purchase and sale of gold stocks, is telling us to stay long gold.

The K-Ratio is computed by dividing the value of Barron’s Gold Mining Index (GMI) by the Handy and Harmon price of gold. The index reflects the relative value of the price of gold stocks to the price of the underlying metal. When the ratio of the price of gold stocks to the price of gold is low, it is a bullish signal. Conversely, if the price ratio of the gold stocks relative to the metal is excessive, it is usually a good signal to sell the gold stocks.

The K-Ratio works best at extremes. The rule of thumb based on past history tells us that a K-Ratio at 1.20 or lower indicates that gold is cheap compared to the price of bullion. A K-Ratio reading of 1.90 or higher is extremely bearish and indicates extreme overvaluation of the gold stocks.

Bullish On Gold Stocks

When last reviewed on April 24, 2009, the K-Ratio was at .90 and flashing a major buy signal. Since that time, the Gold Bugs Index (^HUI) has advanced by 39%. What should be of extreme interest to gold stock investors at this point is that, despite the large gains in the gold stocks, the K-Ratio has increased only modestly and presently stands at 1.15, still in solidly bullish territory. (K-Ratio = Barron’s Gold Mining Index of 1159.20 divided by the Handy & Harmon Gold Price of $1008.25).

Since 1975, readings at or below 1.15 on the K-Ratio have resulted in gold stock gains 90% of the time over the next 12 months with the average gain a very profitable 40%.

There are no absolutes in investing and gold stocks are likely to fluctuate, but based on the time tested K-Ratio, it is way too early to be taking profits in the gold stocks.

Disclosures: Long GOLD, KGC, GG

Comments

[Michael Clark:]

It's much too early to take profits in gold/silver. Gold and silver are bullish for the next decade. See the article below to see why:

seekingalpha.com/insta...

Sep 16 06:12 AM

[anarchist:]

Gold is a commodity and to be traded like any other. I have sold October 101 calls against my GLD positions. If gold roars through 101 I will re-asses and either take my profits or roll to a date and strike further out.

Sep 16 09:14 AM

[chap08:]

Michael, I know that you believe that we will have 20 years of deflation. If that's the case then you really shouldn't hold gold - you should hold dollars. Dollars go up in value during deflation.

Gold and silver benefit from inflation, not deflation. The only exception to this is when you are living under a gold standard. In that case, gold and the currency (e.g. dollars) are the same thing. So, by definition, they both increase in value during deflation and decrease in value during inflation.

But we don't have a gold standard now, we have fiat. Under fiat, gold is no longer the same as your currency, it is the opposite. So, under a fiat inflation, currency goes down in value against everything else (including gold) and under a fiat deflation, it goes up in value against everything else (including gold).


On Sep 16 06:12 AM Michael Clark wrote:

> It's much too early to take profits in gold/silver. Gold and silver
> are bullish for the next decade. See the article below to see why:
>
>
> seekingalpha.com/insta...

Sep 16 12:03 PM

[JeffDB:]

Thanks for the post. That is a ratio I was unfamiliar with.

Sep 16 12:16 PM

[Spartacuss:]

Of course, the K ratio is a good trading fundamental as it clearly shows the relationship between mine production and market value, however, indirectly.

I think though, the greater factor right now is psychological; a fear of dollar debauchment in the extreme as evidenced by the BRIC wanting a dollar alternate. China weighs heavily here as does the central banks now looking at gold as either a hold or a buy. All this despite heavy selling of gold jewelry and such by individuals, over a thousand tons in this last year.

One thing to bear in mind and that is the buyers are the high net worth, banks and funds and not everyday individuals as a rule. This may change when all the money creation finally brings rampant inflation which it has to. Once Joe six-pac wakes up to the reality of a runaway inflationary scenario, he will buy gold big time if he has any money to do it with. And we are not talking the US here necessarily either, so we could well be on the threshold of a major run up. But then, the inflation versus deflation issue is still unresolved.

It really doesn't matter anyway becasue the die is cast. The good ole US is bankrupt, as a nation we can never, ever, repay the debt, only monitize it as we have always done and even that won't work anymore as deficits will continue to rise as fast or faster than monitization efforts; in sum, buy gold and silver.

Sep 16 01:19 PM

[buybigtires:]

While I am not a "news trader" per se, I think that a different argument of whether to hold or sell should be pursued: We are in a time of change, for better(yeah, right) or worse. Gold is stable. When everything else is unstable, that which is stable increases in value.

Now is not the time to be trading on price, but rather how much instability we see on the horizon. I see quite a bit, from the Middle East, to Asia and Russia, not to mention what is going on in our political establishment. If you hold precious metals, do just that: Hold 'em.

Sep 18 01:02 PM

[Jason Hamlin:]

Agree with the author 100%. I think gold will reach $1,250 before any meaningful correction. Historically, these uplegs last around 20 months and put in gains of about 70%. The current rally has lasted 10 months and has gained only about 40%. Much higher to go!

Sep 19 02:45 PM

[Gold Bug:]

Source : maxkeiser1.blogspot.com
Gold could be the next Bubble :
Max Keiser on Alex Jones Tv Kiss The Dollar Goodbye

Oct 09 06:06 PM