Bullish Sentiment Continues for Gold and Silver Stocks

In analyzing the sentiment towards gold stocks, I am going to start with a tactic from Bernie Schaeffer of Schaeffer’s Research. I believe he espouses the idea of looking at the consensus view of analysts. If most analysts are bullish on a stock or sector, then where is the money going to come from to push shares higher? Conversely, if a sector is rising but the analysts are not bullish, they can change their mind and that provides further buying power.

As far as the gold and silver shares, I was curious as to the consensus analyst rating, 2010 earnings growth forecast and price target. In the graph below, I show the current analyst rating on the stock, the consensus forecast for 2010 earnings growth and how far above the current price, the mean price target is. Remember that analysts rate stocks 1.0 (strong buy) to 5.0 (strong sell). A 3.0 means hold, while a 2.0 means buy or accumulate. Since Wall Street is naturally optimistic, a 3.0 basically means “sell” and a 2.0 means “hold”.

Only Silver Wheaton has a rating below a 2.0. Most gold and silver shares rate from a 2.3 to 2.8. The next two columns are very interesting. The second column is the consensus 2010 earnings growth forecast and the third column is how far above the price target, the stock currently is. Analysts are expecting very good earnings growth in 2010, yet they don’t expect the stocks to move very much? In recent days, the stocks have gained a lot. It seems that the rating and price targets don’t fit with the earnings growth.

This is a good sign if you are a bull on gold and silver shares. Analysts have yet to jump on board and that means that clients at those firms are not invested or at least underinvested in gold and silver shares. Moving along, let's take a look at some options data.

Options Data

The first chart shows the ISE Put/Call ratio for SLV and the cumulative Put/Call ratio (ISE) for all the Silver stocks we track. The bottom graph shows the price of SLV and price of GDX. We can see that GDX and SLV are basically flat throughout the period, yet the Put/Call ratios in both SLV and the silver shares are rising steadily. Often times, a spike in the put/call is a strong signal of a potential bottom.

In this chart we show the ISE Put/Call for GDX and a cumulative ISE Put/Call ratio for all of the gold stocks we track. The blue is the CBOE Open Interest Put/Call ratio. The signals are not quite as strong as for Silver but the ISE figures were steadily rising from September 11 to September 25.

Short Interest Data

In our Gold & Silver stock newsletter, we collect short interest data and use it to build these simple charts. The first chart is the cumulative short interest for all the silver stocks we track. We graph the changes in short interest with a silver index we made. It is considered bullish when short interest rises along with the particular market. Since the end of April, short interest in silver stocks has risen steadily.

Here we show the short interest for all of the gold stocks we track. Our price index is XGD, the Canadian Gold Stock ETF. The short interest surged 44% in the period of September 1 to September 15. New short interest figures are available Friday on NASDAQ’s website.

Conclusion

Some sentiment data can give strong signals while some sentiment data has to be interpreted in a different way. I actually think that some analysts place too much importance on sentiment data. Remember that the crowd is actually right most of the time. It is best to use sentiment data to predict turning points and for market timing purposes. I prefer to use sentiment data in conjunction with technical analysis.

In looking at the various data provided here, one has to feel pretty good if you are a bull on gold and silver stocks. First, the analysts on the street don’t have high expectations for the shares, despite the positive outlook for metals prices and profit margins. Secondly, we see constructive put-call data following the mid September peak. In other words, options data gives no sign of excessive bullish sentiment or even bullish sentiment. Finally, the surge in short interest shows strong skepticism about the ability of the shares to sustain these prices.

A daily close above 445 on the HUI should induce quite a bit of short covering.

Disclosure: Author owns junior mining stocks.

Comments

[twitee:]

IF the analyst prediction was any good, they would be having their own hedge fund.....Did any analyst predicted the last year crash.....In the current economic situation around the world, Gold is precious as an insurance against depression and hyper inflation....

Oct 08 12:31 PM

[williemo:]

I would like to see your opinion of gold and silver at the beg of 2010, when they are headed to the lows of the fall of 2008. Things are great now, but doesn't this remind you of what crude did at it's blow off, only to crater to half the highs, within a very short time period. The cyclical highs of gold and silver are very close now, or possibly later in Nov, but lower values in GDX and SLV are coming, sooner than you might expect. Maybe it will take more bullish sentiment to get us to the ultimate highs, but at these levels, it's just too risky to place bets. I'll be ready to short sooner rather than later.

Oct 08 03:35 PM

[The Geoffster:]

Gold and silver stocks should continue to climb as the dollar sinks.

Oct 08 08:30 PM

[Vevey Hedge:]

I have seem the GOLD BUG story before in the 80's the price fell like a stone there after. Could do the same this time but the concerns re printing money could lift even higher but once interest rates start moving higher sell gold that was the trigger beore

Oct 09 08:55 PM

[Whitslack:]

On Oct 08 12:31 PM twitee wrote:
> Did any analyst predicted the last year crash.....

Peter Schiff predicted it way back in 2007, and the other analysts laughed at him. Who's laughing now? Really, anyone who understands and believes in Austrian economic theory knew this was coming sooner or later. The Austrian economists now tell us this is not a recovery, it's a cover-up — a papering over with paper money. Buy gold and silver while your wages still have any purchasing power left in the world market.

Oct 12 10:41 AM