The Rebirth of Gold and Silver Stocks

My last article focused on the large degree correction of gold and especially silver. The event was foreseen by those who use Elliott Wave analysis but now we ask the same question of gold and silver mining stocks.

Not surprisingly, the story is the same as precious metals stocks undergo a severe correction to retrace a large part of the bull market begun in 2000. The example we will use is the HUI index of unhedged gold stocks. The analysis is given below.

(Click to enlarge.)

Once again note how a five wave impulse pattern was completed for the HUI on March 17th as it reached an intraday high of about 520. The bull began on November 15th, 2000, at a neglected intraday low value of 35. So while gold advanced from $255 to $1032 in the same period for a fourfold increase, the HUI has put in a storming fifteen-fold increase to give a 3.75 leverage over gold bullion. That, in a nutshell, is why people invest in gold stocks.

For the record (based on closing prices), wave 1 advanced 37 to 257 (220), wave 3 from 166 to 394 (228) and wave 5 from 300 to 506 (206). Wave 3 was the longest though not by much as they all were pretty much the same length. The only unusual thing to note about this structure is that the final wave 5 was not an impulse but an ending diagonal. This is a stunted move up which was formed by the general stock market dragging down the HUI from a more explosive finish.

The HUI is now on the final trendline as far as support for the 2000-2008 bull is concerned, but it is apparent that a greater degree of correction is now in play which we call wave 2 (encircled). The first part of that correction is now almost over and it could be either an A or W wave, we are open to which one it may be though which one it is dictates how strong a rebound rally may be. As of this week, the HUI has retraced almost exactly half of the entire 8 year bull. It is our feeling it may retrace slightly more before embarking on a rally (not a new bull market … yet).

The story for silver mining stocks is somewhat similar, and that analysis we have reserved for subscribers. Suffice it to say, our exit from silver equities at the end of March avoided having our portfolio cut to a third of its value.

So when will the “rebirth” of gold and silver stocks be? I must say that talk about a new bull arising so quickly from this debacle should be taken with a pinch of salt. I only regard this current down move as the first part of a three part correction. The other two parts of the correction will hopefully not take the HUI down any further, but it is the time element that needs to be considered here. A simplistic interpretation may say that this leg down has taken at least 6 months to complete. If the other two legs take as long that adds up to 18 months before the mega wave 3 of this gold bull market takes a grip of matters. That wave will certainly be worth waiting for and riding out for even greater profits in this inflationary super cycle.

Comments

[extinctionism:]

"in this inflationary super cycle".

that's a real stretch given the blatant capital destruction occurring today. How will Lehman help to inflate things? Or Bear? Or Merrill? Or AIG? The fact is this is a deflationary supercycle based on housing returning to affordable levels (at least another 30% south of here.)

2008 Sep 16 04:35 PM

[sorgmot:]

We use the Fidelity FSAGX gold miners stock fund. And we also use a log base 10 vertical scale and a linear date scale. The 2008 breakdown has not broken any long term trend lines. We believe that 2009 and 2010 should be good years for gold stock prices as the long up trend begun in 2001 continues. The are other stocks which will flare up in 2009 and even more in 2010 but the rides will be bouncy.

As 2008 has progressed, more and more US $'s have vanished in assets like real estate and stocks and bonds. Debtors are selling everything to get dollars to pay creditors.and with the shortfall creditors can not find the US $'s to pay their creditors.

This is the worst credit crisis since the 1930's. As all asset classes are sold at lower and lower prices to raise US $'s to pay creditors, the USA faces financial implosion. How to stop it? Set gold to a price of $3200.00 the ounce with an open market backed by the USA gold horde Has printing money done any good yet? No.

Fiat money can not stop a run on the bank.

Good Luck.

2008 Sep 16 05:17 PM

[CLH:]

Housing and gold both go up with inflation. Is housing going up? Gold has only started to crank down.

2008 Sep 16 06:01 PM

[HBWOW:]

Gold is the only real money. With China's money printing presses running even faster than the U.S. (I keep reading), China and Japan
are playing the gold market down while planning to slowly accumulate
gold and gold mining stocks/companies as they realize fear of paper monies in major ecomonic downturns in the world markets can cause
runaway paper money devaluations. Gold and silver has and is highly
manipulated (they said oil wasn't but now the truth is coming out) by these cash cow countries. They are planning ahead, something the U.S. has forgotten how to do. Our government tends to think problems will go ahead if ignored.

2008 Sep 16 07:38 PM

[jayson888:]

Lehman, Bear, AIG, Freddie, Fannie. These are inflationary because the govt is bailing out most of the losers with money it does not have (essentially printing it), and taking low quality debt collateral from these companies (and others) onto its balance sheet. With junk-bond quality securities making up most of the Feds reserves, which are what back the dollar, the dollar is bound to resume its decline as foreigners begin to bail out of dollars and US securities. A declining dollar will cause oil, food, Chinese products and many other prices to rise in the US, while wages stay flat. Fiat dollars will be exchanged for hard assets.

Housing was a massive bubble driven by underpriced Fed money. It will not be a safe haven this time around, especially as interest rates climb.

2008 Sep 17 03:45 AM

[User 264122:]

unless the PPT continue the manipulation of USD via use of highly leveraged USD Nominal (Derivatives) like nearly every day since July...
Small Euro Billions Control virtual USD Trillions.... they can play this game every day.. do other way the USD can still track 79 index in this Category 6 Super Storm..

2008 Sep 17 06:24 AM