The fortunes of the gold mining companies are of course totally dependent upon finding and extracting the underlying asset of gold itself, so this is where we will start. Gold was unloved and derided as an investment for six long years until its recent breakout when the price rose from sub $1200/Oz a year ago to a high of $1555/Oz in August 2019. Having gained some $300/Oz in just three months a correction was due and as with all rallies they run out of steam. The correction so far has been in the order of $100/Oz and as the chart below shows the overbought position has been unwound. This doesn’t mean that gold cannot go any lower, it most certainly can, but the chart suggests that the selling has slowed and that we may see some sideways action before gold resumes its rally. We are of the opinion that this pullback will be short lived, and we are fully intent on holding onto the stocks that we have acquired with the view to acquiring more as and when the market ‘dips’
The influencers are the S&P 500 and whether or not it will correct in a substantial way and the US Dollar and whether or not it too will lose its attractiveness should the Federal Reserve continue with a strategy of fiscal stimuli, via rate cuts and possibly QE as the ECB are now doing.
The 12-Month Gold Chart
The chart below shows that price of gold has now penetrated its 50dma having remained above it for four months as the rally gained some traction. We view this as a negative for gold prices and as we have skin in this game, we would like to see it recover and settle at a level well above the 50dma, which currently stands at $1500/Oz.
On the plus side we can see that the technical indicators such as the RSI has unwound its overbought position along with both the STO and the MACD.
The Gold Bugs Index: The HUI
As an indicator of how the gold producers are doing, we lean towards the HUI (HUI) because it represents a basket of unhedged stocks. This Index consists of 14 major gold mining companies that do not hedge their gold production beyond 18 months. Unhedged stocks provide us as investors/speculators with exposure to golds movements which is something we desire in a rising precious metals market.
A quick look at the chart of the HUI covering the last ten years is one of misery as this Index fell from a high of 630 to 100 at the end of 2015, registering a staggering loss of 84.12%. During in this time we have seen a bounce to the 300 level and then a slide that gave back around 50% of those gains.
It should be noted that during this unloved period some companies ceased to operate, and others were swallowed up by their peers. However, those that are still standing today have implemented a strategy of cost cutting in order to streamline their operations and can now produce gold at a profitable price.
If we now zoom in and take a look at the last year of activity, we can see that this year has been pretty good for the producers of gold and also for silver for that matter. The HUI ran from a low of 145 to 235 in just three months generating an increase in value for these stocks of 62%. The stocks were firmly in the overbought zone and so a correction has ensued resulting in the HUI falling back to the 200 level.
Now this is just a quirk of mine, but I don’t like gaps in charts as at times the price returns to back fill those gaps before moving on. This is by no means a certainty, but the HUI is only 20 points or so above it which isn’t a lot further to fall. The gap may be ignored, and the index could well move on from here, but it is an irritation for me that I would like to see resolved one way or another.
As for the technical indicators the MACD, RSI and the STO they have unwound and are more or less in oversold territory. The stocks could fall further from this point but this selloff looks to be exhausting itself so it could be over soon. The fundamentals that we mention above should come into play and this rally should the resume its trek north to much higher levels than we see today. The good quality low cost producers will be the beneficiaries as their balance sheets will be transformed by a combination of their efficiencies and the upcoming rally in the price of gold and silver.
In summary do not be put off by these corrections, use to acquire your favorite stocks at bargain price levels.
The central bankers of most countries have embarked on a race to the bottom as they chop interest rates in an attempt to support their flagging economies. As these Fiat currencies no longer offer a return more and more investors will look for another area to place their hard-earned cash and gold and its associated stocks will glisten once again.
As a general rule the stock will rise in percentage terms two or three times faster than the rate that gold increases in value. This offers us leverage to golds movement which is an attractive proposition for investors.
We also expect to enter a period of rotation as the S&P corrects and funds migrate to greener pastures or golden pastures as the case may be.
The precious metals sector is one area of investment that is not in a bubble and when the other bubbles burst the beneficiary will be gold and silver.
If you are new to this tiny sector of the market then read as widely as you possibly can and then take a position as these stocks are set to reclaim and surpass their previous all-time highs, which means an overall gain on the HUI of 300%.
Now is the time to do the work and acquire some of these undervalued stocks as this opportunity may not appear again for many years to come.
Take good care.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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