Getting Ready for the Gold Move - A Look at the Gold Stocks

Now is the time that we're looking at the gold stocks for entry points when the dollar rally ends (which we believe will be sooner than most...).  We anticipate that 2010 will be a very good year for gold stocks, notably in the first half of the year as oil prices remain seasonally weak, the dollar wears out its rally, and gold begins moving up again.

In today's analysis, we're going to keep it simple by showing relative performance of select stocks over given periods of time. Note that no fundamentals are included in this analysis (You really, really need to look into the fundamentals for any gold company stock you are consider buying.  Caveat emptor).  We may own one or more of these stocks already, but certainly do not own them all.  This list was chosen based on some not-so-obvious reasons and does not represent an implied endorsement or recommendation for any or all of the stocks.

We're not going to draw conclusions for the reader today--that homework assignment is for you.  We simply want to paint a picture that you may not have seen when considering gold stocks in the past.  It's chart heavy from there on, so be prepared to sit down, think about what the charts are saying to you, and get ready to do some of your own homework.  You may want to consider purchasing the Mining Explained book, available in our bookstore at the bottom of the page to help with fundamental evaluation of any stocks you deem of interest.


This list is not, by any means, comprehensive.


We will present two charts for for each category of stocks we list.  The first chart is the "long term" chart.  Depending on when some of the stocks listed became available publicly, the duration for the long charts varies dramatically.  Please note the dates.


The second chart will be the same stocks since roughly the beginning of March, when the credit crisis ended and global stock markets (and gold prices) began recovering.


All charts are relative performance.  Many companies are repeated in this analysis for various reasons, notably if they're part of one index or the next.


In this collection of charts, the "control group" is the HUI index, which can be proxy purchased through the GDX ETF.  Keeping the HUI in the calculation means that all price measurements will be done relative to this index as a baseline.

Finally, note that this charting function we're using from stockcharts.com only allows the measurement of 10 ticker symbols at once.  Thus, when we analyze a given index, we must do it over multiple charts, for which we again need a control price (like the HUI) so that we are consistently measuring apples vs. apples.


First, let's look at the performance of the major gold mining companies relative to the S&P, the end of day gold performance, the end of day silver performance, the USDX performance, and the HUI.  First, note that gold stocks (as represented by the HUI) have outperformed the S&P consistently since 2001, which was, of course, the beginning of the gold bull market.  Gold stocks have also outperformed gold itself (which has outperformed the S&P) and silver.  Owning gold stocks is not a safe substitute for owning physical metal (which is insurance), but gold won't make you wealthier (you preserve your purchasing power only) while the right gold stocks will.

Now you can see the rationale for measuring all stocks relative to the HUI.  Since it has outperformed the S&P, it is one way of determining a stock's performance relative to an index which has dramatically outperformed the S&P...

From this first chart, you can see the major gold producers individually, Anglogold Ashanti, Gold Fields, Barrick, and Newmont have not performed as well as the entire index.  This is largely due to the smaller and mid sized gold producers in the HUI.  Point number one to remember--the smaller the company, the higher the risk and the higher the reward...

The next chart is the relative performance of the same stocks since the March bottom in the S&P.

Obviously, the dollar has taken a real beating in that time.  In general, oil prices and costs of production are down, and the HUI has not outperformed the S&P recently, even with a higher gold price (and, by proxy, more profitable gold for these miners with lower oil costs and higher product prices).  Note that none of the majors have outperformed the entire HUI index.


This is the primary reason we anticipate a very profitable 2010....


Here are the charts for some key large and intermediate producers, relative again to the S&P, the gold price, the silver price, the dollar index, and the HUI again.  Note that this chart is from 2003 forward, but is plenty representative of the long term gold bull market.

Some may consider Goldcorp to be a major, and though the company is working on it, we consider it to be "large."  Yamana has been the big winner for the last six years or so.

The same companies from March.

Most recently, Buenaventura has been a strong outperformer.  As a Brazilian company, much of that has probably been real currency appreciation vs. the dollar.


The next few charts show two sets of smaller producers over the long term and from March forward.  Note that we had to break these into two sets of charts because of the number of companies in the list.

Since 2003, Eldorado Gold has been he best performer by far.


Since March...

The second group, from 2007:

Second group, since March:

The HUI components, again broken into two sets of charts.  This time, we compare the individual stocks to the HUI alone (since the prior charts clearly show the HUI vs. the S&P outperformance in many different ways).

These are laid out in alphabetical order.  The first group, from 2003 forward (with the HUI now on the far left, in red):

Same group, since March:

The second half of the HUI index, since 2003:

Since March:

 From Jim Puplava's October filings, we bring 4 sets of the "Pup charts," both long term and since March:

"Pup charts" set two:

Set three:

 

Set 4--ok, maybe not really a set, but the last one of the lot...


An interesting mixed set, including some royalty companies, against the S&P, dollar, and HUI:

 

 

To be fair, here are some key silver players:

 

 

The Rob McEwen list.  Four sets!

 

Finally, there's a new gold mining juniors ETF on the market, the GDXJ.  To the extent possible, here is the relative performance of the stocks that make up that group.  Note that due to limitations in the stockcharts.com symbol list, several juniors from the Australian, London, and Hong Kong exchanges are not included in this list.  They are Kingsgate Consolidated, St. Barbara Ltd, Avoca Resources, Medusa Mining, Dominion Mining, Real Gold Mining, Avocet Mining, and Lingbao Gold Co.

Four sets again.

 

That's a lot of ways to slice and dice many of the gold juniors, but given the range of views, with a little studying the right ones seem to just jump out....

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The Dollar Move - A Look at Key Foreign Currencies

As a follow up to this morning's gold message, we thought it would be good to forecast the rest of the dollar's move, based on the dollar index's constituent currency makeup.

Looking at yesterday's dollar close, we can already see signs that this move may be about over.  As has occurred in the past with regular repetition, the dollar frequently makes rounded tops.  It appears we're getting one now, with confirmation on the RSI and overbought conditions on the slow stochastic.  Worst case, we'd look to the 150 day moving average as a ceiling.  But that leaves the question, how much further is this rally likely to go?

The euro, yen, pound, and loonie together make up 92% of the US dollar index.  These four currencies, notably the euro and pound, should provide additional visibility into the dollar rise and probable limits.

 The euro will likely move down a bit lower, toward its 150 day moving average--around 1.45 (where we showed support before)--where it has strong support.  That's roughly a 1% down move from here.

The strong support for the yen will likely coincide with the uptrend that's been in place since April.  That's roughly a 2.6% move down from here.

The pound is an interesting case in that it is very, very close to support here.  This is the worst of a bad lot of fiat currencies and is likely ready for a rally with a *potential* inverse head and shoulders pattern on the charts.  It is oversold and appears to be turning around here.  Watch the neckline...

For all intents and purposes, the pound's short-to-intermediate term downside is over for now.

Finally, we have the Canadian dollar (loonie).  The chart is showing a fairly well formed symmetrical triangle that, if it were to break to the upside, would have a target of around $USD 1.01.  It is right at a strong support level, and given that the Canadian dollar is a commodity currency, we believe that gold will either break up or down and the loonie will follow.  The period of indecision is quite obvious on this chart as the symmetrical triangle is almost perfectly formed.  This chart tells us little about the potential dollar direction since the loonie can break either up or down.

Thus, only the euro and yen can provide likely direction for the dollar.

This is the makeup of the US dollar index.  Between the euro and yen, 71.2% of the dollar index direction is determined.  Assuming everything stood still except the yen and euro, the US dollar index is likely to rise approximately .9% from here as the euro and yen reach their target ranges.  That's a target number of around 76.7 on the US dollar index.  76.82 was a previous point of resistance, and thus we believe that line will probably hold--especially with the loonie (and Swiss franc, by way of having gold backing, its very much in the same position) likely to be a follower of the gold price and the pound beginning to rise.  Intraday, we've gotten close to that mark.  The implication is that there's probably a bit more upside in the US dollar (though it's marginal), and by proxy, a bit more downside in gold.  At this stage, we're expecting 1100 on the gold price to hold (or, more accurately, the 150 day moving average will hold) with a possible overshoot to the downside of 1070.  We're not going to hold our collective breath on 1070, however.  If it gets there, consider it a gift.

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Gold's Getting Into the Target Range for Traders

Again, any time along here is a reasonable time to buy physical gold if one is in need.  By the time one pays a markup from a dealer, the impact on the typical retail investor's price points is negligible--you don't want to miss it if it rebounds quickly.

It appears that gold will reach that 1100 range we discussed as the first target.  In reality, we believe it will start seeing buying at it approaches the 50 day moving average, currently at 1101.76.

We are sticking with our previously published buying strategy.  We'll be taking our first paper gold positions today and holding out for a possible short but strong break below the 1100 level in the next few days (no guarantees on this one, which is why we're taking some positions now as gold approaches 1100).

The reason for a possible break to 1070, which we would definitely consider an overshoot to the downside at this time, is because the euro has shown weakness and has bit further to fall, as does the yen.  Meanwhile, there's no central bank on the planet that wouldn't like to take more steam out of the gold price...

Given that we're in a seasonally strong period, however, once gold starts moving up again, we believe it will take off with gusto.  Thus, you're going to have to be quick if you're going to try and grab the bottom.  Instead, we're easing in now and holding some cash for a break below 1100--if it comes at all.

We also really, really like the gold stocks near here.  We'll update this more near the end of the day today.

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Should be Close to Gold Buying Time Again

While there may be some additional downside in the gold price, we don't believe there's much at this stage.  Look, perhaps, for an intraday downspike or a brief period toward 1100, but for investors, this appears to be a good entry point.  Traders should probably wait for confirmation in the dollar and the beginning of the next upswing.

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Currency Intervention in the Works?

Granted, it's early still and things can dramatically change.  However, Friday's action was concerning with the magnitude of the dollar move.  We've waited to see how early forex trading, the gold market, and the stock market began behaving before commenting....

There are two areas that bare close scrutiny, and possible concern.  First, again, is the magnitude of the dollar's move on Friday.  It smashed through the 50 day moving average, which has served as strong resistance since March, and we've technically seen a breakout above the 50 level on the RSI, which implies a possible bull market turn.

The euro and yen have taken a beating, but still show more downside potential.  Strong buying support for the euro will probably come in around the 1.45 level as a worst case.  There is support at the 1.46 level, but it is not as strong, and the triangle breakdown pattern points to a 1.45 level support.

The Bank of Japan is clearly not happy with the yen's strengthening over the last couple of years as a result of the unwinding yen carry trade.  There is more downside here, implying more upside for the dollar.

We usually avoid the conspiracy talk here, but in this case, it may be warranted.  It is our belief that we're seeing a coordinated currency intervention by major central banks, notably the Fed, the Bank of Japan (BoJ), and the European Central Bank (ECB).  The dollar has had extremely negative sentiment, but was not oversold in the big picture sense.  However, the yen was stronger than the BoJ would like, gold was higher than any central bank would like that was interested in buying, and if they're not buying, they definitely don't want a high gold price.  The ECB has been supporting the Fed for some time, and they are under considerable pressure to help the export markets.

What better time to strike than when gold is "frothy" and sentiment on the dollar is ridiculously negative (for good fundamental reasons, we might add...)?

Currency interventions are short lived events--typically.  None of these central banks wants to see a repeat of 2008 with crashing asset prices, so some care would have to be taken to avoid forcing a major deleveraging event.  However, some defense of the dollar would be valuable for all involved and a knock down of the gold price also benefits the entire lot.

Seem far-fetched?

Note that the correlation between rising asset prices and a lower dollar has fallen apart since Friday.  Most commodities held their values well.  Global stock markets held out well enough.  The only negative effect on such a currency move was against gold.  Typically we've advocated shorting the stock market when the dollar broke the 50 day moving average--as long as the correlation was present.  Since the correlation has been present since 2001, either the world is going back to the roaring 1990s (very, very unlikely) or something out of the ordinary is taking place...

Meanwhile, all of the fundamental indicators of credit stress are fine.  In fact, the TED spread was down on Friday, not up as one would expect with such a move.

Of course, we'll know more over time, but at this stage, we're sticking our neck out and calling this a coordinated currency intervention.  It has triggered some selling in the gold market by the weak hands, supported the short term Treasury market,  and lifted some export pressures in Japan and Europe, as well as punished the speculators (probably retail investors...) that were late to the dance. 

Interventions are short term, by definition.  After all, if central banks could control the markets for any period of time, gold would be free, there would be no economic problems in the world, and the banks would never have gotten into trouble.  At this stage, we're looking at the levels discussed on Friday for gold buying.  There is likely more downside, so the first target buy point is probably 1100, not 1130.  There's a bit more downside in the euro to come, and considerable downside in the yen.  The potential for a dollar rally up to 78 exists here over the next month, though we're not forecasting that quite yet.  That will definitely impact our Q1/2010 thesis with the dollar hitting 72 and gold at 1300.  We'll adjust that and provide updates as this situation unfolds.

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