Regular readers of the blog know that I usually do not discuss Gold Miners specifics when it comes to the Precious Metals sector. I usually place a lot more focus on Gold and especially Silver, which happens to be my favourite investment for the coming years. However, looking at the recent Gold Miners price action and crash-like conditions, I cannot hide my excitement as we see extremely oversold levels and extremely pessimistic sentiment.
Let me share a few charts and indicators I am looking at right now, which signal that we are either close to a bottom or most likely already there:
Chart 1: Gold Miners are most oversold since 2008
Source: Simone Alberizzi
Looking at the weekly chart of the Gold Miners, we can make two conclusions. The first, the uptrend started in late 2000 and the second, we are currently at the most oversold level since late 2008 and late 2000 - both being major buying opportunities in the current secular bull market. While the price could make further lows in the short term, I assume that a reader looking back on this post in 12 months time would appreciate the fact that a major low was at hand.
Chart 2: Internals suggest final stage of bear market
Chart 2: Internals suggest final stage of bear market
Source: SentimenTrader / Short Side of Long
They say a bear market develops in three stages. The famous Dow Newsletter author, Richard Russell once wrote about it:
1. The first phase is the one where the bear market wipes out the optimism and excitement which existed at the preceding bull market’s top.
2. The second phase of a bear market is usually the longest phase. This is the phase where it gradually dawns on stock holders that business is deteriorating and that we are moving into hard times.
3. The third phase of a bear market is the “throw ‘em in” phase where stocks are sold for no other reason than that the sellers need to raise cash.The third stage is also the one which shows internal breadth readings hitting rock bottom capitulation levels. The common indicators that I use to track oversold levels are usually the percentage of stocks above the 200 MA and the Summation Index. Both of these show readings relative to where previous major lows have occurred.
Chart 3: Bullish Percent Index is at record oversold levels
Source: Objective Trader
Staying with the theme of internal breadth readings, another indicator is also currently proving to us that we are in the final capitulation phase of the bear market - the Bullish Percent Index. According to StockCharts.com "the Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an index. Because a stock is either on a P&F buy or sell signal, there is no ambiguity when it comes to P&F charts. This makes BPI a straightforward indicator with clearly defined signals." The chart above, thanks to the Objective Trader website, shows that we are currently at extremely low readings. In other words, conditions are similar to the panic of 2008 - a major low in Gold Miners [recently corrected].
Chart 4: Valuations show Gold Miners at bargain prices
Source: BMO Capital Markets
While we can use a variety of valuations metrics, I'd hate to fall into the value trap like so many traders recently did with Apple. Apparently the stock was extremely cheap at the $650 to $700 price range, trading at ridiculously low forward P/E ratios. Well it seems that the bubble is deflating and the stock just got even cheaper.
I do not believe that the Precious Metals sector has yet to reach an euphoric frenzy such as Apple just went through (it might one day soon), so therefore tracking its Price to Cash Flow ratio could hold some value for us. According to BMO research, valuations have now reached levels similar to that of late 2000, just as the bull market was starting. This could mean two things, either the Gold Miners are currently discounting eventual Gold price decline at which point the P/CF ratio could actually rise or truly the sector has hit rock bottom bargain value.
I understand certain traders will disagree with my subjective and bullish views here and therefore they will dismiss the valuations. The market is always comprised of bulls and bears, therefore any opposing views are always welcomed at this blog.
Source: BarChart.com / Short Side of Long
Chart 6: ... and could outperform in coming quarters!
Source: Simone Alberizzi
The fact is, since August 2011, the S&P 500 has been on a super sprint while from a relative perspective, Gold Miners have been all but forgotten. Technically speaking, a mean reversion is now overdue. My opinion is that Gold Miners could surprise to the upside in the coming quarters ahead, at least on relative basis (chart above).
Chart 7: Gold vs Gold Miners ratio is giving us a buy signal
Source: Short Side of Long
Gold Miners have now been under performing the yellow metal since the early parts of 2011. Theoretically, the overall Precious Metal bear market started around that time and Gold Miners served as an early indicator. Mining Juniors were the first shoe that dropped and it was followed by the huge Silver crash in May 2011. This was followed by a further sell of in Gold and Silver in September 2011 (which I happily shorted back then link 1 & link 2). The whole of 2012, we spent watching PMs move in a sideways range while Gold Miners tanked. However, looking at the chart above, the ratio between Gold (the underlying asset) and Gold Miners has now reached levels surpassing the late 2008 bottom. In my opinion, this is definitely a buying opportunity.
Chart 8: Losses are approaching historical extremes
Source: Short Side of Long
Finally, the annual performance of the Gold Mining sector has been in the slumps for most of 2012. The price itself has gone through two mini crashes which easily rival the infamous 2008 panic. The last two major buying opportunities that reached 1.5 SDs on the downside happened in 2000 and late 2008. While we aren't there yet, we are definitely fast approaching similarities to those two extremes. Therefore, while further downside might exist in the short term (as already explained above), it is important for an investor to gauge his longer term bearings towards the bullish side.
The Bottom Line
As we judge the recent cyclical bear market within the longer term secular uptrend, we can see that Gold Miners are becoming very attractive. Whether it is the technically oversold levels that only occur a handful of times over a generation, the rock bottom valuations on nominal or relative basis, or the extreme sentiment that the overall sector is going through, all of these indicators point to one conclusion: we are fast approaching a major buying opportunity. Time to put your dry powder to work!
What I Am Watching
This comment has been removed by the author.
ReplyDeleteAppreciate your sharing the gold analysis !!!!
ReplyDeleteIf Silver is your main focus, is it time for a similar
analysis. I'd LOVE to read it !
Thanks, Charles
the bmo pcf graph is from q12012
ReplyDeleteI have a feeling the mining stocks are leading the metals lower. Hopefully I'm right so there's a better buying opportunity for the metals. I'd rather own the actual metals than the mining stocks.
ReplyDeleteA plane carrying workers headed to a gold mine in Peru’s northern Andes region crashed, killing all nine people on board.
ReplyDeletebuy silver bullion online
Dojitrader - Thank you for the kind words. Regarding Silver, a decent amount of posts have already been published on this blog regarding this metal in both late 2011 and middle of 2012 (around the time Silver was making an intermediate low). If you use the archives section of the blog, you will be able to find those previous posts. I still believe this metal is a great buy even at the current prices today. You might also want to look at Sugar, which could also be making a major bear market low.
ReplyDeleteThe Hook - I agree. There are variety of charts which are more recent in nature, but I felt like that chart represents a good view from the early 2000s, when the secular bull began. Valuations have actually become even cheaper, with certain large cap Gold Miners selling for book value at current levels (few quarters ago these companies were at 3 times book value).
Great post on the miners
ReplyDeleteThis comment has been removed by the author.
ReplyDeletetiho, love the blog as its one of my favorites. I wanted to correct your comment above "The chart above, thanks to the Objective Trader website, shows that we are currently at record low readings. In other words, not even the panic of 2008 pushed the Gold Mining sector to such depressive depths."
ReplyDeleteThe BPGDM actually did go lower back in 2008 when it hit zero in early December.
Thank you for clarification. I double checked the charts going back and you are right. I will fix the blog post.
DeleteI think gold miners are screwed - sorry, that is the way I see it.
ReplyDeleteI think if people want to speculate in gold or silver now then they buy either GLD or SLV - those who have traded both ETFs over the past 5 years have done very well indeed. Such people have ignored all the paranoia from the goldbugs about there being no gold or no silver - it doesn't matter if you are just trading those ETFs.
The only silver mining share that seems an exception is SLW. That seems to do well.
Of course, you have to take into account the human rights and environmental issues of gold mines - it is all very well making money from such things but some of them do allegedly have very poor records in both the above.
Yes, gold miners are screwed, exactly. And that is what I like the most. Look at the weekly charts - we've got nearly the same situation as in May 2012 i.e. huge volume and candlestick formation called "Hammer". For me it's a technical strong "Buy" signal. I am in that trade on the long side.
ReplyDeleteMany regular readers of this blog know that I hardly ever write about Gold Miners and furthermore, I do not holding any miners in my investment portfolio regarding PMs secular bull market. I prefer Silver and other commodities too (not companies). But I definitely think that Gold Miners are not screwed. As a matter of fact, if you look at the Chart 7 on the post, you can see that Gold Miners have done amazingly well since the beginning of the secular bull market in 2000. At one point they were up over 1600% times while Gold only managed a 600% return in the same time span. Obviously, not many if any, have positions from early 2000s so the volatility in recent years (2008 and 2012/13) has really hurt holdings of speculators who expected super returns. If my thesis on PMs is right, then the final mania blow off is still yet to come, and it would really surprise me if Gold Miners did not participate. A more likely scenario is a decent increase in price above August 2011 highs.
ReplyDeleteShort gold/long miners?
ReplyDeleteNice post, very helpful for us.I will come back here again & again...:)
ReplyDeleteAlso, to know more about...
silver
silver prices 2011
silver investing
gold
Australia is one of the few countries where gold and silver coins are legal tender so theoretically you can use them in the supermarkets etc
DeleteGreat post as usual.I am delighted to see such widespread bearishness on PMs both in words and deeds so to speak..Traders are bearish and they're acting on it by liquidating longs and heavily short-selling the metals...Meanwhile the USD is on a tear and equities are at or close to all-time highs with investors having wet dreams about stocks reaching a "permanently high plateau" thanks to the Fed ministrations.
ReplyDeleteIf you were to tell the above to somebody who ignores what the price of gold is,he would probably guess it has collapsed 40% or 50%...but the reality is that it's gone down less than 20%.This is spectacularly bullish behaviour.I always avoid making outlandish claims or predictions,but it's hard not to be enthusiastic about gold's resilience in the face of so many adverse circumstances:a clear testament to the extreme strength of reservation demand.Of course it could still decline a bit,but the backdrop is undoubtedly very bullish.In fact I bought a little more PMs and even some "screwed" miners recently(for the first time during this bull market,as they now appear truly appealing to me).
Many people point to the mid '70s bear in gold which cut its price in half,but they forget to enumerate all of the factors that made that period so much different from the current one(the most prominent one being the fact that gold rallied spectacularly after being freed from artificial price suppression in 1971,gaining more than 400% in less than 3 years).Moreover,one should not forget that during that bear silver actually declined less than gold(a testament to the fact that the yellow metal was in desperate need of a serious correction).
And speaking of silver,it has now already declined almost 50% from its peak:all those calling for 20$ or even sub-20$ silver should keep that in mind.
I believe PMs are setting the stage for a huge rally.
Re sugar,you might find this article interesting:
http://www.sugaronline.com/reports/website_contents/view/1209943
This,and other facts,have me believing that there really is no meaningful downside traction under 18c$.This is where a speculator can safely build a large position.
Great piece....again ! Thanks Tiho.
ReplyDeleteI wonder why large HF such as Paulson or Activist Hedge Funds have not began an aggressive campaign vs. gold miners community. Boards have been incompetent and out of control. Now, book value in the sector is just crazy cheap.
After 18 months of being away of gold miners, I began tipping the toe and will continue to build a position as momentum increase.
Happy Trady everyone.
gd
The Rothbardian Investor - I couldn't agree more. We seem to share a same view on the markets majority of the time. I personally think Sugar is one of the better plays out there right now, and I have been saying this for at least a couple of months now.
ReplyDeletegd - thank you for the kind words. Gold Miners could be at a major bottom right now or in coming months. After that the upside should be very decent.
Thanks for sharing such a interesting post, keep posting as well as great work.
ReplyDeleteit's one of the biggest crash ever. Gold in the market today still plays a little shaky, hoping for its consistency.
ReplyDelete