Golden Gains come After the Pain

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Richard (Rick) Mills

Ahead of the Herd

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As a general rule, the most successful man in life is the man who has the best information

HUI/Gold Ratio, National Inflation Association

When the HGR is rising, gold stocks are outperforming gold.  Conversely when the HGR is falling, gold is outperforming gold stocks. 

Since 1996, the HUI/Gold ratio has averaged 0.363.The all time low HUI/Gold ratio was set on November 17, 2000 when it bottomed at 0.135.

The HGR closed Wednesday November 20th at .148.

The above data tells me gold mining stocks are extremely undervalued and way oversold compared to the price of gold. Can I make some money off that bit of knowledge, am I looking at a potentially profitable investment into a few well chosen gold company’s, do I wait a bit or pull the trigger now?

Let’s investigate further and look at a couple of charts (the following four charts are from marketwatch.com)…

NYSE Gold Bug index (HUI)

PHLX Gold/Silver Index

The two above index’s are excellent proxies for what’s going on in the gold sector. But you can’t invest in an index so let’s look at a couple of investable barometers and see what they show us…

Gold Miner ETF (GDX)

Junior Gold miner ETF (GDXJ)

It looks to this writer like a bottom.

BUT

What are gold and gold stocks going to do. Are they going up, down or staying flat?

Because we’re smart ahead of the herd contrarian buyers – the buy low sell high kind of buyer – we need additional confirmation if there’s a buying opportunity currently being presented in gold stocks, or, is there perhaps a little more pain before the golden gains?

The Federal Reserve tried to fix the U.S. economy by Quantifornication - stimulus measures.

Investors reacted to the Fed’s unconventional efforts. Since the U.S. dollar is the world’s reserve currency and precious metals are priced in dollars they bought gold and silver to protect their wealth against currency devaluation and inflation. Gold catapulted to a record in 2011 as investors wagered on higher inflation and a weakening dollar.

The Fed ended its bond-purchasing program in October of 2014 and is expected to start raising interest rates sometime in 2015, experts are talking June/July.