Schmidt's Gold Thoughts 23 April 2012

GOLD STOCKS: HALF WAY?

With the calendar moving into the second third of the year, some of the popular delusions of the crowd seem increasingly remote possibilities. Have we been waiting a year for QE-3? But like a broken clock, those forecasting QE-3 to be imminent still have a shot at being correct. At the same time, some are chopping down the AAPL tree. Already down 10% from the high, the leading delusionist on that stock is still forecasting a $1,000 price. Gold seems well short of $2,000. Would that be still or again? And the pick up trucks loaded with Silver ready for the ride to $100? Well, seems most have broken down in the middle of the road. And the Gold stocks? Perhaps about half way to the bottom.

Above chart plots the GDM, the index of larger Gold mining stocks used as the model for the GDX, the Gold stock ETF. Solid black line is a stochastic oscillator. That index closed last week at a new low. Thus far it has fallen ~30% from the high. With a third new low and twice failing to make a new high, that is a near textbook picture of a bear market.

A particularly annoying truth is that markets do not stop going down till they reach bottom. Calling a market bottom prior to a bottom in place is often a mistake. Most technical tools simply are little help in such an effort. Note that stochastic has annoying characteristic of being over sold repeatedly in a bear market. Reason for that is simple. Such market environments are created by selling.

What might be reasonable expectation for the above index in the remainder of the bear market? A drop to below 800 would not be abnormal. As to timing, a bottom might be put in place in late July or early August. With $Gold having put in place a top last September, to expect a sudden advance in such stocks would seem overly optimistic.

Chart below is of the index of junior mining stocks used for the ETF GDXJ. That index too closed out last week at a new low. As the oscillator shows, the index is over sold. That, as mentioned above, is a common characteristic of a bear market. That too is not a picture of an index poised for a serious move upwards. With Gold and Silver both in bear markets, such stocks are not likely to be rewarding in the immediate future.

What might be reasonable expectation for the above index? Thus far it has fallen ~40% from the high. While that is a significant decline, the index has risk to below 1,000. Timing of a bottom in these stocks is perhaps in late Summer.

What should an investor with an interest in Gold stock be doing? First, no god on yonder mountain is going to turn losses into gains any time soon. Depending on your tax laws, book losses for tax purposes, if any, and move on. If you still like the stock, set a date to buy it back consistent with any wash sale rules in your tax system.

Second, for larger mining stocks set a price target roughly 30-40% below today’s price. Should the stock reach that level this Summer then consider purchasing it. However, do so without expecting immediate gratification. Third, for smaller mining stocks that actually have production, or production that is imminent, set a price target to consider the stock at 40-50% below today’s price.

Finally, remember that Silver and Gold stocks derive their value from Gold. They do not exist in isolation from the price of Gold. Any investment at this time should be in Gold. While it may have some downside risk, it is the source of the returns for Silver and Gold stocks. It should be your primary investment. We recently completed revisions to our target dates for the bottoms in Gold and Silver in the latest issue of The Value View Gold Report.

GOLD THOUGHTS comes from Ned W. Schmidt,CFA,CEBS as part of a mission to save investors from the regular financial crises created by Keynesianism, and the high priests of that misguided ideology. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com