-- Posted Wednesday, 29 December 2004 | Digg This Article
December 28, 2005
Many Gold letter writers are calling for another leg down in Gold shares. I simply don’t agree. Here’s why. All previous bottoms in PM shares during this bull market have been characterized by extreme undervaluation of the PM shares against Gold. Each extreme undervaluation didn’t last for more than 2-3 weeks. Now it happened again, the PM shares are extremely undervalued against Gold since Dec 8. The valuation of Gold stocks against Gold is illustrated by the Gold/HUI ratio. The Gold/HUI chart suggests that the HUI bottom is in and issued a ‘BUY’ for PM shares.
Based on historical data the Gold/HUI chart suggests that extreme weakness in PM shares reflected by RSI tops in the Gold/HUI charts exceeding 70 won’t stay there for a long period of time (2-3 weeks maximum). Now let’s have a look at the Gold/HUI chart:
So based on its own history we could suggest :
- PM shares do bottom at RSI tops > 70 of the Gold/HUI ratio.
- RSI tops > 70 mark the beginning of an uptrend in PM shares lasting 2 to 9 month.
- Each rally in PM shares which started from a RSI top >70 gained 50 to 130%.
- RSI tops > 70 have a very short life span (less than two weeks)
- Right now (Dec 8) RSI crossed the 70 mark again, so PM shares bottoming within two weeks ? Expected minimum gain of HUI is 50% within three month, so HUI >300 before end of Q1 2005 ?
Now when we zoom in on the last year of the Gold/HUI chart you should notice that PM shares are a ‘BUY’ indeed :
So what to do now when the PM shares are so dirt cheap ?
Well, load the boat with your favorite junior gold mining shares. Why ?
Again. read the conclusions of chart I, it says :
- Right now (Dec 8) RSI crossed the 70 mark again, so PM shares bottoming within two weeks ? Expected minimum gain of HUI is 50% within three month, so HUI >300 before end of Q1 2005 ?
If the HUI reaches >300 by end of Q1 2005 (even end of Q2 will do), what do you think the Junior shares will do ? They’ll go ballistic. We just saw a preview of what can happen in 2003 when lots of Junior shares appreciated by a multiple of 100%.
Juniors are trading at fire sale prices now and could be rewarded well next year. Remember that 75% of all discoveries are made by juniors and that the major producers are facing a decline in gold reserves so they’ll have to go after the juniors. As an investor you should do the same. (see for details my article ‘Juniors in denial’)
I know the sentiment regarding juniors is terrible these days, but that makes them dirt cheap and worthwhile to buy. Same sentiment we’ve witnessed in Dec 2002. In my piece ‘2003 - Year of the juniors’ I wrote:
Profits of 100 – 1000 % are in the pipeline next year if invested in high quality junior mining companies. END
Well, that’s exactly what happened. Now, two years later I would say the same for the year of 2005. But remember, in order to enjoy a multiple 100% profit next year you’ll have to buy low, and that’s NOW !
As said before, senior producers have to go after the juniors (details see ‘Juniors in denial’), so when a junior makes a big discovery it will be in the spotlight straight away. Just to remind you what could happen with a junior making a big discovery is best illustrated with the example of Arequipa Resources in 1996. Arequipa shares were trading at 1 CAD$ just before they found 7 million ounces of Gold. Within 6 month they were taken out by Barrick Gold at a share price of +30 CAD$ , see chart below:
It seems that the awareness is growing among Gold analysts regarding such opportunities. The Wall Street Journal (Dec 02) quoted John Bridges, a senior gold analyst at J.P. Morgan Chase & Co who said :
“If you are lucky enough to buy into an exploration company that makes a discovery, you can effectively buy your own auto teller machine. Some of these things are just phenomenally profitable.” END.
Your own auto teller machine, isn’t that what we all dream of ?
Just buy the next Arequipa and enjoy your own auto teller machine by the end of 2005 !
Wish you all a healthy and golden 2005
Best, Eric
ehommelberg@planet.nl
P.S. Reasons for a sustained bull market in Gold (and thus Gold shares) are well documented in the gold drivers (Preview) 2005 PDF, readers interested can still drop a mail.
-- Posted Wednesday, 29 December 2004 | Digg This Article
