-- Posted Tuesday, 10 April 2007 | Digg This Article
Note:
When I wrote the first piece of my ‘HUI – Preparing for launch soon’ series I didn’t have it in mind to write three updates on it afterwards. The reason of doing so is simply because it generated plenty of feedback from readers who encouraged me to write some updates on it. The funny thing is that the HUI has been marching higher ever since I wrote part I (HUI was trading at 318 vs 358 now) but sentiment of most gold investors was pointing exactly the other way during this period. As pointed out in previous pieces the gold shares are most likely to take off when sentiment is at an extreme low. Well, that’s exactly what happened lately, despite the bearish sentiment towards the gold shares the HUI is creeping higher and has come in reach of the important 360 mark for the 4th time since September 2006. If the HUI could manage to breach this important mark it could be challenging its all time high of 400+ rather sooner than later. Since current situation is so critical I decided to write part IV of ‘HUI – Preparing for Launch soon’.
END.
HUI – Preparing for Launch soon – part IV
Gold continues its roller coaster ride which caused many (short term) gold traders clueless as of why gold is going into one direction or the other. Gold sharply down on the news of 15 British soldiers seized by Iran, gold going up sharply after the release of those 15 British soldiers. As stated many times before, the more bullish news for gold the more it’s being sold off. A good example of what I mean we saw on March 29 when gold sold off $8 in the face of increasing Iran-UK tensions (Iran reneged on its promise to let the captured British woman soldier free thus firing up tensions). While crude oil responded by moving up sharply gold went into the opposite direction. The reason why is obvious, (as explained in detail in ‘HUI – preparing for launch soon – part I, II and III) establishment doesn’t want gold to regain its role of safe haven since that would undermine the dollar’s credibility to a great degree.
Now if that would be the case indeed you would expect the central banks stepping into the market during geopolitical tension increase (Iran) and sell gold in increasing quantities to kill the rise of gold thereby torpedoing gold’s function as a barometer of geopolitical/financial stress.
Well, it seems that that was exactly what has happened, Neal Ryan of Blanchard & Co wrote his clients April on 04:
We've gotten our update on ECB bank sales the past week, and just as we figured, we've seen another week of massive increases in bank reserve gold selling into the market. This past week's additions are roughly 17.5 tonnes of gold into the market. That means that in the last three weeks, 45.5 tonnes of gold have flooded out of ECB banks into the gold market. For a point of reference, the previous three weeks, sales had totalled roughly 7 tonnes total. Considering the past price action in periods when selling has increased this dramatically, the gold price has held up considerably well and even made advances in the face of this massive selling pressure. END.
Now please digest this carefully:
A massive increase in gold sales didn’t succeed in putting the yellow metal down. In contrary, gold managed to appreciate even further. Now please don’t think a massive gold sale to the tune of 45 tonnes in three weeks time is peanuts since previous similar gold sales of such order resulted in severe price collapses.
Ryan Neal continues:
The last two examples of similar selling pressure into the market had collapsed prices; Sept. '06 when +50 tonnes were sold into the market, prices fell nearly $30; May '06 75 tonnes were sold into the market and prices fell over $100 per ounce.
That gold has absorbed this increased selling and continued higher should highlight two things. First, the physical demand in the marketplace at present is quite robust to be able to digest these levels of supply and trend higher. Second, this can now be confirmed as the reason the gold market has not been reflecting the current market conditions that should be pushing prices higher. END.
OK fine you’ll say, so central banks are stepping up to the plate and are willing to sell into any gold rally in order to kill any rise in gold, but that’s exactly what I fear, central banks fighting any serious gold advance tooth and nail. Aren’t the central banks so powerful they can do with gold whatever they want whenever they want?
Well, although I can understand this kind of fear, the opposite is true. Central banks can only do so much but they can’t stop or reverse a primary trend. The simple truth is that central banks are running out of physical gold to hit the market with enough physical gold in order to kill gold’s primary trend.
According to Neal Ryan there’s only one remaining seller left out in the market of any size who was more than likely behind the major sales over that three week period. This particular seller only has some 3 – 7 million ounces to sell for the remainder of the year.
Yes, the Washington agreement (CBGA II) allows central banks to sell gold to the tune of 500 tonnes a year but Neal Ryan expects the central banks will miss this mark by over 150 tonnes this year and if that wasn’t already bad enough he expects the central bank gold sales will miss the mark by 200 – 300 tonnes in 2008 – 2009. This translates itself into a dramatic supply drop of 6 – 10% coming years. Now please don’t think the gold producers will come to the rescue here since they are facing a decline in gold production coming years which will exaggerate the total supply drop even more. You simply don’t have to be a genius in order to see that in the face of an ever increase in demand for gold against a severe drop in gold supply the only way is up for gold.
The bottom line is, don’t let yourself being fooled by short term counter-active price movements and subsequent bearish gold comments. The big picture hasn’t changed a bit, the fundamentals which took gold from its 2001 low of $250 to its current level of $675 are all still firm in place and are pointing towards much higher gold prices the years ahead.
OK, so higher gold prices in the years ahead, but what about the gold shares then? Many analysts are calling for a top in gold shares since they can’t confirm gold’s recent strength and besides that gold shares could be victim of a brutal sell-off in the stock market they say.
Well, since charts are telling more than a 1000 words, let’s take a peek at some updated gold and hui and charts. In other words, please forget about all bearish comments lately and just focus on the hard data and nothing else.
The first chart concerns the gold chart. The reason for showing this one is simple. Just take a look at this chart which is completely free from any bearish comment and shows you painfully clear that gold’s uptrend is extremely healthy. Please commit this to memory.
You see? Despite the brutal sell-offs every now and then gold’s primary trend remains up, not down. As an investor you should be prepared emotionally to deal with such sell-offs otherwise you will find yourself most probably ending up selling at the worst possible times.
The second chart concerns the Gold vs HUI chart. I just show this chart to visualize the strong correlation between gold and its shares. This chart leaves no doubt. There is a strong correlation between gold and its shares indeed no matter what some analysts want you to believe…
OK you’ll say, a strong correlation between gold and its shares indeed but what about a potential stock market crash? Does it take down the gold shares with it? Does it worry me? Well, although no one can predict exactly what will happen during a stock market melt down I’m not too worried about it since gold will shine in such an environment and eventually the gold stocks will prosper. Please remember that during the great depression of the thirties Homestake Mining appreciated by more than 500%
Now if the HUI is really tracking the price of gold then it has some catching up to do since it is trading at the same level as when gold hit $635 in September 2006. In September 2006 the HUI clocked the 360 for the first time after its correction in May 2006. It has done so on another two occasions ever since then (December 2006 and February 2007) and now the HUI is approaching the 360 for the 4th time. If the HUI can breach this resistance at 360 it is off to challenge its all time high of 400+ reached in May 2006. The chart below visualizes the HUI lagging the price of gold.
So the 360 seems to be somewhat of a heavy resistance here so the question remains whether or not we will see a successful HUI attempt to breach this 360 mark soon.
Well, it seems that we’re not that far away from such an event. As said above the HUI seems somewhat undervalued compared to gold these days but having said that it seems that the HUI’s undervaluation is disappearing fast so if gold can hold its current strength the HUI will breach its 360 resistance rather sooner than later.
How do we know if the HUI’s undervaluation is disappearing or not?
The HUI’s undervaluation/overvaluation against gold is visualized by the Gold/HUI ratio chart. The HUI always moves from undervaluation towards overvaluation against gold. Since the HUI has been in undervaluation territories for quite some time now the odds are that it’s only a matter of time the HUI will be overvalued again against gold. The chart below tells it all:
The Gold/HUI ratio chart says the Gold/HUI ratio is dropping lately which translates itself into a move from under-valuation towards over-valuation. Gold/HUI values exceeding the 2.0 mark are pointing towards undervaluation of the gold shares vs gold thereby generating excellent ‘BUY’ opportunities while on the other hand Gold/HUI ratios falling below the 1.7 mark are pointing towards over-valuation of the gold shares vs gold. It seems that the Gold/HUI ratio is dropping indeed. A continued drop simply points towards higher HUI values.
Now how can you profit from such a potential up-leg in the gold shares? Well, sure enough you can track the HUI by simply buying a major producer such as Newmont but the biggest profits are being made by juniors making discoveries. Please be aware that mine supply is on the wane and major producers such as Newmont simply have to turn to the juniors in order to replace their dwindling gold reserves. History makes no mistake about it, juniors making discoveries are paying off tremendously. Arequipa Resources shot up from 1 CAD$ in 1996 after to $35 after discovery of 7 million ounces gold, more recently Aurelian Resources (still in discovery) shot up from 92 cents towards $40 (now trading at $32). Sounds simple right? Just buy the right junior and get rich instantly. Well, unfortunately it doesn’t work that way since it’s not easy to find a junior on the verge (or just in) of an economic discovery. Remember that only one out of every 1000 projects will make it eventually to a mine, some estimates are even more conservative and are pointing towards one out of every 2000 projects that will make it to a mine.
Although as stated above picking the right juniors is not an easy task but nevertheless we feel quite confident about some high quality junior companies which we believe could turn out to be extremely profitable the years ahead. We will introduce these companies to our members soon as they will be added to our favourite Discovery TOP 10.
If you want to participate in the new up-leg in gold shares and profit from the potential of promising juniors you can sign up HERE for as little as $30 a month (one month free trial)
Best Regards,
Eric Hommelberg
The Gold Discovery Letter/
The Gold Drivers Report
www.golddrivers.com
-- Posted Tuesday, 10 April 2007 | Digg This Article
