-- Posted Tuesday, 29 January 2008 | Digg This Article
| Source: GoldSeek.com
- Gold on its way to $1000+ in short term
- FED emergency cut extremely bullish for Gold
- South Africa's Gold production halted due to Power crisis
This piece was sent out to our members on Friday January 25, 2008
Gold is on a roll these days and marching higher into new record high territories. Gold's current rise is running on some heavy fuel indeed and it's only a matter of time before $1000 gold will be hitting the news wires. Gold surely got a rocket boost from the FED this week since the FED slashed the FED Funds rate by an unprecedented 0.75 bp in order to prevent a 1929 style crash. It happened before, back in 1987 Alan Greenspan’s response to the 22% DOW crash was an emergency rate cut of 60 bp and what happened next wasn't that difficult to predict. Sure enough the dollar tanked and gold took off but more importantly the gold shares took off as well and appreciated by 50% in just three weeks time.
Now fast forward to today, the gold share holders were panicked lately due the liquidity crisis but investors should realize that gold shares are tied to the gold price, not to the DOW. Yes, a 400 pt down day for the DOW will drag the gold shares down as well but that doesn't mean that gold shares could only appreciate on the back of a rising DOW. Unfortunately this is what many analysts would like you to believe. Let's face the facts, this year so far the DOW depreciated by about 7% while the HUI appreciated by 14%. You get it? Staring at daily movements will get you nowhere so please forget about the noise coming from those analysts arguing that a decline in the DOW would be bad for gold stocks.
It goes far beyond the scope of this update to discuss the liquidity crisis and how governments/central banks will respond, the only thing that matters is to know that:
- Most central banks are running their money supply at double digit numbers.
- The Dollar will be sacrificed (lower rates) in order to avoid recession
- Inflation is roaring its ugly head
This is all very gold friendly and will speed up gold's ascent to its inflation adjusted all time high of $2250+.
Now on top of the items mentioned above there came this disturbing news out of South Africa:
SAfrica gold firms stop all mining on power crisis
JOHANNESBURG, Jan 25 (Reuters) - South Africa's three top gold producers suspended production at all their mines in the country owing to a power shortage that the government on Friday termed "a national emergency". END.
No matter how you slice it, no mine production from South Africa translates itself into a severe shortage on the physical gold market for many weeks to come. Needless to say this puts additional up-ward pressure to the gold price.
Now higher gold prices down the road, what does that all means for us gold share holders?
Well, the gold shares are picking up steam lately and the HUI is trading near new all time highs again. I expect that next quarter earnings from most producing companies will see an explosion to the up-side thereby fueling new investor interest.
OK you'll say but what about the junior exploration companies? They have been trading like if gold was trading at $400 instead of $900, what is going on over here? Should we sell our juniors and swap them for rock solid producing entities or is there some light at the end of this long dark tunnel?
Sure enough I got a lot of questions coming my way asking what to do with our juniors since the general attitude seems to be that most juniors will have a hard time surviving the on-going liquidity crisis. The argument is that due to the liquidity crisis it will be harder and harder for juniors to raise money and juniors not able to raise money for their exploration adventures are doomed to file for chapter 11 rather sooner than later. Although I understand such logic I simply disagree with it. My point is that it only requires such a tiny percentage of the total amount of invested money to flow into the gold share sector in order to skyrocket all gold shares into spectacular new highs. Remember that in 1980 about 5% of all invested money was in gold and gold shares, we 're nowhere close to even 1/10 of that today!! You get it? Even a small amount of money flowing into the gold share arena will blow it up big time. Juniors sitting on a significant amount of proven resources will do well since there's a huge demand for new resources by the senior producers. Right now the huge sell-off among the juniors is driven by fear which has driven the entire junior sector into extreme over-sold territories. The good news however is that such extremities never persist for a long period of time and in order to work off that extremity the gold price has to come down sharply or the junior sector has to catch up sharply.
Let me visualize the extreme undervaluation by means of a few charts.
Normally when the gold price goes up you would expect the juniors to go up as well. Now a good tool in order to determine extreme over/undervaluation of the junior gold shares is to divide the junior index by the price of gold. Now let's say when gold appreciates by 10% and the junior index appreciates by 10% as well then the chart will show you a flat line since the ratio didn't change. Now as long as the line stays flat the juniors appreciate exactly by the same percentage as the gold price. When the line turns down the juniors under-perform the gold price and when the line goes up the juniors do outperform the gold price.
Since there isn't really a junior index I used the CDNX index which isn't really a perfect match but nevertheless good enough to draw our conclusions. Now let's take a peek first at the daily CDNX/GOLD ratio chart:
Clearly visible is the extreme undervaluation of the junior shares. Although the down-trend hasn't been breached to the up-side yet it seems that we might be very close to a bottom here.
Now when we take a peek at the same chart but on a weekly base then some interesting things come up:
The weekly CDNX/GOLD ratio chart reveals an extreme undervaluation of the junior shares against gold not seen before in the entire gold bull market that started in 2001. As the saying goes 'BUY LOW' and 'SELL HIGH' it seems that we've arrived at a perfect 'BUY' opportunity here.
Now when we take a peek at the monthly CDNX/GOLD ratio chart we'll see the extreme under-valuation again but more importantly we'll notice plenty of room for a giant up-move in the junior shares that could last for more than a year!!
The most interesting part of this chart is without doubt the almost identical setup as in early 2003. Now the year of 2003 turned out to be the best year for the juniors so far and in fact still many juniors are trading at levels below their 2003 peak! Another beauty of this chart is that it leaves plenty of room for a giant up-move for the juniors which could last for more than a year!
So what are we supposed to do from here?
Well, if you are a believer in gold's future then these are the times to increase your gold share positions. In other words, downside risk is low. Higher gold prices the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.
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-- Posted Tuesday, 29 January 2008 | Digg This Article | Source: GoldSeek.com
