-- Posted Thursday, 26 July 2012 | | Disqus
By David Skarica
I realize many gold stock investors are very disappointed and depressed about the action in the gold market. We have seen gold in a consolidation pattern of about $1520 to $1900 an ounce . However, the gold stocks have acted much worse. The Amex Gold Bugs Index, an index of unhedged gold stocks, has dropped from 638 to 392. This is a drop of over 40 percent and represents the second worst gold stock decline of the past 10 years. Only the 2008 crash, which saw the HUI lose over 70 percent of its value, was worse.
In the stock market, there is what is known as a 4 year cycle. This cycle states that the stock market will usually bottom in the second year of the presidential cycle. From 1960 on you will see this pattern: 1962, 1966, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998, 2002, 2006, 2008, 2010 . These were all years that saw major or intermediate lows in the stock market. Only 1987 and 2008 were major lows that did not occur during the second year of the presidential cycle.
This brings us to the good news about gold and gold stocks. It seems that gold stocks have developed a 4 year cycle of their own. Since the start of the bull market in 2000, gold stocks have seen major lows in 2000, 2004 and 2008. It looks like 2012 could be another one of these lows.
Let’s look at these lows.
Amex Gold Bugs Index
Year Low Price Low Near Year High Price High Percentage Gain
2000 35.31 2003 258.60 732.37
2004 163.81 2008 519.68 353.87
2008 150.27 2011 638.59 424.96
2012 ???? 372.74???? ????? ???????? ??????
As we can see from the chart above, along with the graph that I have enclosed, each of these bottoms in the gold market were followed by 3 to 4 year rallies that took the HUI up anywhere from 353.87 to 732.37 percent.
Now let’s, for argument's sake, say that the 372.74 low in the HUI is the low for this year. If we look at a gain of 353.87 to 732.37 percent from this low, we are looking at a HUI range of 1319.50 to 2728.45. The truth probably lies somewhere in the middle. However, considering that gold stocks when compared to the price of gold and in price to earnings terms are about as cheap as they have ever been, I would not be surprised to see the gains in the upper range because we are starting from such low valuations.
The question is not so much if gold stocks will bottom this year, but when? Was the low of 372.74 the low for this year or will we see one more plunge lower? The good news is we are approaching August which is seasonally when gold tends to bottom (see the chart from equityclock.com that is enclosed that illustrates this trend).
Source: equityclock.com
Of course, the wild card remains how gold stocks react to a potential blow out of the debt crisis in Europe. I fall in the camp of people who believe that Greece will default and leave the euro sooner rather than later. After this default, we will see massive money printing and some sort of euro bond scheme to bail out Italy and Spain. However, gold stocks could head lower into such panic selling. Therefore, we could see a bit more downside. However, the other side of that panic should be wildly bullish for gold. We are about to see India, China, Europe and the United States all print money later in the year. This is wildly inflationary and should bring back the reward on gold trades and start another gold bull market.
Whenever it starts, regardless of whether gold stocks bottom here or still have one more low to make, 2012 should end up being another major low for gold stocks and by the end of the year, they should have begun another major 3 to 4 year rally that will take them hundreds of percent higher from their current prices.
About David Skarica and Addicted to Profits
David Skarica is the founder and Editor of Addicted to Profits, a popular newsletter known for its stellar performance in both up and down markets. Skarica entered the financial markets at a very young age and, at the age of eighteen, became the youngest person on record to pass the Canadian Securities Course. He is a regular speaker at trade and investment conferences in Canada and is a guest on the Business News Network (BNN), Canada's flagship business broadcasting network. His work has appeared in publications such as the Bull and Bear Financial Report, Barron's, Investor's Digest of Canada, and Canadian MoneySaver. Skarica also writes Gold Stock Adviser, an investment newsletter for the conservative media outlet, Newsmax.
His website www.addictedtoprofits.net specializes in finding undervalued contrarian investments and finding value. It combines what David calls the quartet of security analysis combing Fundamental, Technical, Psychological and Monetary analysis. Addicted to Profits has prepared For anyone who reads this article David is offering nearly $100 or a over 25 percent savings off his regular subscription price. For more information on this newsletter please log onto www.addictedtoprofits.net and to sign up for this limited time offer CLICK HERE
-- Posted Thursday, 26 July 2012 | Digg This Article
| Source: GoldSeek.com
