The chart above clearly shows one thing: long-term trends often last many years. The bear market that started in 1988 ended in 1993. The up-swing that followed lasted three years from 1993 until 1996 and culminated in what may be called a false break-out. Then another bear-market unfolded taking the gold price down to $250 over a period of almost four years.

Then the spike in the gold price (1999) came as a consequence of the central banks’ announcement that they would be limiting their gold-sales.

The 1999 bottom was tested again at the beginning of 2001. At that time, when few believed that any money should be put into precious metals, the present bull market started; a bull market we deem has still a long way to go.

On the last trading day of the year 2007, the price of gold reached the all-time high briefly touched in 1980. During the first trading days of 2008, the rally continued. It will be a matter days till the barrier of $900 will be breached and the $1,000 target will be the one to be watched.

The medium-term picture

From the above presentation, it is easy to see that there have been many buying opportunities since this bull market started in 2001, along with some excellent prospects for selling. Each time the gold price fell back to or below the EMA 50 (green line) we would have been well advised if we had bought.

On the other side, taking profit would have worked well each time the gold price moved to a level of close to 20% above the EMA 50 – except at the end of 2005 where we would have missed the price surge from 525 to 720 (+37%).  At present, the gold price has again moved away from the EMA 50 and stands in fact at plus 25%. If however we take the price surge of 2006/7 as a guide, we should refrain from selling too early as we may reach a level well over $ 1,000 by the end of this move.

At this junction, it can be helpful to see how unhedged gold stocks fared compared to gold:

The price of gold increased close to 250% since the start of the bull market in the year 2000. The HUI-Gold Bugs Index surged however 1,250% from its low to the high it reached at present with 475.67 points.

Higher percentage gains for the gold shares relative to the price of gold imply a higher volatility which means that corrections are also more severe when the price of gold corrects. This however should not concern us unduly as gold shares make up for any losses suffered very quickly once the gold price starts firming again.

Gold and gold shares do not move in a parallel fashion. At times, gold is leading, at times the gold shares.

Should you own gold rather than gold shares?

We have shown above that gold shares over the long-term show a far better performance than the metal – in fact, since the start of the bull-market, gold shares outperformed the gold at ratio of 5 to 1.

In the short-term, the ratio between the price of gold and the HUI Index does not remain constant as the graph below demonstrates. A ratio of about 2 would be a long-term average but it can go up to reach 2.5 or 3 points or down to 1.5 points.  Such extremes would be a signal of buying or selling opportunities.

Where are we now? We stand at 1.9 points. This indicates that the gold shares which are represented in the HUI Index have kept pace with the gold price. Whether gold or gold shares will outperform in the future has to be seen but as we expect the gold price to move higher, we would not be surprised when gold shares also would move up strongly, outperforming gold.

Are you frustrated owning junior gold stocks?

Unfortunately, there is no index that would reflect the performance of junior gold stocks. Nevertheless, we know that they have not kept up with the medium and large cap stocks. Many have asked themselves whether they should switch to mid and large cap stocks in order not to miss the movement under way.

We believe that this phenomenon of underperformance is temporary and should actually be seen as an opportunity to buy.

In order to demonstrate what has happened, we have tried to select a representative junior gold stock which is in production but has great exploration at the same time.

The following graph shows the gold price divided by the price of the gold stock – Alamos Gold. What do we notice? We see a long period during which the stock spectacularly did better than gold as the ratio fell from 360 down to 53.  In other words, you only needed 53 shares of Alamos to equal the value of one ounce of gold.

Then, the situation changed and the ratio rose steadily from 53 to presently 165.  The period from the year 2003 to 2006 also reflects the strong performance of the stock because of their exploration success. The period from 2006 up till now reflects the strong gold price on one side and production uncertainties of Alamos on the other side and the general underperformance of junior gold stocks.

This will change in our opinion. The large caps will tire. Money will seek stocks left behind and the juniors will experience a spectacular revival.  It would be a sad mistake, on our mind,  to switch now from juniors to mid and large cap stocks.

The recommendations were valid at the time of writing, viz. at

but may no longer be pertinent at the time of reading.

Peter Zihlmann

www.pzim.com

www.timeless-gold.com

invest@pzim.ch

phone  +41 44 268 51 10

mobile +41 79 379 51 57

-- Posted Wednesday, 16 January 2008 | Digg This Article