Adam Hamilton wrote an excellent if long and exhaustive essay a few weeks ago called Gold Stocks Big Bargains setting out how undervalued gold stocks are relative to gold that we earlier took note of. He is right of course if a little early on the timing because of the year-end tax-loss selling that has knocked prices down more. So we have bided our time waiting for the optimum moment to move in and that time is believed to have arrived.
The extent of the anomaly is astounding. From the start of the year gold is up about 27%, yet gold stocks as represented by GDX are up only 11.6%! Normally, gold stocks leverage gold’s gains by 2X to 3X so they have a lot of catching up to do. While this anomaly can be explained to a limited degree by rising mining costs, they don’t rise that fast to account for this huge anomaly.
A very important point to keep in mind is that a market crash is likely to be averted by creating vast amounts of additional new money that accelerate the trend towards hyperinflation, a setup that benefits the super-wealthy who own most of the stocks. This means that gold’s robust uptrend looks set to accelerate further which means that gold stocks will have even more catching up to do.
Looking at the latest 1-year chart for GDX we see that the 3-wave downleg from mid-October looks like a normal correction to the 5-wave upleg that preceded it with this correction bringing it down to the lower rail of the large channel shown and to a point some way below a still rising 200-day moving average, which is a very good point for it to start higher again, especially as we are going into the New Year with tax-loss selling over.
The underperformance of gold stocks relative to gold itself is shown to dramatic effect on the following year-to-date chart of GDX over gold. On this chart we see that while gold has risen about 27% this year, GDX has only risen 11.6% with the ratio of GDX to gold actually falling by 12%! As mentioned above this is a truly extraordinary anomaly given that gold stocks normally outperform gold itself by 2X to 3X and it means that even without gold continuing higher, which it is expected to, gold stocks have an awful lot of catching up to do. Given that their costs are relatively fixed, many gold miners are now making windfall profits which are feeding through into results and lowering P/E ratios dramatically.
Eldorado Gold EGO $14.97, ELD.TSX, C$21.60, EQX,TSX, C$7.40.
Eldorado looks like a beachball pushed under water on its latest 6-month chart and set to come bouncing back soon…
Equinox Gold EQX $5.13
Equinox Gold dropped back quite sharply in the middle of this month to arrive at a zone of strong support in an oversold state which is expected to reverse it to the upside soon. If it does break lower here it should turn out to be a “head fake” or false move that is followed by a rapid reversal to the upside.
Harmony Gold HMY $8.24
Harmony Gold has also dropped back to a strong support level and while oversold, its new low of recent days has not been confirmed by momentum, which is bullish. Its decline from its mid-October peak looks like a 3-wave A-B-C correction that has run its course. With the price quite some way below a rising / flat 200-day moving average, it has plenty of upside from here.
End of article.
Posted at 4.30 pm EDT on 28th December 24.