We’ve comented recently how gold and silver mining shares have been under-performing the price of both physical metals. We also mentioned a couple weeks ago in our weekly updates email that the shares appeared to be leading the price of the metals higher. In this article J.S. Kim reasons that on a historical valuation basis even though the shares have jumped in price recently they still remain very under-valued…
Every Precious Metals investor knows about the typical summer doldrums that usually afflicts the Gold & Silver sector as summers are typically poor performance months. However, this summer we were hit with a steep downfall earlier than in most years in April and early May, so there is a distinct possibility that despite gold and silver mining stocks normally waiting until late August to put in a bottom, that the bottom may already be in. I expect the second half of 2011 to produce a very significant rally in PM stocks, given the ongoing disaster that is the EU, the ongoing US debt problems, and the development of new PM futures markets in Hong Kong and Shanghai. If you look at the chart below, you will see that just a couple of weeks ago, on June 16th, the HUI Gold Bugs Index fell to a level comparable to the levels that existed on October 20, 2010 and January 25, 2011. On those respective days, gold was trading at about USD $1,324 a troy oz and USD $1,339 a troy oz. On June 16, 2011, gold was trading about 15% higher than its price level as of October 20th, yet the HUI Gold Bugs mining stocks were trading at a price level that was no higher.
Given the history of gold mining stocks’ performance being leveraged to the upside, many a commercial industry analyst declared mining stocks dead at this point, although at SmartKnowledgeU, we declared them severely undervalued, specifically because we believed Western banking interests were manipulating the PM stocks downward at this point and because fundamentally the best gold and silver mining stocks were still very sound. See our article here called The Surprising Truth About the Volatility of Gold & Silver Mining Stocks for some further analysis about the volatility of gold and silver stocks. In the below chart, you can see that we guided our CIO investment newsletter members to use this volatility for profitability as we instructed them to sell out of the gold mining stocks near a short-term high in early April and then guided them to buy back more shares of the same mining stocks at a lesser price in mid-May.
I’ve written many times in the past about the low utility of technical analysis when analyzing gold and silver assets if one does not also take into consideration Western banker manipulation of these assets. To understand this truth further, check out this article I wrote earlier this year called “Technical and Fundamental Analysis Fall Woefully Short When Assessing Manipulated Markets”.
If you look at the same simplified, clean chart of the HUI Gold Bugs index again below, you can see that a technical “death cross” sell signal originated around June 24th last month. In response to the “death cross” sell technical signal, this is a portion of a detailed commentary I sent to my Platinum members on June 24, 2011. The death cross, “in many the mind of a chartist, is supposed to trigger an immediate steep decline in said stock or index. I’ve written many times before that understanding the fraudulent activity in mining stocks is much more important to predicting the immediate price behavior of mining stocks than technical analysis.” Thus, I told my Platinum members to disregard the death cross event because it was of little significance. Then on June 27th, when the fear was palpable of a larger sell-off in the mining stocks because of the one-day plummet in the HUI that accompanied the death-cross event (indicated in the above chart), I told my Platinum Members that instead of panic-selling, to get ready for a significant rebound. I told them “I believe that since we re-tested the most recent lows, and that level held, that the short-term bottom for mining stocks should be in.”
Back then my view was the contrarian view among technical analysts and not the consensus. Back then, many analysts spoke off impending doom in gold, silver and PM stocks, with some even stating that gold and silver were ready to “fall off a cliff”. Despite the fact that serious gold and silver investors knew the “fall off the cliff” prediction was very unlikely, the average investor that has never invested in gold/silver assets was likely to be fooled by this mainstream commentary. Even with the recent very strong recent performance of gold and silver mining stocks, we believe that this is just the beginning of what will be very significant returns in PM stocks over the next 6-9 months. We also believe that the many Commercial Investment industry analysts that declared the upside leverage of PM stocks as dead as of mid-June to be 100% wrong. We believe that the upside leverage of PM stocks to the underlying commodities of gold and silver will manifest itself very strongly again in the near future.
If you refer to the first chart above, even with the very strong recent move higher this week in PM stocks, you can see that the HUI Gold Bugs Index closed at 565.11 yesterday, a level comparable to where it stood on December 10th, 2010. On December 10th, gold traded at $1375.25 a troy oz. Yesterday, gold closed at $1583.60 a troy oz, a 15%+ premium to its price on December 10th, when the HUI Gold Bugs Index was trading at the same level. Thus, even with the strong recent move higher, one can still make a strong argument that that gold (and silver) mining stocks are still greatly undervalued even as of today. We’re not saying that the PM stocks may not take a breather shortly with its recent strong move higher, but we are confident that the upside for the rest of the year for the best in class gold and silver mining stocks is still very significant.
For more expert insight into gold and silver markets and specific gold and silver stocks, please come visit us at SmartKnowledgeU
About the author: JS Kim is the Managing Director of SmartKnowledgeU Research, a fiercely independent investment research & consulting company that offers a subscription Crisis Investment Opportunities newsletter that is now available for the first time on a monthly as well as an annual membership basis. To learn how to download a couple sample Crisis Investment Opportunities newsletters for free, please click on the previous link.