Gold Sector
Update
Steve Saville
January 30, 2004
Extracted from commentary
posted at www.speculative-investor.com on 25th January 2004:Note: A lot of the
short-term downside risk in the gold sector that we emphasized
near the highs in December and January has now been wrung-out
and some new buying might now be appropriate for those investors/traders
with minimal exposure to the sector.
Overview
Signs that
an intermediate-term peak is in place in the gold sector include:
- The breakdown
in the HUI/gold ratio
.
- The huge upward
move in silver stocks relative to gold stocks over the past two
months (refer to the 12th January Weekly Update for an explanation)
.
- Pronounced
weakness in leading gold stocks such as Goldcorp and Golden Star
Resources since early December
However, we
haven't yet seen the level of speculation amongst the exploration/development-stage
juniors that we would expect to see near an important peak (many
of the juniors are still under-valued). Also, historical data
indicate that the gold sector is unlikely to reach a major peak
until some time after -- most likely a few weeks after -- the
Dow industrials Index has peaked. With the Dow having hit a new
recovery high last Wednesday and, we think, being at least 2-3
months away from its ultimate recovery high, the historical record
tells us not to expect a major peak in the gold sector until
at least April-May.
We've taken these conflicts to mean that the positive trend in
the gold sector will remain intact until at least April-May but
that the HUI might not exceed its December-2003 peak. In any
case, regardless of whether the HUI does or does not exceed its
December-2003 peak over the next several months we think that
gold stocks -- particularly the stocks of the under-valued exploration-stage
companies and the South African majors -- will perform very well
for a few months after the current correction runs its course.
Gold stocks versus
the stock market
Below is a
chart of the HUI/S&P500 ratio showing the upward trend --
reflecting persistent strength in the gold sector relative to
the overall stock market -- that has been in place since November
of 2000.
The upward
trend in HUI/S&P500 is intact. However, at last December's
peak the ratio had completed three upward pushes (or waves) separated
by consolidations; and advances during bull markets often take
the form of 'three pushes to a high'. Also, note that the third
upward push (or wave) was weaker than the first two. We therefore
need to be open to the idea that a major peak (one that will
hold for more than 12 months) was put in place last December
for the HUI relative to the S&P500. This idea appears to
be in conflict with the fundamentals, but it is consistent with
the recent upside breakout in the S&P500/gold ratio and it
is not uncommon for price action to lead the fundamentals by
several months.
Current Market
Situation
As mentioned
in recent commentaries we are anticipating new correction lows
over the coming weeks and that a bottom will be in place by the
end of February at the latest (most likely within the next three
weeks).
We've repeatedly warned of the short-term downside risk in the
gold sector over the past two months. And when the HUI was trading
in the 240s and 250s we suggested, in no uncertain terms, that
anyone with substantial exposure to the gold sector consider
taking some money off the table.
However, while there is still some short-term risk the risk is
a lot lower now, with the HUI in the low-220s, than it was when
the HUI was in the 250s. This is not so much because of the modest
10% slide in the HUI itself, but because a lot of the froth has
been taken out of the market. For example, speculative favourites
Goldcorp (NYSE: GG) and Golden Star Resources (AMEX: GSS) are
down by 25% and 35%, respectively, from their highs. And in Goldcorp's
case, the stock has just reached an area of strong support defined
by its January-2003 peak, its post-July-2002 trend-line and its
200-day moving average (see chart below). We are not interested
in GG as an investment because it still appears to be over-priced,
but there can't be many worse times to sell than AFTER a stock
in a long-term upward trend has just plunged 25% to a level at
which it is likely to find strong support. We wouldn't be surprised
to see GG spike below this support during the next few weeks,
but we doubt that it will drop more than 10-15% below its current
level before a substantial rebound gets underway.
Another high-profile
gold stock that is nearing a potentially important support level
-- in this case, the bottom of a 1-year price channel -- is Barrick
Gold (NYSE: ABX).
When important
support levels are breached a result is that many chart-watching
traders turn bearish and sell. However, when a stock breaches
an important support level after having already experienced a
large decline the break of support often turns out to be a 'bear
trap'. In such cases the knee-jerk selling in reaction to the
support break often sets the stage for a sharp rally.
The upshot is: although we expect to see one more downward leg
in the gold sector before the correction is over the time for
selling has past. Instead, anyone who wants to increase his/her
exposure to the gold sector should now be preparing to do some
buying. With this in mind we mentioned, in last week's Interim
Update, reasonable under-the-market buy prices for sixteen gold/silver
stocks that look good from a valuation perspective. Furthermore,
there are many other stocks that we could have mentioned but
didn't. In general, though, buying your favourite gold/silver
stocks following pullbacks to near their 200-day moving averages
should work out well over the short-term and the long-term.
 Steve Saville
email: sas888_hk@yahoo.com
Hong Kong
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