Loading ...Despite already being monstrously oversold relative to bullion, gold stocks were “taken to the woodshed” yet again last week as a result of gold and silver breaking lower, and suffered further heavy losses, as we can see on the 5-year chart for the HUI index shown below. They are now in freefall, and clearly, if gold now drops to its big support in the $1,000 area, they can be expected to continue to plummet, and it is reasonable to expect to see a downleg of similar magnitude to the one that lead into the big consolidation pattern of the past 15-months.
Although the immediate outlook is awful, we should keep in mind that the all-pervasive negativity towards the sector is a sign that a major bottom is not too far over the horizon. Firm evidence of that is provided by the 7-year chart for the Gold Miner’s Bullish Percent Index. This shows a truly extraordinary situation where, already, no-one is bullish in the sector. This is the “dry tinder” for an explosive rebound immediately the market senses that the bottom is in. The prolonged rotten performance of stocks relative to bullion is a reminder that we can expect stocks to front run the bottom in the metals. On only two occasions in the life of this chart have we seen such an abysmally low reading in this index. One was the 2008 general market panic low, which was followed by a huge rally in the Precious Metals sector lasting several years into the 2011 top, and the other, in the Summer of last year, was followed by a bounce and then the development of the long trading range that preceded last week’s breakdown.
Just how horribly oversold stocks are relative to bullion is made plain by the following two charts, which show first the HUI index over gold, and then the large stock XAU index over gold, which is even worse. To understand what this means, you have to realize that when investors are fearful towards this sector they favor bullion over stocks, because while companies can and do go bust, gold bullion always survives, whatever its price in fiat. The more fearful they are towards the sector, the lower these ratios go, and as we can see, they are considerably more fearful towards the sector than they were at the 2008 crash low, and with respect to the HUI Index over gold ratio, they are as fearful towards the sector as they were in late 2000, before the great bull market in gold and silver began, and much more so with respect to large cap stocks, as shown by the XAU index over gold ratio, whose reading is much lower than in late 2000. These are clearly extremes of fear that have major bullish implications. What it means is that once the dollar’s swan song deflation rally is done, we are likely to see a humongous recovery in gold and silver stocks, magnified by the fact that many companies will have already “gone to the wall” by the time it happens.
In conclusion it appears what we are about to witness is the sector collapse into the final low, before a recovery that promises to be amazingly robust. This collapse will trigger an industry wide cull and cleanout. It will be like the Black Death with bodies being taken away by the cartload, but the companies that pull through this terrible time can look forward to the prospect of an extraordinary resurgence in fortunes, and a correspondingly big increase in their share prices. Those of you who have any capital left should make sure you don’t miss out on this.