Precious Metals Stocks Major Buy Alert...
Originally published August 12th, 2008.
If you take a stroll around the financial district of any big city such as London, New York or Tokyo, you will walk past countless well dressed and groomed men, in smart suits and ties with tidily coiffured hair and neatly clipped nails, and if you listen to their conversations you will observe that many of them speak softly in measured tones. The image conveyed is one of poise and professionalism. Yet beneath the veneer of civility and reasonableness there frequently lurks a seething cauldron of greed, lust - and fear, a fact which many women are instinctively aware of and which business women are able to turn to their advantage. If you do not believe this you only have to pay a visit to some of the seedier nightspots that are not too far away, and not just at night but even in the lunch hour, and observe the same people "letting their hair down", but even more effective and convenient is to simply observe action in the stockmarkets, where absurdity and irrationality have free reign. This is the arena where all the anxiety of those countless worried looking commuters you see at the train station reading newspapers and peering into their Blackberries, and the trigger happy performance driven stressed out types in dealing rooms around the world is distilled into action. Want an example? - you need look no further than the action in the gold and silver market in recent weeks and especially in recent days, and especially in Precious Metals stocks, where worried selling has cascaded into the blind panic that we have witnessed over the past few days.
Market panics are a "harvest time" for seasoned speculators who, armed with a war chest of cash, coolly watch from the sidelines as the great unwashed masses push and shove and beat their way towards the exits, gripped by blind fear that the world is coming to an end, at least as far as their investments are concerned, and that if they don't sell immediately their previously cherished holdings, they will get much less for them later and perhaps nothing. They jettison everything, regardless of fundamental or intrinsic value, and as the panic approaches maximum intensity and prices accelerate into a vertical descent, the Smart Money moves in and vacuums up all the trashed securities at firesale prices and then sits back and relaxes, assured of huge profits as prices stabilize ahead of the next long upleg. The investment masses, lying battered and bruised on the sidewalk, take a sideways look up to see the Smart Money limousines pulling smoothly away, their occupants chuckling with contented glee, and acknowledging their benefactors out on the street with a final "Thanks suckers!". That is exactly the situation we find ourselves in with respect to the Precious Metals sector right now, and especially with respect to Precious Metals stocks, which are close to or at a historic extreme low relative to the metals.
The oversold extremes and extremes of negative sentiment that we are now at are abundantly obvious on many charts. If we take a look at the chart of the XAU index going way back to 1990 we can see that that the steep plunge of the past couple of weeks has resulted in its MACD indicator, shown at the bottom of the chart, dropping not just to its normal oversold extremes, but way, way beyond them, so that it can reasonably be described as being insanely oversold, and as the index is likely to drop in the early trade to even lower levels, after last nights losses in the metals in the Far East, that take it into our target zone, this indicator will hit even lower levels. On this chart we are also afforded the perspective of seeing the entire Precious Metals stock bull market in its entirety from the trough late in 2000. This enables us to see that despite the savage losses that have just occurred, the long-term uptrend in the index remains unbroken and with it now approaching its long-term uptrend line, underpinned by the strong support level shown, and incredibly oversold, we are very close to or at a major buy spot.
While on the subject of oversold we would be remiss in not keeping the spotlight on the extreme disparity that now exists between gold stocks and gold itself. As many readers will not need to be reminded the drop in gold stocks in recent months and especially in recent days has been out of proportion to the drop in gold, a fact made clear by the long-term chart for the XAU index relative to gold shown below. The time period selected for this chart is the same as that for the XAU chart above, i.e. back to 1990 to enable direct comparison. On this chart we can see that after smashing through relative support in the 0.18 area a few days back the ratio has dropped to even lower levels and is now arriving at the freak low of late 2000. What this chart makes clear is that gold stocks are now grossly undervalued relative to gold itself, making them doubly attractive, and this is just the large gold stocks - if we stop to consider the junior and exploration stocks, they have been almost vaporised by the latest declines, and the better ones, which can lay claim to real resources, must now be very attractive to predators.
Precious Metals stocks are expected to drop into our target zone below 300 on the HUI index and below 130 on the XAU index very soon now, and possibly in the early trade this morning. As these indices can be expected to bounce very strongly once their targets are met - and could turn a little above the target levels - it is thought wise to start buying ahead of the bottom.