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« Gold Drops to $800, Why? | Main | $1500 Gold according to Merrill Lynch! »
Wednesday
Oct152008

Gold Stocks: Oversold?

Gold DJIA stocks chart 16oct08


Fear rules the market as the flight to cash continues at a frantic pace. The rally by the Dow Jones Industrial Index turned out to be a dead cat bounce or a suckers rally as we alluded to on the 14th October 2008. However, gold is refusing to lie down and is trading at $841/oz as we write. Gold stocks on the other hand have been sold off even faster than mainstream equities!

The above chart which covers 2008, shows gold down a few percentage points, the DJIA down around 35% and gold stocks as represented by the gold bugs index, commonly known as the HUI is down around 45%.

There is one school of thought that suggests that the gold stocks are leading the way and that gold will follow to lower levels and indeed this view has some merit. Microanalysis at this level is rather difficult to do at the best of times and is especially difficult to do during a time where history is being made with an unprecedented amount money being created from thin air. Rate cuts are also coming thick and fast making it cheaper to borrow money, although we understand the banks are not parting with it as fast as the powers that be would like to see. As we see it a massive dose of inflation is just around the corner and gold usually leads inflation by about 18 months. In the United Kingdom the rate of inflation has hit the 5% mark and is accelerating as the chart below, clearly demonstrates. This chart and the associated data are from the United Kingdoms own national statistics department, to read more please click here.

Inflation in the UK 16oct08

For what it is worth we believe that gold’s stubborn behaviour has signalled the up-coming bout of inflation and will continue to rise from here on, albeit subject to pull backs as we move forward.

The task for us is to identify the vehicle that will protect our wealth, the metal itself, the EFTs, the gold producers et al!

It could be that we will need to use all of them at different times depending on the prevailing circumstances. One thing is certain though; the investment landscape has changed and is changing dramatically right in front of us.











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Reader Comments (8)

I think your points are more easily seen and emphasised if you overlay a line that shows the fiat currency supply imposed on these two lines.

There was an excellent article this morning [if I can find it I'll forward it to you] on the unbelievable [but all too, too true!] amount of paper pushed by the Fed in the YTD. Truly a mind-boggling, drop-dead sure indicator of equally immense inflation in six months or less.

All best, Joseph, 65, near Victoria, BC

October 16, 2008 | Unregistered CommenterJoseph E Fasciani

http://news.goldseek.com/GoldenJackass/1224227280.php

GOLD & SILVER AWAIT THEIR EXALTED STATUS

We are witnessing the disintegration cited in my recent forecasts. It is a systemic failure, marred by lost confidence and trust in the entire financial system. Expect foreigners soon to pull the rug from under the American syndicates in control. Several key meetings have already concluded, totally unreported in the US press, which occurred in Berlin Germany. Consider it the Anti-G7 Meeting. Implications are profound, and involved the Shanghai Coop Org tangentially, since its member nations possess so much new commodity supply. Consider it the Anti-NATO group. An important and powerful alternative financial system is soon to spring into action, including high-level bilateral barter. Those who expect the current US Regime to continue their financial terror are in for a big surprise.

Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching. They hold massive precious metals assets. Disparities now contribute to powerful forces, sure to break the current system. Grand systemic changes come. THE RESULT WILL BE A BREATH-TAKING DISCONTINUITY EVENT.

Ironically, the more inner anguish felt on the falling gold & silver prices, the closer we are to a new financial framework, with the USDollar relegated to a Third World role. A REPLACEMENT GLOBAL RESERVE CURRENCY HAS ALREADY BEEN DECIDED UPON. Its launch awaits the proper moment. The Americans are last to know, as usual. The US leaders are under the illusion of being in control!

October 16, 2008 | Unregistered CommenterDavid

Joesph,

If you find that graph, we would be very interested in seeing it.

Thanks

October 17, 2008 | Unregistered CommenterGold Prices

Apart from the deleveraging,hedge fund redemptions,mad scramble for cash,strenghthening of the dollar and stock mkt collapse;can someone explain why Gold stocks like ABX,NEM,AUY etc have been completely decimated when Gold itself has only dropped 20 percent and oil prices have halved?

These stocks were also trading at much higher levels when Gold was at 650 dollars!!

October 17, 2008 | Unregistered CommenterRich

Rich,

To answer your question;
Gold miner stocks are way down because of a contracting money supply due to investors losing confidence in banks and the global economy. The world is in (leveraged) retreat. Almost every stock has been battered.

October 18, 2008 | Unregistered Commenterde Graaf

New invest analysis came out today;

The World Bank and IMF are sounding warnings of a severe global recession.
What happens if global economies slip into recession? Global demand for commodities declines. It always does when economies slow down. And those entities hoarding it are feeling the pinch of vaporizing profits...
As investors and fund managers are scrambling to save what's left of their principal… hundreds of hedge funds, pension funds, and ETFs are forced to sell their better assets to raise capital. That means a potential – and quickly accelerating– flood of commodities will hit already unstable markets.

The result will be a destruction of commodities valuations. It'll be on a similar scale as we've seen in the financial and real estate sectors – wiping out those investors who sought out the treacherous shelter of hard assets as “inflation hedges.”

Analyst expect a short term (possible) rise in gold for the short term to approx 1000 ~ 1200 USD. Gold Bullion that is.
Also analysts are forecasting that gold will eventually be drawn back to as low as $500 US dollars, due to a simple fact that started the gold rally in 2004. SPDR Gold trust fund.

The SPDR ETF is another way to leverage the gold price and does not hand you real gold, just a paper with some $$$-value. (This represents actual gold (which they buy on the market) but you can never get a hold on. Governments are the first to buy/confiscate from these ETF funds if the need was there. Remember this, because it happenend before!)

But the dollar isn't dead. It has reversed its decline against the euro and most other currencies. Currencies issued by countries whose economy relied on commodities exports.
Look around: Canada and Australia's export base is plunging with the prospects of global recession. Europe is at the brink of a deep, drawn-out recession.
Gold is a speculative commodity. If the dollar continues going up, it's upside is capped. And if funds start liquidating – it's downside is WIDE OPEN...especially applicable for commodities stocks.

Analysts expect the 15 to 1 ratio of oil and gold is of the table since SPDR ETF was introduced. Today its stand at 7.5 which equals a gold price of $500 @ $70 a barrel oil.

Global demand is shrinking even more, as Europe falls into recession and China demand is down min. 20 percent. Everbody follows suit and expectations are that oil will enter $50 dollar a barrel soon, if OPEC does not react to cap it's production.

Sell those stocks, its gonna get worse. Just look at the markets. There are way more opportunities than miners today.

Have a good one

October 23, 2008 | Unregistered Commenterde Graaf

de Graaf,

Your comments are excellent, high quality and much appreciated.
Since you've sold your gold stocks, are you just in cash now then?

October 24, 2008 | Unregistered CommenterGold Prices

Thank you Gold Prices, for your welcomed remarks.

About the gold stocks; Yes I'm out almost completely. That is, the gross of my commodities investments. Former strategy thrown straight out the window. I'm on cash now and grinding for (big) opportunities while I try to get a grip on todays markets.

My intention is not to share my commodity buys with everyone, but you may expect some brainwork and gathered analysis coming by when the opportunities are opening up again.

In my view, with others, the TSX will remain down for some year(s) from now. Oil & Gas are to keep an eye on.

Too bad this is only a gold forum :)

October 24, 2008 | Unregistered Commenterde Graaf

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