Gold: $858 / HUI: 444
It sure has been a week for gold and its shares this first week of 2008. Right from the start gold blasted through its 1980 all time high and the gold shares exploded to the upside as well thereby finally showing some signs of strength after failing to out perform gold for quite a while. Now what can we expect from gold and its shares this year? Is this bull market coming to an end as many of the gold bears want you to believe? Or are we nowhere to an end of this bull market yet? Yes, reading gold market analysis form many different sources can be quite disturbing and confusing for the average gold investor. Remember the gold pundits declaring the end of the gold bull market last year when gold hit $680? Gold was supposed to be overvalued then and bound to correct to $500. Well, obviously the bears were wrong since gold went exactly the opposite way and challenged its old all time high by end of last year.
Since gold slashed its old 1980 all time high people are wondering where to go from here?
Well, it's my strong belief gold will top $1000 this year and a multiple of that in the years to come. Sure enough there will be corrections here and there but the thing is that you shouldn't be scared about them since they could provide excellent 'BUY' opportunities (such as happened on December 18 last year, see below). The thing is to keep the BIG picture in mind. It goes far beyond the scope of this article in order to discuss all critical drivers pointing towards higher gold prices the years ahead like inflation, supply/demand and an eroding dollar but I like to highlight a few important charts which you should keep in mind each time the gold bears are preaching a top in gold again.
- DOW/GOLD ratio says gold bull market nowhere near its end
- Gold's Long Term Inflation Adjusted Average says gold still cheap
- Gold/OIL ratio says Gold is a bargain
DOW/GOLD ratio chart
Gold could be topping $1000 imo this year but more importantly it could reach a multiple of that in the years to come. The one and only chart you have to focus on when it comes to the 'BIG' picture is the DOW/GOLD ratio chart. Although the DOW/GOLD ratio chart isn't of any use when it comes to short term predictions its works perfectly well when it comes to predicting long-term trends.
The DOW/GOLD chart is a powerful tool in order to determine major turnarounds. It's simple, when the DOW/GOLD chart tops you buy gold, when the DOW/GOLD chart bottoms you buy equities. Once you've established your position you can ride the wave up or down for at least a decade. The DOW/GOLD chart flashed a 'buy' for Gold again in the year 2000 and indeed 7 years later Gold is already 240% off its lows since then. The DOW/GOLD chart tells you to hold on to your Gold until a new bottom has arrived in the 1 - 5 area.
If it were all that simple why don't we hear that much about it ?
Well, as said before the DOW/GOLD chart isn't useful at all in order to predict yearly price movements. It could very well be that next year will show a higher reading than this year instead of an expected lower reading thereby losing confidence as being a reliable indicator. Unfortunately that's the same analogy as denying that higher temperatures will arrive in summer based on a single day temperature drop in spring. The problem is that the DOW/GOLD cycle has a wave length that's so big that we humans have a hard time to figure out where to position ourselves into this cycle. Nevertheless many veteran analysts such as Richard Russell and John Hathaway do refer to this cycle. Indeed history does suggest that the DOW/GOLD ratio bottoms periodically in the 1 - 5 range. The Dow/Gold ratio topped in 2000 far above 40 and is heading down now (current reading at 15.17).
If the DOW/GOLD ratio can live up to its expectations than we can expect a new DOW/GOLD bottom later this decade or shortly thereafter.
The DOW/GOLD ratio bottoming in the 1 - 5 range translates itself into a gold price exceeding $2000..
Long Term Inflation Adjusted Average for Gold
This chart speaks for itself, in order to reach new 'real' all time highs the gold price should exceed $2000 with ease!
NOTE: The long-term inflation adjusted chart is calculated upon government issued inflation data. As discussed many times before, inflation data issued by government are blatant lies. Current inflation numbers are running in double digit numbers, still government wants us to believe that inflation is not a problem.
There has always been a strong correlation between gold and oil. From a historical perspective it takes about 15 barrels of oil in order to buy one single ounce of gold. Now oil prices are challenging the $100 mark and the end is nowhere in sight. Cheap energy is a thing of the past so what gives? In order to return to an historical average gold should be catching up on oil soon. The chart below clearly demonstrates the undervaluation of gold against oil and the GOLD/OIL ratio chart suggests $1500+ gold as being the norm for today!
The GOLD/OIL relation is clearly visible in the chart below. There has always been a strong correlation between gold and oil indeed but gold is lagging oil tremendously lately. As said above, cheap energy is a thing of the past so gold still has a long way to go in order to catch up with oil.
No matter how you slice it, gold is way undervalued related to its own historical averages so yes, gold on its way to $1000 and way beyond is something we should seriously consider!
So much about the BIG picture. Let's focus now on a short term scale and see what happened last month. On December 18 we send out our piece 'HUI - Correction over' which was right on the mark. We suggested a temporary bottom was near based on the GOLD/HUI ratio. Let's review the GOLD/HUI charts of December 18 vs the GOLD/HUI charts of today and see what happened:
GOLD/HUI ratio chart from 'HUI - Correction over' - December 18, 2007
GOLD/HUI ratio chart now
HUI chart from 'HUI - Correction over' - December 18, 2007
HUI chart now
GOLD chart from 'HUI - Correction over' - December 18, 2007
GOLD Chart Now
Last but not least we wrote on December 18:
In fact nothing has really changed, no uptrend has been broken and the current AB Flag formation simply has to resolve itself one of these days. If it can resolve itself to the upside then the HUI is in for a spectacular move to the upside. END.
Well, the AB Flag formation did resolve itself to the upside and the HUI exploded in a spectacular way to the upside indeed. Furthermore our $900 gold objective for Q1 2008 (see 'HUI - Too Young To Die - November 18, 2007) is already within reach by now so yes, the year of 2008 could be a very rewarding year for us gold shareholders indeed. In case gold can manage to clock $900 indeed before end of Q1 then we could see HUI levels topping the 500 mark before end of Q1!
Now the question remains of course how can we profit from a continued bull run in gold and its shares?
Well, our focus will remain on those companies which are or could be on the verge of a major discovery since discoveries are paying of tremendously. The idea is simple, a tiny junior explorer with a market cap of $50 million making a world class gold discovery will find its market cap to increase by a multiple 100%. The question however is which companies to select since only 1 out of every 1000 projects will make it to a mine.
So if you are a believer in gold's future then these are the times to increase your gold share positions since the gold shares are still selling at fire sale prices. In other words, downside risk is low. Higher gold prices the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.
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