The gold bugs index, the HUI, spent most of 2007 being buffeted by external influences to finish with an increase of 20% for the year while the metal of kings managed an increase of 31%. Both returns are excellent however our readers have raised the question of which to hold during the coming year in order to maximise your profits.
If we examine the chart above we will see that over the last twelve months gold has indeed outperformed the mining index. However if we expand the the same chart to cover the last seven years then the position is dramatically reversed.
The HUI index shows returns of 800% against golds returns of around 200% giving you leverage of 4:1. We would normally expect gold stocks to rise in step with gold but by incremental increases in the order of 2:1 to 4:1. None of these ‘guide lines’ are cast in stone and 2007 was an exception to that rule.
As gold reacquaints itself with with its old high the gold stocks lag behind fearing perhaps another disappointment, after all there have been a few false dawns since 1980. Now if gold can break through its old high and set some new records, then the publicity that would ensure would add to the upward pressure already on gold, taking it around $1000/oz. This is what we believe will happen however there is one niggle that bothers us and it is this. The following chart shows that gold is now at $833/oz but its 200dma is close to $700/oz which is an enormous differential. Again we can’t rely on just one indicator but over the last couple of years gold has taken tea with the 200dma on more than one occasion. However on the positive side, gold prices have broken out of the Symmetrical Triangle Formation that they had previously been stuck in.
Moving on we do not expect to see a more peaceful world in 2008 unfortunately, which will in turn add pressure to the price of oil thus raising the spectre of inflation. However we are of the opinion that inflation is caused by the constant expansion of the money supply which is now in top gear and shows no sign of stopping. Its not just the US Dollar that is in trouble most of the other currencies are suffering expansion from their own printing presses, nonetheless the US Dollar has the limelight, for now!
We anticipate a fast and furious first quarter with volatility being the order of the day, gold moving higher and gold stocks outperforming gold considerably and generating terrific profits for those with quality gold stocks in their portfolio. We have a small amount of cash on hand and intend to do some more selective buying shortly, once we have done the work.
Since attending The Silver Summit at the Paddington Hilton in London we have more or less been on the road visiting the USA to do a little business and catch with old friends, then on to Fiji to relax and struggle with dial up internet! As you have probably guessed from our recent competition we are now in New Zealand, a country with a rich mining history.
Take care for now and have a prosperous New Year.
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