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Final Bottom in Gold Stocks Coming

In my articles you’ve heard me talk about accumulating on weakness, buying support, being patient and waiting for better opportunities. Folks, this next week is one of those opportunities. The mining stocks have been a disaster if you’ve invested in the average fund, GDX or GDXJ. If you’ve invested in the wrong stocks, they’ve been a total disaster and you now hate the sector forever. We’ve certainly been surprised by this protracted struggle. However, the gold shares are set to test a major bottom and could be on the cusp of a major reversal which could begin as soon as next week.

The gold stocks are setting up similarly to the bottom in 2005. Let me explain. The gold stocks made a major double bottom in 2004 and 2005. The first bottom occurred in 2004 and the second in 2005. Interestingly, the 2004 bottom was its own double bottom. Following that the gold stocks rallied significantly for several months before eventually giving it all back. Note the circles on the chart as they compare to the current situation. Below is a chart of the HUI in 2004-2005 with the HUI/Gold ratio plotted at the bottom.

In 2012 the HUI formed a small double bottom and then rallied strongly for a few months (like in 2004). Similar to 2005, the market has given all of that back and in the process the HUI/Gold ratio broke to a new low. The question now is will the HUI form a major rebound similar to the one in May 2005 and cement a long-term double bottom? Correlation is not causation but we should be aware of the potential for a strong rebound.

Aside from the 2012 double bottom support, there is major trendline support around the 350 area. In the short-term, a move below the May 2012 low would constitute a major breakdown. However, it could be a test of the bull trendline and induce a bear trap and major reversal. On a very long-term chart, the difference between 375 and 350 is barely noticeable. The chart below shows the trendline connecting the 2000 and 2008 lows.

One should buy when the sector becomes extremely oversold on a very short-term basis. Look for a bad day followed by a gap down the next day which produces big losses intraday. This is the type of action that precedes bottoms in the mining stocks. Traders can buy GDXJ or NUGT for leverage. For stock pickers, look for stocks with strong fundamentals which have held up well in recent days and weeks. Those stocks will produce good rebounds. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.   

Good Luck!

Jordan Roy-Byrne, CMT

5 Responses to Final Bottom in Gold Stocks Coming

  1. fazsha 02/02/2013 at 10:16 pm #

    There’s no way of knowing whether this is a bottom or not; I’ve heard others say “this is it!” in the gold market since the EU crisis a year ago, and they were wrong. But for me it doesn’t matter; I’m holding all my gold stocks, and since i don’t need them right away, I figure they will be highly appreciated in 10-15 years when I do need them, so there’s no need for me to try to jump in and time when to get in. Take Semafo, for example. There are 53 common stocks on the TSE w a market cap over $700m, $100M revenue, and 100K daily volume with a price cash flow under 10 and an operating margin over 20%. But it is 1 of only 2 that are a consensus strong buy and has a debt equity ratio under .1, the other being Yamana. This stock is being given away.

  2. solohoh 02/02/2013 at 11:15 pm #

    This is magical thinking

  3. mustangman 02/03/2013 at 10:46 am #

    For the most part when the gold market turns against us we look for a reason or reasons why it should go back up…..why it just has to go back up……..when in fact just go with the direction. Get out…….based on the inflows into the general market fund industry, I dont see squat money going into gold juniors until the Dow blows off, maybe in 2-2.5 years… speculators, no gains, simple……the gold shares look like they are anticipating a large scale downdraft in gold prices………the only shoe to fall now is a monthly close below 1530 and then all that stands between that and 1100 is air…………!..

  4. James Bergmann 02/03/2013 at 11:54 am #

    Speculation in Gold and Silver is just that at this time “SPECULATION”. I beleive that many juniors and specs. are dirt cheap. Trading near 52 week lows. These against a back drop of the coming down movement in the USD and EURO. Where the botton is?? I have been investing for over 50 years. I gave up trying to pick bottoms years ago. I scale in when a security looks attractive, then accumulate a position, Currently buying GPL (spec.), EXK (junior) and AUY (senior). I can lve with these positions. Best of luck to all!

  5. qwerty 02/06/2013 at 9:01 pm #

    I agree. The gold stock shares are way more valuable than the fiat they are priced in. Most of the major smaller companies either already have cash flows, financing or partners. They are further along in building the mines also. Most mines are economically based on 1400+ gold. The favorable economics of the gold mines far out weigh share issues. If they go lower, I will look at it as a gift and try to scrape together more fiat to buy the shares.

    I bought most of the stocks when they were cheap but like you I am not trying to time the bottom. If they go cheaper, I will try to buy more. Couple years from now, these stocks will soar.

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