Gold’s “Monkey Magic” – An Update On Gold And Gold Stocks

Has a Bull Market Begun?

Gold stocks have risen so much and so fast recently that a pullback, resp. consolidation either has begun already or is likely to begin soon. We have therefore decided to post a brief update on the situation in order to discuss what might happen next. Back in late November, we made a few remarks in order to clarify why we have focused so much on the gold sector again since last summer.

Processing plant of the Driefontein mine in South Africa

Photo via goldfields.co.za

Here are a few excerpts:

“When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term.

We like these catastrophes because they usually mean “the stuff is cheap and there is probably something people don’t see”. That is definitely the case here, since one of the things that has been routinely ignored is the improvement in costs and cash flows that is slowly but surely progressing at many gold producers.”

Something evidently did get overlooked.

The HUI has rallied by about 57% in a mere three weeks – right after setting a trap for bears by briefly breaking below multi-month support. It has now reached an area of lateral resistance and is quite overbought, so some sort of consolidation is highly likely over coming weeks – click to enlarge.

Here is another important point we made at the time:

“While we are waiting for the turning point, we are always interested in the potential for tradable rallies until it happens, because they tend to be so big in this sector. Just look at the last move from 104 to 140 in the HUI – that’s as if the DJIA went from its current level of 17,792 points to 24,000 points in just two and a half weeks. Will it do that? We doubt it. The HUI can – and not only that: it can rally that much and still be a few light years below its 200 day moving average. In short, these “small bounces” are really gigantic, because prices are so compressed and the sector is so small and illiquid.”

In recent weeks we have indeed seen one of those “small bounces that are really gigantic”. As we have pointed out, rallies in the gold sector are eminently playable regardless of whether they are just a short term flash in the pan or the beginning of a bigger move. As far as we know, we have just witnessed one of the biggest, if notthe biggest three week rally in a stock market sector in history (especially shortly after breaking to a new low for the move).

There are essentially two possibilities now: one is that similar to recent years, the sector has given us a scorching performance in January, that will once again be surrendered over the remainder of the year. While we cannot rule this possibility out (more on this further below), we don’t believe it is likely.

The other possibility is that the sector has just made a major low and is poised to continue its advance after a period of consolidation. Readers may want to take the time to review the “comparative analysis” section in “How to Recognize an Emerging Bull Market” – which shows possible road maps for the coming months in case a bigger move is in store (here are links to charts of the successful turning points of 1986, 1992/3, 2000/2001,2008 as well as the failed turnaround attempts of 1998 and early 2015).