by John Chinnock
Now that the entire world hates gold and gold mining stocks, I wanted to make a case for why they just might be an amazing long-term buy at these levels. I should preface this by saying first that I am not a typical gold bug. I do not believe that the U.S. dollar is going to zero, or that hyperinflation is coming. Actually, if I had to own any currency, I would favor the U.S. dollar over most others. However, I still am a gold bull. Let me list some points on why. My arguments here will be technical and based on historical data rather than fundamentals. There are valid fundamentals for the bullish case in gold, but that is beyond the scope of what I will discuss here.
1 – Gold rose in every calendar year from 2001 to 2012. That is right. Gold didn’t have a single calendar down year over that entire time span. 2013 was the only down year for gold since 2000, and 2014 is yet to be determined, but even now is still nearly flat. Even after this 40% pullback from the all-time highs, gold is still about 4.5 times higher than it was back in 1999-2000. If this isn’t a bull market, I don’t know what is!
2 – Extreme pullbacks of 35-45% are nasty but actually fairly common in long-term bull markets. Think of 1998 in the NASDAQ right before the huge run higher. Think of the nearly 50% crash in 1987 within the huge larger bull run higher. There are many more examples of this.
3 – Just like what often happens during large pullbacks, sentiment in gold has been completely destroyed. Everywhere I look I see predictions for gold to go to 1000, 900, or even 600! Calls for new all-time highs are completely ridiculed. This is again typical of bull market pullbacks. If I am right and the bull resumes, people will later say things like “what a buying opportunity we all missed back then!”
4 – Meaningful bottoms often occur after all support has been taken out. If you look at the 2009 market low in the crash, it surpassed the old 2002 low. The 1180 triple bottom in gold was too obvious. If gold is to bottom anywhere around current levels (1100-1160 or so), it first needed to flush out all of the stops in a capitulation move where all hope is abandoned, and all of the technical reasons to own gold are invalidated.
5 – People use certain arguments to make a fundamental case for why gold is no longer a good investment (improving economy, low inflation, end of QE, etc.). Since this article is focused on technicals and historical data, I will simply point out that gold rose every year from 2001 to 2012. During this time we experienced both a falling dollar and a rising dollar. We had times with rising interest rates and times with falling interest rates. We had bull markets in stocks and bear markets in stocks. Yet gold rose throughout. A resumption in the gold bull could be enough to power through whatever fundamentals may or may not be in its favor.
Now a quick case for the mining stocks.
The gold:XAU ratio is now stretched further than at any point in history. I know the miners have had issues with costs and debt, but the XAU mining index is now trading at the same levels as it was all the way back in 2002. Gold was only in the 300’s then. This seems far overdone.
This is how markets and sectors bottom though. Sectors are pushed to extremes as everyone abandons them. On Friday 10/31/14, the gold:XAU ratio peaked at over 18, its highest reading in history. The historical norm for this ratio is around 5! That means that miners could or should triple from here even if gold only remains right around these levels. However, if I’m right and gold goes back to new highs, these stocks are the buy of a generation.
Making predictions is often a lesson in being humbled publicly, and I’m sure this one will be no exception, but if gold quickly regains both 1180 and then 1200, then there will be a strong case that the breakdown was a false one, and that the long-term bottom is possibly in place. If history holds, and the bull market in gold does in fact resume, it likely will resume quickly and fiercely in some sort of runaway move. If this does happen, the miners just may be the buy of a lifetime.
Feel free to heckle me in the comments section, especially if I am dead wrong! It won’t be the first time, or the last.