Gold's Real Price & the Investment Case for the Miners

As the HUI index of premier gold miners continues to chop and grind its way through ongoing correction, the idea for those who understand that this unique sector of the stock market stands to gain during phases of economic contraction, is to survive. The idea is to remain strong (and by strong I mean have cash to exploit the intensifying value proposition) and be ready for opportunity, which is likely to present itself to nearly the extreme witnessed in Q4, 2008.

 

Now, I don't expect nominal HUI to decline to anywhere near the 150 level that was so compelling a buy in 2008, when quality explorers were selling for net cash, gold in ground for free. But as the index grinds around looking for a bottom, whether it be in the ongoing consolidation or a final washout, the opportunity should be in the same 'no brainer' territory as it was in '08. 

 

We are looking for 'higher lows' in 'value' indicators like the HUI-Au ratio. Some individual explorers are actually starting to approach the 'selling for cash, gold given away free' level. In 2008, the idea was to buy with a thought like 'this is either an epic opportunity, the whole investing world is ending or I maybe I am just crazy'. Thankfully, the first option proved out.

 

The 2008 meltdown happened relatively quickly, as it was triggered by a deflationary impulse that resulted from a meltdown of the US financial system. As I used to write at the time, the gold miners were fundamentally vulnerable then because their product, gold, had been in under performance mode for an extended period due to the upward price pressures on commodities, goods and services (many of which negatively impacted gold miner bottom lines) that resulted from the previous, Greenspan sponsored inflationary regime (and resulting inflationary growth cycle).

 

Now? Not so much. And yet still we have a value buying opportunity shaping up amid a still generally favorable fundamental economic backdrop as gold remains in out performance mode over the intermediate term (2012's Goldilocks recovery notwithstanding). Spend some time reviewing this chart and meet me below...

 

Here we have various ratios that help indicate the 'real' price of gold. These are measures of the monetary metal in various things that are positively correlated to economies; crude oil, stock market, copper and broad commodities served two ways, the CCI and CRB indexes, which are weighted differently. This chart is vital to the NFTRH (and thus, my) fundamental view that gold stocks can only  be defined as investment worthy and unique in phases of economic contraction.

 

The red boxes show how poorly gold performed in relation to these other markets during the multi-year run up to Armageddon '08 and HUI's subsequent crash. Then, as the system belched up all the previous inflationary excesses and prices of everything the previous inflationary regime had created crashed, gold's ratio to these things exploded impulsively higher. Enter the kickoff to a new phase of a rising 'real' price of gold and thus, rising gold mining fundamentals.

 

Ah, but the chart shows an intermediate correction now in force since the 'real' price hit 'blue sky' last summer during the Euro crisis. I began warning of unsustainable momentum (http://biiwii.blogspot.com/2011/08/to-newly-minted-gold-bugs.html) in real time and indeed the gold sector has been in a post crisis consolidation to the current day. I reiterate for oh, maybe the 10,000th time that you do not buy the euphoria in the gold sector. You buy the washouts, the agony and the bile.

 

So, while the current environment is no fun, especially with the up and down volatility, the chart above paints the case for gold and especially quality (and there is a lot of garbage out there folks, you need to be selective) gold stocks as being in an intermediate (post Euro hysteria) term correction within a still-bullish structure.

 

Some people do not want to hear bullish talk at a time like this, just as they do not want to hear 'gold bashing' at a time like last August. But it is appropriate to become bearish or bullish during the extended phases when risk vs. reward is in the process of coming in line. It is now in line for a bullish stance. Last summer, it was the opposite and guarded stance at least was warranted. Being in line with 'risk vs. reward' does not mean go all in; at least not for me or my newsletter. It simply means be aware that the herds are in the process of realigning to provide opportunity.

 

Now, if Team Bernanke really is smart enough to keep up the current inflation regime while manipulating Treasury yield curves to paint a serene and economically friendly picture, then maybe it will be time to take the blue pill and sleep soundly. But the indicators of gold's real price above are not broken. Any decent chartist will look at the above and think 'consolidation'.

 

From this consolidation comes what?... Anyone? Anyone? Beuller? Anyone? A consolidation is a pause before a move higher. The current angst among the gold 'community' (a terrible term that sets its members up as foot soldiers in a bloody battle) is understandable for players who have been 'all in' since the acute phase of the Euro crisis.

 

I do not know from what level the gold stock sector (using HUI as a somewhat ill-suited proxy) will stage its comeback, but I do know that the fundamentals remain intact on the intermediate picture, an HUI-Gold ratio value point is approaching and sentiment is bleak. NFTRH is on a 'week to week' watch to keep a fine tune on the proceedings and the ongoing analysis (including frequent email updates on both the gold sector and the general markets) has done its best to keep its writer and subscribers on the big plays while managing risk every step of the way in the effort to remain strong.

 

It does no good after all to win a war but still be dead upon its conclusion. If the analysis tells me this a war that will not be won, the adjustment will be made. That is not the case, however. Not nearly. Right now the theme is survival, as many of us that are bullish on gold look silly (or worse, look like dinosaurs here in the newest New Economy). Extreme patience and a sober attitude is required, but the rewards are going to be great for people who make it through.

 

Join me and I can promise you not riches resulting from easy 'set it and forget' or frantic 'bullish, no bearish, no bullish' type of analysis, but rather an ongoing and tightly focused management style that will either bring us intact to the point capitalizing or continue to keep us out of the worst of harm's way until things do become actionable. 

 

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