Monday, November 16, 2009

Animal Spirits in the Gold Market

16 November 2009, updated 17 November 2009

Up until now, gold's price advance has been orderly. The upward moves, the levelling off, and the pullbacks, were all as expected.

Gold (and gold stocks) were supposed to pull back again this week, after topping out last week.


Things have changed.

The animal spirits are back in the gold market.

This is what bull markets do.

Add ImageHere is a chart of today's unexpectedly lively gold action:

I'm busy today. More later.

16 November 2009 (evening):
I added the following comments on Seeking Alpha today....

The observation that gold may remain a superior investment to the gold stocks has certainly held true since March 2008, in fact, from as long ago as November 2003 and May 2006. Bill Fleckenstein recently stated that gold stocks have been trading as if they are radioactive.

However, current developments are likely to boost the margins of the gold miners considerably. Thus, the fact that they have risen dramatically from depressed levels in October 2008 (at that time, they revisited levels last seen as long ago as June 2002) hardly means that they have climbed too far or too fast. We are just now surpassing strata in the HUI (the unhedged gold miners index) that were observed 2 years ago, when gold first challenged the $800 level.

Yes mining costs have gone up - but not all costs, such as energy, which at $100 oil was pricier 2 years ago than now. The HUI:Gold ratio in late 2007 was ranging from .50 to .55. That ratio fell to .205 in October 2008. We have just now surpassed the .41 level in the ratio.

It is true that gold mining companies have reported more than their share of bad news, even recently. But it's hard to argue that good news is not on the way with gold surpassing the $1100 level.

Here's a rule of thumb. Gold has not surpassed its February 2009 levels in most currencies (at which time the US dollar was considerably stronger).

Gold is certainly going to move to new highs in currencies other than the US dollar before the current run is through - and not just because the US dollar may bounce.

So is gold done yet? I don't think so. Here is Clive Maund's view:

Are the miners done their run? No, we have some ways to go in revaluing the gold miners as well. Here is P. Radomski's visual analysis of the HUI gold miners' index:

With animal spirits in charge, gold is simply going to do what it wants to do... and gold mining stocks will be tugged along for the ride.

Enjoy the ride. It might get a little bit wild!

17 November 2009:

With animal spirits breaking out in the gold market, I don't think anyone can say where it is going (apart from $1200 pretty soon). Captain Hook has an idea, based on some of his proprietary charting tools. He thinks we might be headed to $1386 as a "next stop."

Who knows? But Captain Hook might be onto something here.

P. Radomski confirms that we remain a long, long way from a top in the gold price, based on his analysis of the silver to gold ratio. The silver price tends to move parabolically at gold peaks.

Guess what?

We're not even close.

So someplace, such as $1200, or even today's $1140, could be a resting place for the gold price for a while - even constituting a short-term resistance zone. But gold - and silver with it - are going much higher than today's prices.

Over two years ago, I gathered together some arguments that gold is probably headed to $5000 per ounce or higher.

Click here to read more about gold's longer-term targets.

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