In September of last year we saw gold jump two standard deviations above our gold intermediate-term risk indicator’s average, a feat only seen on three prior occasions (2006, 2008, 2009). Since then, gold has significantly worked off its overbought condition and fallen by over 20% to its recent low on December 29th. Now, the recent decline has been sufficient enough in both time and magnitude to drop our gold indicator to a very oversold reading of more than 1 standard deviation below its historical average. The last time gold was this oversold was back in 2008 and represents the second most oversold reading since gold’s secular bull market began, and likely represents a major buying opportunity as the long term fundamentals (negative real interest rates, global currency debasement) remain.
Source: Bloomberg
As with gold bullion, the same can also be said for large cap gold stocks as seen by the NYSE Arca Gold BUGS Index (HUI). Our intermediate term risk indicator for the HUI is also at extremely oversold readings of more than one standard deviation below its historical average. Readings in this vicinity have served as major buying opportunities in the past as gold stocks have soon recovered after finding a footing.
Source: Bloomberg
It has been remarked by many analysts that gold stocks have significantly lagged behind the price performance of gold bullion. This action has significantly depressed the values of gold shares which are selling at valuations last seen in 2008 when viewed by the price-to-sales ratio (P/S). Given the elevated price of gold, gold miners are flush with cash and represent bargain values. It is typically readings near 6.5 in the P/S ratio that gold miners run into trouble. Also, holding the price of gold constant, with the current P/S ratio for the HUI coming in at 4.0681 the mining index would need to rally 60% before gold stocks would begin to become overvalued, which would give a price target of 2 for the HUI Index.
Source: Bloomberg
For investors who continue to believe in the secular bull market for gold bullion and have a decent level of patience, today’s miners represent an attractive long-term entry level given their significantly oversold condition and cheap valuations.
