Bull markets climb a wall of worry with gold bulls growing increasingly concerned wondering when gold and gold company shares will move up again or if they ever will. In March 2008 after touching $1,000 for the first time in history gold took another 19 months to finally breach that level and has not looked back. On August 23, 2011 gold touched $1900 but has since languished with some analysts now calling that a top and stating the gold bull is dead. Not so fast.
Looking at the charts, and imposing the 19-month time period outlined above to the most recent pinnacle at $1,900 takes us to the second week of April this year. We may have just witnessed the bottom for gold in this consolidation period. Still, I suspect we may see one more down draft towards the support levels just below $1540, or lower, prior to gold reasserting itself in this debt ridden, paper printing pyramid scheme we find ourselves in.
All evidence points to the conclusion the gold bull is on with the world awash in worthless paper currencies and piles of debt against a macro back drop where central banks are now accumulating bullion. Of all countries, it is China that may be the catalyst here.
Investor exhaustion has lead to increasing gold share liquidation with the recent downdraft taking bullion below $1600 shaking even more weak longs out of their positions. This recent selling on top of the existing weakness in gold shares and juniors in particular, leaves a stellar entry point assuming one believes in the long-term outlook for gold.
The indices suggest the time is now or very near. Trying to pick the exact bottom becomes more an issue of luck than anything material. The ^XAU index of major gold miners touched 134.6 on February 20th marking the lowest point in nearly 4 years and signalling what some are suggesting is capitulation as exhausted, tired longs give up in frustration. Adjusted for inflation, struggling producer ABX is trading lower than it did back in the late 1990’s when gold was below $300.
The ^HUI, the AMEX Gold Bugs Index illustrates the same reality marking a recent low at 355.86, also the lowest point in close to 4 years. It is with this class of shares that the greatest upside potential exists, perhaps even the buy of the millennium. We know of TSX-V listed companies currently selling for little more than $10 to $15 per ounce gold in the ground.
The standouts have cash, a million plus gold NI-43-101 compliant resource, North American location, reasonable share liquidity and structure with a management record of hitting stated goals on time. These companies are destined to provide stellar returns and from current levels, a five-fold share price increase by year-end 2013 would be little more than a good start. It’s all about risk reward.
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