Gold bounces off most oversold level since ’08 – buying time?

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The gold price has been working its way higher since hitting bottom in late-December and yesterday managed to breach its rising 200-day moving average. To put matters into perspective, friend Chris Puplava, portfolio manager of Puplava Financial Services and contributor to the Financial Sense website, agreed to Investment Postcards sharing the article below with its readers.

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.

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.

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 $832 for the HUI Index.

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.

Source: Chris Puplava, Financial Sense, January 10, 2012.

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6 comments to Gold bounces off most oversold level since ’08 – buying time?

  • […] Read full article… icBeacon('investmentwatchblog'); Be Sociable, Share! Tweet(function() {var s = document.createElement('SCRIPT'), s1 = document.getElementsByTagName('SCRIPT')[0];s.type = 'text/javascript';s.async = true;s.src = 'http://widgets.digg.com/buttons.js';s1.parentNode.insertBefore(s, s1);})(); January 11th, 2012 | […]

  • Mark Viljoen

    Your words are indeed most profound and genuinely prophetic! I trade raw gold out of mostly West Africa to buyers world wide and we are seeing some of the biggest banks in the world climbing in boots and all on the “down low” who, along with the Chinese are fighting to buy up every scrap of gold gleaned from these more off the radar sources to secretly bolster their stocks and perhaps not drive the LBMA prices up as quickly or as much as if they were openly buying in the more recognised markets. And do not for one minute think that these are insignificant purchases, unofficial estimates amongst some of the traders put this volume as high as around five to six tons per month and given the recent exposure of the physical holdings of JP Morgan and HSBC these volumes are VERY significant!

  • Holistic Hypnosis & Hypnotherapy - Los Angeles

    I sense a rising trend in gold too. To take advantage of this I have bought some Gabelli Gold Fund, (GGN), which pays out some 9% at present. I intend to buy some GDXJ, a junior gold miners fund, near its long term lows, paying over 4%. This way I can earn a dividend while waiting for the capital appreciation that would ride on an increasing gold price. And avoid the risk inherent in single junior gold mining stocks.

  • BenRock

    Liked what the author had to say – one thing I would add is that Platinum is also oversold, but looking at the last 6 month chart on gold and platinum, the inflection point on 12/29 was probably more impactful to platinum than gold, but both should do great this year!

  • @BenRock: Platinum bore the brunt of the Eurozone crisis. I rate platinum as a buy. Silver too.

  • […] The least bullish positioning of investors in gold since 2008. (Also see yesterday’s post “Gold bounces off most oversold level since ’08 – buying time?“) […]

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