On heavy profit taking days like today it is easy to forget the big picture for miners. I hope this post will at least make you think twice before you even consider throwing in the towel.
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This is a chart of the weekly Amex Gold Bugs Index (HUI) from 2002 to today's close. With horizontal lines I have identified the four major consolidations of the mining stocks since the secular bull market was born.
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The first consolidation lasted 24 months and when the HUI mining index broke out in late July `03 it rallied to add a 60% gain to the index.
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The December `05 breakout of the second consolidation phase led to another immediate 60% gain.
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The third consolidation was truncated at only 21 months and when the HUI took off from the consolidation level once and for all in December `07, it rallied to an impressive 32% gain.
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The fourth consolidation, and our current situation, has lasted a whopping 36 months. Price flared up 13% in December `10 but has since come back down quite literally to the consolidation level - essentially making no progress whatsoever.
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It makes utterly no sense to me that a 36 month consolidation would amount to a quick 13% pop that is quickly taken away. That is not how secular bull markets work, for one thing.
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Much more likely is that we get at least a 30% rally, taking the HUI from its current price to around 700. And due to the size of the consolidation, it is even more likely we get a 60% rally that takes the HUI just north of 850.
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Never thought of throwing in the towel but 3 of my junior miners were down 14% - 15% at one point this morning. I didn't want to look after that so I turned off all feeds including Kitco and JS Mineset. You have to have a cast iron stomach to be a precious metals investor, that's for sure.
ReplyDeleteIs there possibly a difference between the consolidations occurring before 2008 and the current one? Some people contend that we are in a cyclical bull market within a secular bear market regarding the overall market and that the secular bear market started with the selloff in 2008. It certainly appears that the mining stocks are affected by the overall market behavior. This leads me to wonder if the miners will not take a huge hit when the SPX heads for 800. I'm not worried about the bullion, but mining stocks seem to have a mind of their own.
ReplyDeleteAdam -- well said. Until the dollar daily cycle tops and the gold daily cycle finally bottoms, it is going to be a painful capitulation indeed.
ReplyDeleteLoren -- your excellent points are very well taken. I will probably do a post about this soon to address your thoughts. But for now, what is going on is mirrored by the price action of the SPX and HUI in Q1 2008.
That is, the stock market is getting ready to resume the secular bear market and plunge, over time, from 1300 to 600 and the miners are ready to put in a spectacular although comparitively brief rally to new heights.
The other thing I would add is that the mining index HUI has risen steadily from 60 to 600, a 10 fold increase, since it began it secular bull market. In the same time period, the SPX has fallen from 1550 to 666, now rising to 1300 are ready now to fall perhaps even lower, all during its secular bear market.
My point is, while there are times when the general market has taken miners down with it in the past 10 years, the bigger picture is that miners have gained tenfold while the stock market has only continued lower.
John,
ReplyDeleteI know you must see the reverse head and shoulders consolidation in the hui. And if you measure it off, from the the neckline, it goes to 850 just as you have said. Now, I'm not a bull on the stock market, but I think I see a similar formation in the major indexes. So, I'll stick my neck out and say stocks are going up to new highs. EVERYTHING IS GOING UP.
Hi Monty -- well I agree with you that the miners are going to blast off now, but disagree that the stock market is going up to new highs.
ReplyDeleteI need to write a post about this and show it with a chart, but until then...... the SPX is making lower highs and lower lows now. Its 40 - 60 day daily cycle is very left translated (bearish) and has weeks of time left on the shot clock to head lower.
Sure, you can and will have some up days and rallies - even enough to keep most people fooled while the smart money escapes. But for all practical purposes, the stock market has concluded it cyclical bull phase and is now in the very very early beginning of resuming its secular BEAR market.
Study Q1 2008 and compare the price action of the SPX and HUI. We are now, I believe, at the very same juncture as then.