Sunday, September 11, 2011

1980 Gold Parabola, BGMI, HUI and Some Small Miners with Big Earnings

I've spent the past couple of weeks learning a new skill - making charts using Microsoft Excel. This article will use my new skills to compare gold's current C-wave development with gold's great parabola that concluded on January 21, 1980, as well as examine the historic relationship of gold with gold mining stocks using both the BGMI (Barron's Gold Mining Index) and HUI (Amex Gold Bugs Index). Then we will conclude with some charts of miners that appear to have not only explosive future earnings, but also explosive future price appreciation.

The upper portion of this chart is the great 1977-1980 gold parabola that blew up on January 21, 1980.

The lower portion of the chart uses the Excel spreadsheet to recreate this parabola (in blue). The red line is the price of gold from the beginning of the current C-wave (April 16, 2009). The green line is essentially a duplication of the conclusion of the great 1980 parabola 'glued' onto the current gold price.

I am showing you this in the context of historical perspective and not in the context of price prediction.

Honestly, I shudder to think what it what take for gold to now double it's current price of $1857 to over $3700 in the next 10 weeks. But I do recognize that it is possible - particularly because, as we observed in 1980, it has happened before.

I can indeed think of several realistic mechanisms to make this happen as 'historically contemplated' on this chart (think Bernake and QE 3, Europe and sovereign defaults, Comex futures short squeeze of exciting proportion, and other possibilities including war and so on).

The mining indices we are familiar with, such as the HUI (Amex Gold Bugs Index) and XAU (Philadelphia Gold/Silver Sector Index), believe it or not, have not existed for all that long. The HUI dates back to mid-1997 and the XAU only to mid-1995.

Fortunately, there is an index of precious metal mining stocks that predates both the HUI and XAU - and it is the BGMI (Barron's Gold Miners Index). Data and charting of this historical index is available online (BGMI link HERE) and dates back to 1939.

This next chart shows you both the BGMI price action to the present day, as well as a log-scaled chart that suggests the relationship between this index of gold miners to the ever changing price of gold.

The lower portion of the chart suggests that a BGMI/Gold ratio at or below 1:1 has been consistent with the beginning of huge gold miner stock rallies, particularly since 1978. Unfortunately, I did not design both of these charts ('glued' one atop the other) with the identical time frame - which means that 1.0 readings on the lower chart do not line up precisely with the rally origins in the upper chart.

But hey, I warned you I am just learning how to do this stuff.

At any rate, using this metric it appears the gold miners are seriously oversold and likely to  rally hard. The current reading is well below 1:1.

If you would like to study the BGMI in greater detail, Mark Lundeen has authored a number of outstanding analyses which include: 1, 2 and 3.

Let's turn now to the HUI index and see if it too is suggesting a bullish future for the miners.

The HUI index consists of 16 miners that are not equally weighted within the index. I have noted these miner's ticker symbols in the upper left corner of the chart.

The immediately striking observation one makes is that gold tends to be priced at 2 times that of this index. (ie. if gold is $1000, the HUI would be close to $500).

Then we notice that at the beginning of gold's secular bull market in 2001, the miners were way out of whack - with gold comparatively selling at a 4-5X premium to the gold bugs index. This led to a miners rally that nearly tripled their value in less than 16 months.

The HUI miners bottomed ahead of gold, reaching a closing price of just $35.99 on November 14, 2000. As of this date September 11, 2011, the HUI index has gained 17 times it's value in November, 2000 ($628.34 vs. $35.99).

By the way, gold bottomed on April 5, 2001, 5 months following the miner's low, with a closing price of $255.45. As of this past week, gold has appreciated over 7 times it's value since making it's secular market low in April 2001 ($1857 vs. $255).

The other thing we notice about this chart is that since 2008 the mining index has not been able to get back to it's more 'balanced' 2X relationship with gold. At present gold is selling for about 3 times the price of the index. Will the HUI index now rally more fervently than gold to close this oversold difference? I don't know.

I can observe that while miners rallied strongly higher during the final 3 months of gold's 1980 parabola (gaining 50+%), they were no match for the rocket launch of the precious metal itself, as gold literally more than doubled in this time period. However, once gold and the miners peaked and then spent 3 months working off a severely overbought status with a sharp 25-35% correction,  the miners proceeded to literally double in the following 6 months as gold made a failed attempt to reach the parabolic high.

Finally, let's take a look at the daily/weekly charts of three miners with big earnings.

I am particularly indebted to the outstanding resource produced by Bill Matlack of Scarsdale Equities and published this past Friday at

I studied about 200 miner charts to select these three to show you. There are more than three that interest me, of course, but I will need to get to them another time.

This is Claude Resources Inc. (CGR). The earnings data, past and estimated, is noted on the weekly chart. The right side of the chart is the daily view of CGR.

Next up is Great Panther Silver (GPL).  The earnings data is on the weekly side of the chart as well as the daily side.

And finally, my personal favorite, Minefinders Corp (MFN). The float is small at 84Million shares, gold and silver mines producing in 'safe' Mexico, and the projected earnings are simply breathtaking. Any stock that can go from .09 per share to $1.76 in just three years deserves a good hard look. (!)

And which of these stocks do I own?

Not one. But that may change this week.

Good trading to you.

John Townsend


  1. John. You make the statement "At any rate, using this metric it appears the gold miners are seriously overvalued and likely to rally hard. The current reading is well below 1:1." Do you mean UNDERvalued?

  2. Those kids are keeping you busy I see.
    What are your intentions with DZZ and TNA?

  3. Thanks for the great post as always!

  4. good evening John,
    It's good to hear from you again. I knew you must have been up to something. I'll have to look at this more closely later. Right now just let me say that I am worried about the dollar rising and that if it keeps up it might spoil things for not only the miners but stocks overall. I'm trying to play the volitility and hope I'm on the right side. I'll get back into DZZ if it looks right. M-

  5. Anon - nice catch and thank you for taking the time to write me. The word should have read oversold and I have corrected it now.

  6. MrMiyagi - yeah, I've been under water with distractions like school and trying to learn how to make charts in Excel. DZZ and TNA are obviously dud positions and I have been waiting to catch a break that has not materialized yet. At some point, probably sooner than later, I will throw in the towel.

    The daily TSI for silver, I notice upon waking up this morning, has broken its rising trendline to the downside. Gold is on Day 11 of its daily cycle and has flirted with its TSI trendline each of the past 4 days. So far it has topped on Day 7 which, if it holds, would amount to a left translated bearish daily cycle.

    On first blush these observations appear bearish and suggest I shold hold onto DZZ for now. But I've got to tell you that I have this eery feeling that the unexpected is going to happen - particularly after my study of the 1980 parabola. Those charts were created with data, not the illusionary tactics of resizing lines with software.

  7. Hi Monty - I agree with what you are saying about the rising US Dollar and the likely effect it will have on the stock and gold markets.

    Watching the market news lately I have begun to understand that nothing is sacred in the currency world. When the Swiss franc can be devalued 8% in a single day one realizes that what appears to be a safe haven can change almost instantly with a single decision.

    My point: the US Dollar is rising but I am just cynical enough, at this point, to believe that Bernanke could change this situation just as instantly as the drop in the world's safe haven Swiss franc, if he decides to do so. QE 3 which most do not seriously think will happen and the game changes again.

  8. John, Another excellent article. I've owned GPL and MFN for years. So far so good. Thanks. Bruce

  9. DZZ should be ok John, that TNA is a concern, maybe in a month or so or when QE3 gets put into action (probably inevitable at this point). At that point though unless you've bought lower to average down, I'm not sure that it will get to the 60$+ range anytime soon.
    Damn ETF!

  10. The difference this time is... the fiat currency shall die. Which means, the price of gold will rise dramatically... then become undefined as the USSA dollar becomes history.

  11. Hi John, Great article. If we have a resolution for gold like in 1980 (2º chart), does that means this C wave is the final bubble phase for gold?

  12. Out of curiosity, was there anything of historical importance that happened around January 21, 1980 that caused GOLD to go down....or was it purely mathmatical /cyclical?

  13. John,
    I got into NUGT after the HUI broke 610, but yesterday it droped below 600. I'm a little concerned I may get stuck in a D wave. Since a D wave could come at any time, I'm not sure Miners are worth the risk. What are your thoughts?

  14. Anon2 - a resolution like 1980 would mean this C-wave has concluded, yes.

    Anthony - there was a lot going on leading up to Jan. 21, 1980 - not the least of which were the actions of the Comex to halt the silver parabolic.

    Harry - the key word you mentioned was 'risk'.

    At this point I find it incredible to believe that gold will continue as it did in Dec '79/Jan '80. But I am quite sure that traders in that time period felt the same way.

    The question of risk is very appropriate at this time.

    I can tell you that, in my opinion and based on the gory research I have done on the 1980 gold parabola, until $1705.40 is taken out intraday, it is game on for miners and gold. I am still wondering if/when this price level will be retested. I simply do not know the answer.

    I can tell you that if gold makes a new high anytime in the next 15 or so trading sessions we will very likely see a huge price move up in both the miners and gold.

  15. John, nice post and thanks for sharing this information. That is a very interesting 1980 analog. Usually when people draw an analogy to 1980 they're doing it to make the bearish case. First time I've seen someone do it to make a (potentially) bullish case.

  16. By the way, I think the biggest thing standing in the way of a 1980 analog playing out right now is the dollar. It is making very bullish moves to the upside here and there are only a couple things I can think of that would put a stop to that:

    1) More easing from the Fed
    2) Euro regaining its footing

    At this point I'd say #2 is more likely, but that may take some time to play out.

  17. flaunt - you practically took the words out of my mouth. I could not agree with you more.

    If this continues to play out to script, there will be a retest of $1705.40 around the end of this month - which fails to break lower. Then another 3 weeks of sideways before the show begins.

    I've done all the research and made the charts - hope to get it into a new post/article soon.

  18. I love charts as much as the next guy. Use them religously. That said, it pays to listen to pros who have established a solid track record based on their day to day professional experiences in the market being analyzed. James Turk is just such a person. He told Eric King gold goes to $2000 within 45 days. No hedging there.

    So can gold go to $1705 by the end of Sep, lanquish for 3 weeks and reach that target in 2 weeks? Maybe, but I wouldn't bet on it. This is not 1980. Not even close. Expect almost anything.

  19. Rickster - I am not suggesting that anyone bet on the scenario you outlined.

    If gold does trade below $1705 that would amount to a failed daily cycle and be bearish. I may be willing to place a bet that gold is finished if that should happen.

    Alternatively, if gold trades above $1924 that would turn the present daily cycle from a left translated cycle to a right translated cycle and be bullish. I may be willing to place a bet that gold has more upside if that should happen.

    In the meantime we are kinda in no man's land.

    btw, James Turk expectation also squares with the 1980 scenario, though I am sure his opinion is based on something other than the 1980 parabola comparison. When I post the daily cycle analysis of the 1980 parabola you will see what I am talking about.

  20. This is my article on Gold John :)

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