NIA: Proof Gold Stocks Most Undervalued in History
On Sunday when NIA suggested January 2015 GDX $25 call options, we showed you a chart of the HUI/Gold ratio. The HUI index for the most part tracks the same exact stocks owned by GDX. The HUI/Gold ratio shows how undervalued gold stocks are vs. the price of gold. The HUI/Gold ratio has a 17 year average of 0.37 and currently is down to 0.164, the lowest it has been since 2001, at the very beginning of gold’s secular bull market.
However, this doesn’t tell the complete story. Gold miners have seen their expenses go through the roof – a fact that proves there is massive price inflation, despite what the gold bears say. A big portion of a gold miner’s expenses are related to energy. Therefore, the Gold/Oil ratio is another important chart to look at. In June/July of 2008, when oil soared to well over $130 per barrel, the Gold/Oil ratio declined to below 7. From year 1970 through today, the Gold/Oil ratio has averaged 15.19. Currently, we have a Gold/Oil ratio of 12.22.
A low Gold/Oil ratio is bad for gold miners, because their expenses are high relative to the gold they produce. The current Gold/Oil ratio, although below the long-term average, is not at an extreme level like in June/July of 2008. Oil prices, although expensive, are not high enough to severely hurt gold miners in a way that justifies a HUI/Gold ratio of less than half its long-term average. If we currently had a Gold/Oil ratio of 7, a HUI/Gold ratio of 0.164 would be justified, but right now there is no justification to the current artificially low HUI/Gold ratio.
Below, we are once again going to provide you with the HUI/Gold ratio chart we showed you on Sunday. After that we will show you a chart of the Gold/Oil ratio. Following those two charts is a chart of a new ratio that NIA has invented – the Gold/Oil to HUI/Gold ratio. NIA’s Gold/Oil to HUI/Gold ratio has a 14-year average of 37.68. A high Gold/Oil to HUI/Gold ratio of well above its long-term average indicates that gold stocks are undervalued relative to their potential profitability.
Historically, any extreme highs in the Gold/Oil to HUI/Gold ratio were an excellent time to buy gold stocks. In December of 2000, when it spiked up to above 60, the HUI was priced at 177.61. When the Gold/Oil to HUI/Gold ratio returned to a more normal level of 39.63 in June of 2001, the HUI was up to 276.24 for a gain of 56% in six months. In December of 2001, when it spiked up to above 60, the HUI was priced at 266.73. When the Gold/Oil to HUI/Gold ratio returned to a more normal level of 34.31 in April of 2002, the HUI was up to 422 for a gain of 58% in four months. In December of 2008, when it spiked up to above 60, the HUI was priced at 254.63. When the Gold/Oil to HUI/Gold ratio returned to a more normal level of 36.25 in June of 2009, the HUI was up to 354.25 for a gain of 39% in six months.
On the first three occasions the Gold/Oil to HUI/Gold ratio rose to above 60, it only remained there for one or two months. Shockingly, the Gold/Oil to HUI/Gold ratio most recently rose above 60 in May of 2012, and has remained there for 20 months. It reached an all time high in November of 78.58 and is currently 74.51.
After the Gold/Oil to HUI/Gold ratio spent an extended period at extreme lows several years ago, it made its largest upward spike in history. NIA believes we will soon see the Gold/Oil to HUI/Gold ratio make its largest downward move in history, and it will cause gold stocks to quickly double or triple in value.
NIA is not an investment advisor and is not making any target prices or financial projections. Never invest based on anything NIA says. Always do your own research and make your own investment decisions. NIA never recommends to buy or sell any stock.
This email is not a solicitation or recommendation to buy, sell, or hold securities. Never make investment decisions based on anything NIA says. This email is meant for informational and educational purposes only and does not provide investment advice.
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