"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, September 20, 2011

HUI - Mining Shares surging towards a retest of all time high

Very impressive strength in the mining sector was the feature of the day in the trading session.  The result was to set the index within striking distance of its recent all time high.

Newmont Mining shot to yet another all time high today.

Having a few days of price action under our belt allows us to get a better picture of where the buy orders and sell orders are coming in; in other words, defining where the "value" regions are located.

Note the chart and look at the horizontal red line drawn near the 580 level. We remarked that the index bounced off of this level on its retest last week, confirming a reversal of polarity principle where stubborn overhead selling resistance now becomes strong buying support.

IN yesterday's session the market pushed through the former gap and go region noted on the chart but was unable to hold its gains and settled below the bottom of the gap. While the action was not particularly bullish, it did hold the previous day's low, and refused to break down even while the metal price of gold was moving down to near the $1780 level. It was evident that there was dip buying taking place at the lower levels. This was all the more noteworthy because of the very broad weakness across the entirety of the equity world yesterday.

Today saw the miners explode back to the upside, through the gap and go region and to within a few points of the all time high in the index. The ferocity of today's move higher indicates distressed buying on the part of some of the shorts in these shares. They are being squeezed out by some fairly steady and determined buying. My guess is that there were some fresh shorts piled on below the 600 level that were too far underwater to hold any longer.

You can see on the chart that there are several candles with long upper shadows present up at these levels. There is also a minor double top just shy of the 640 level. The bulls now have it in their power to attack that region and see if they can dislodge some of the more stubborn bears in these shares. If they can do so, the buying by the shorts as they seek to cover will intensify and that should give us another sharp push higher.

The strongest hands in the short community are going to try to make a stand and prevent that from happening. Whether they can do so remains unclear at this time. If they fail to hold it at 640, they are in trouble.

Note something else of significance on the following ratio chart. This compares the price of the HUI mining shares index against the price of gold itself. The ratio is useful in the sense that it provides us a benchmark; something against which to measure the value of the shares in general. Here we have the situation where the HUI made it to within a few points of its all time high today yet the overall HUI/Gold ratio is sitting at a relatively low level compared to previous peaks in the valuation of the shares.

Today we closed at the .344 level. The peaks in this index were either above the .60 level or right at it. In other words, even with the HUI sitting at such a lofty level as where it closed at today, the overall sector remains UNDERVALUED against the gold price.

This is what happens when a long established trade outstays its welcome and descends into the arena of foolishness. The ratio spread trade employed by the hedge fund community, buying gold or the ETF and shorting the shares, depressed the share prices of so many miners that it has led to a case of excessive undervaluation which is now in the process of being corrected. I think one could easily make the case without even getting too far out on a limb, that this particular ratio could move to at least the .50 level before it gets anywhere near being in the "overvalued" camp. Believe it or not that would put the index closer to the 900 level if the gold price were to remain near the current level of $1800.

That is mind boggling now isn't it???


  1. DAN,

    repeatedly your commentary is so insightful i somehow almost feel guilty reading it.

  2. good analysis.
    "the overall sector remains UNDERVALUED against the gold price." Indeed! Gold stocks have ways to go to catch gold price. Last time gold stocks were this cheap (based on cash flow) was in 1979!


  3. Dan,

    We have been "all in" with the gold and silver miners since fall of 2005. Well, we did put 10% into gold and silver coins and own our home free and clear.

    So, you can well imagine how important your work is to us.

    Thank you!

  4. Dan, thanks again for your comments.

    You said: "The strongest hands in the short community are going to try to make a stand and prevent that from happening. "

    Are you basing your comments on an aggregated measure of short interest in the stocks making up the HUI index?

  5. I meant to ask: how are you tracking the level and changes in the short interest of the stocks making up the HUI?

  6. The tide is finally changing side. A long overdue correction for all of us that endured artificially depressed prices in the minor’s shares. I wish I could see the faces of these short traders getting squeezed as the HUI moves higher. But they probably don’t care that much as they are probably loosing other people’s money. People that were foolish enough to trust them to manage their portfolio...

    On the long run the fundamentals must prevails. The banking cartel cannot manipulate the market for ever. Thanks again for your analysis Dan. Outstanding work really.

  7. three questions for no one in particular:

    1. will you be able to cash in your PM stocks quickly enough and buy gold or other assets, when the banking sector finally goes into meltdown? If not, your immense profits may count for nothing.

    2. are you confident enough that we are far enough into stage 3 of the gold bull, that there won't be another massive wave of deleveraging which make the current undervalued PM stock prices look expensive?

    3. do you have a strong enough stomach for the PM stock volatility given the inherent instability of the current financial system and markets?

    if you answered YES to all 3 above then you are either not clear about the magnitude of current financial problems or you sure are one brave investor!

  8. BlackSwan,

    "the future's un-certain and the end is al-waaays nearrr"

  9. Hi Dan,

    I was wondering about your thoughts on the ratio of CDNX/XGD. http://stockcharts.com/h-sc/ui?s=$CDNX:XGD.TO&p=D&b=5&g=0&id=p94434688092

    This suggests to me that the micro caps are under-performing the large and mid caps in the sector as well. Any oppourtunities here?

    I got the idea from this link http://www.dailymarkets.com/stock/2011/07/04/which-index-is-the-best-to-use-the-hui-xau-or-gdx/

    Thanks for all your posts!

  10. Black Swan.
    1.) As my bank account is linked to my trading acccount it takes but a second to get my money.

    2. It is assured that Ben is not going to let our country go the path of the Depression. He is betting his PHD on it. We will see much more QE before we see the crash again. This is a global government crash event, not a private bank crash event. That horse has already been traded into a Global Government Crash event.
    3. Strong stomach??? currently gold equities are quite solid compared to any other assets. let the powers to be try to crash gold to 1500. Mining equities will not drop but 10%. The long term quashing of these equities has established a strong floor on the HUI.

    Go Dan....

  11. Wofie,
    1. ditto, but i sure hope you own some physical also

    2. yes it's a global govt crash event but the TRIGGER will be a single, then multiple bank crash events

    3. agreed but in a rapid global crash there are no floors under paper

    P.S. (i wouldn't even use uncle ben's PhD to wipe my arse


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