Where's the Beef for Gold Equities?
By Frank Holmes
NEW YORK ( U.S. Global Investors ) -- Gold bulls have plenty of room to graze in the stockyard these days as the investing herd migrated to other assets during the market's steep climb in 2012.
For the fourth time in the past year, gold bears outnumbered the bulls in Bloomberg's weekly Gold Bull/Bear Sentiment Survey. In fact, the bears had the bulls outnumbered by almost two to one.
Today's growing slew of gold bears is a "buy" signal for contrarian investors like us at U.S. Global . Research from the gold team at Canaccord Genuity found that gold rallied about 10% on average during the month following each of these sentiment "crossovers."
This historical increase means that gold could potentially rally to the "high $1,700's per ounce," which Canaccord believes "would breathe some new life into the gold equities."
After a year of neglect from investors who favored bullion, gold equities need resuscitation. Going back to April of last year, gold stocks have been undervalued compared to bullion. I discussed this disconnect back in June 2011 and again in August .
This trend has been accelerating recently: At the end of March, the spread between the NYSE Arca Gold Miners Index and gold bullion was at the same extreme level it was during the 2008 credit crisis despite a much rosier global economic outlook. Going back the full decade of gold's bull run, this is quite a rare event.
It hasn't been a complete drought for gold equity investors though, as there have been occasional spurts of relief over the past year.
From the beginning of 2011 through the middle of the year, the S&P/TSX Global Gold Index declined by 14%. The index then quickly reversed course upward during the market's volatile period last fall. Now, the index has been declining for four months now, dropping 28%, while gold bullion has only fallen 9% over that same time period, says Canaccord.
Believe it or not, the four-month selloff is a bullish sign for gold stocks. If you expand your time horizon, you'll see each dip has been a turning point for gold stocks.
Canaccord says that, "sector weakness (less than one year) in the gold equities over the last six years has typically ended with "V" shaped corrections to the upside." Gold investors must be quick to "buy on the dips" since these sharp V-shaped corrections have been frequent.
The Stampede to Buy Undervalued Gold Miners
If you plan on shopping for bargains in the gold miner department, you're going to have to fight a crowd. Numerous global investors have been pounding the table for gold stocks, including Dr. Marc Faber who said "gold shares have become extremely oversold and could rebound in the next few days" in his April market commentary and Global Portfolio Strategist Don Coxe, who reiterated that gold equities are undervalued compared to the precious metal on his weekly conference call last Friday.