The Gold Mining Sector Breaks A Record

We are leading off with a discussion of gold mining stocks because the recent price action has created a situation that can now aptly be described as unprecedented. A consequence is that there has NEVER been a better time to buy gold mining stocks.

The unprecedented situation we just referred to is associated with distance below the 200-week moving average (MA). This was previously discussed in our 24th April commentary, when we wrote:

"At the end of last week the BGMI [Barrons Gold Mining Index] was 41.5% below its 200-week MA. This compares to other major bottoms as follows:

  - At the 1970 bottom the BGMI was 39.2% below its 200-week MA

  - At the 1976 bottom the BGMI was 46.8% below its 200-week MA

  - At the 1982 bottom the BGMI was 43.7% below its 200-week MA

  - At the 1986 bottom the BGMI was 41.5% below its 200-week MA

  - At the 1998 bottom the BGMI was 55.7% below its 200-week MA [and the XAU was 54.2% below its 200-week MA]

  - At the 2000 bottom the BGMI was 43.6% below its 200-week MA [and the XAU was 43% below its 200-week MA]

  - At the 2008 bottom the BGMI was 53.6% below its 200-week MA [and the HUI was 53% below its 200-week MA]

The BGMI's average distance below its 200-week MA at major gold-sector bottoms over the past 50 years was 46.3%. The range is from 39.2% to 55.7%.

So, last week's BGMI bottom was within the historical range for a major bottom. Furthermore, at last week's low the HUI was 46% below its 200-week MA, or right at the long-term average for a rare, major bottom.

Note that for the HUI to roughly match the most extreme bottoms of the past 50 years in terms of distance below the 200-week MA, it would have to fall to around 215 within the next few weeks. This could be viewed as a measure of the maximum remaining downside risk, although we think the chance of the HUI getting that low is remote. We are only mentioning the possibility because the recent price action makes almost anything seem possible."

Here is an updated version of the chart we included in our 24th April commentary. The chart shows the distance, in percentage terms, of the BGMI from its 200-week moving average.



It turned out that almost anything was possible, because at last week's low the HUI was 55.9% below its 200-week MA. Therefore, using either the BGMI or the XAU as a sector proxy up to and including 2000 and the HUI as a sector proxy thereafter, at last week's low the gold-mining sector of the stock market was further below its 200-week moving average (MA) than it had ever been.

We know from painful experience that there are no absolute benchmarks when it comes to sentiment and 'oversold' extremes, so the current extreme does not provide buyers with a guarantee of success. However, it isn't every day that you get the opportunity to buy an investment at its most 'oversold' level in history. Hopefully, some of our readers have kept enough cash in reserve to take advantage of this opportunity.
 

The above is excerpted from a commentary originally posted at www.speculative-investor.com on 30^th June 2013.