KISS on Gold
Eric HommelbergWhen emotions are running high, panic is near and confusion is playing games with your brain please take a deep breath, take a few steps back and apply the KISS principle on Gold and its shares. KISS stands for "keep it simple stupid". What is the big picture, why are we in such a severe oversold territory with Gold and its shares today ? Did it happen before ? What happened next ?
Hereby I want to share some comments which I've send to Bill Murphy of Lemetropolecafe on Friday May 14 and Sunday May 16 which may be of any help in order to visualize the big picture. I wrote these comments in order to show that such extreme oversold conditions in Gold shares as we're witnessing today won't stay for a long period of time and will be most likely followed (according to its own history) by a sharp upward bounce of the HUI.
This is what I wrote on Friday May 14 :
Ever saw such a bearish attitude towards Gold and its shares ? People are really panicking out of their Gold stocks lately thereby pushing the Gold shares into its deepest over-sold territory in 6 years ! I can't help but to think that a we're at the verge of a very powerful upward move in Gold shares . When people ask me what to do I always tell them to take a few steps back and look at the big picture. You'll notice that :
1 - Stocks never tend to stay either in deeply oversold or in deeply overbought area for a long period of time.
2 - A deeply oversold HUI always bounces back >50% in a relative short period of time. Yes, even during the worst years of the bear market in Gold this was the case ! See chart below !
3 - Last time we've witnessed a severe oversold condition in the Gold shares was March 2003 when the HUI hit a bottom at 112. The Bull couldn't be stopped until the HUI reached 258.
So where are we right now ? Indeed right in the deepest oversold territory of the last 6 years !
So the HUI took a dive to 163 and finds itself in the deepest oversold territory of the last 6 years. According to its own history we could witness a sharp upward correction any time soon which will launch the HUI well over 200 in a short period of time !
On May 16 I made some additional remarks regarding Gold/Oil :
Last Friday I send you some notes regarding the extreme oversold condition in Gold shares and the 'big picture' view. The main point is : An extreme oversold condition doesn't last for a long period of time, no matter if the primary trend is up or down. History shows sharp HUI bounces after such extreme oversold conditions as we're witnessing today.
An other graph which illustrates painfully clear the extreme oversold condition in Gold is the Gold/Oil ratio. This ratio is at an extreme low right now and again, such extremities won't stay for a long period of time ! So what gives ? Oil going down or Gold catching up ?
Furthermore I would like to remind people that such extreme bearish sentiment (panic, bullish consensus <10%) as we're witnessing lately is typical bottom stuff. Remember the Gold sell-off in March 2003 ($390 to $320) ? Well, back then there was panic all over the place too. A good example of what pain people suffered in March 2003 is shown below : (taken from JSMineset.com)
Sunday, March 16, 2003, 9:18:00 PM EST
Too much pain from gold stocks
Author: Jim Sinclair
Q: Jim, I simply cannot take the pain in gold shares.
I have a lot of respect for your opinions. I still want to believe you that we are in a bull market for gold. But today I gave up. I sold all my gold mining stocks. There is only so much pain I can take.
A: I am so sorry, but I certainly understand. I feel your pain and wish you all the best whichever way you go. Please stay in touch.
Well, sounds familiar right ? Remember, March 2003 was a bloodbath for Gold shares as well as it is today ! Remember that the time to buy is when blood is in the streets (Nathan Rothchild). Remember that extreme overbought/oversold conditions don't stay there for a long period of time (Jesse Livermore). Remember that the HUI bounced off like a rocket (>50%) after previous bloodbaths. In March 2003 I suggested in my piece "Nasdaq vs XAU" that : "one should expect then a sharp upside reversal of the XAU. Downward risk is extremely low:" END. Well, that was March 2003, today I would suggest the same !
You get it ? Even if it were true that the Bull market in Gold has ended (which I personally don't believe at all), still an extreme oversold condition has to be worked off and a powerful bounce is due for the Gold shares.
May 17, 2004
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