My last article spoke of the larger degree correction currently being suffered by gold and especially silver. The event was foreseen by those who use Elliott Wave analysis but now we ask the same question of gold and silver mining stocks.
Not surprisingly the story is the same as precious metals stock undergo a severe correction to retrace a large part of the bull market in such stocks begun in 2000. The example we will use is the HUI index of unhedged gold stocks. The analysis is given below.
Once again note how a five wave impulse pattern was completed for the HUI on the 17th March as it reached an intraday high of about 520. The bull began on the 15th November 2000 at a neglected intraday low value of 35. So while gold had advance from $255 to $1032 in the same period for a 4 fold increase, the HUI has put in a storming 15 fold increase to give a 3.75 leverage over gold bullion. That in a nutshell is why people invest in gold stocks.
For the record (based on closing prices), wave 1 advanced 37 to 257 (220), wave 3 from 166 to 394 (228) and wave 5 from 300 to 506 (206). Wave 3 was the longest though not by much as they all were pretty much the same length. The only unusual thing to note about this structure is that the final wave 5 was not an impulse but an ending diagonal. This is a stunted move up which was formed by the general stock market dragging down the HUI from a more explosive finish.
The HUI is now on the final trendline as far as support for the 2000-2008 bull is concerned but it is apparent that a greater degree correction is now in play which we call wave 2 (encircled). The first part of that correction is now almost over and it could be either an A or W wave, we are open to which one it may be though which one it is dictates how strong a rebound rally may be. As of this week, the HUI has retraced almost exactly half of the entire 8 year bull. It is our feeling it may retrace slightly more before embarking on a rally (not a new bull market … yet).
The story for silver mining stocks is somewhat similar and that analysis we have reserved for subscribers. Suffice to say our exit from silver equities at the end of March avoided our portfolio being cut to a third of its value.
So when will the “rebirth” of gold and silver stocks be? I must say that talk about a new bull arising so quickly from this debacle should be taken with a pinch of salt. I only regard this current down move as the first part of a three part correction. The other two parts of the correction will hopefully not take the HUI down any further but it is the time element that needs to be considered here. A simplistic interpretation may say that this leg down has taken at least 6 months to complete. If the other two legs take as long that adds up to 18 months before the mega wave 3 of this gold bull market takes a grip of matters. That wave will certainly be worth waiting for and riding out for even greater profits in this inflationary super cycle.
September 15, 2008
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