Gold Stocks Are Leading
By Przemyslaw Radomski, CFA
Based on the May 10th, 2013 Premium Update.
Visit our archives for more
gold & silver articles.
T.S. Eliot called April “the
cruelest month” in his famous poem, and without a doubt April was cruel to many
gold investors. Sunshine Profits subscribers who followed our
suggestions in April avoided a share of the pain. Probably no one suffered
more than hedge fund manager John Paulson. He is joined by hedge fund
manager David Einhorn whose Greenlight fund took a big hit on its gold miners
ETF holdings. Einhorn said recently what we would consider an
understatement: "We were somewhat surprised by the swift decline in the price of
gold in April." If they were following fundamental valuations and analysis only,
then that’s not surprising. Paying attention to the breakdown below the key
support level at that time provided a sell signal.
According to reports, Paulson's $700
million gold fund lost 27 percent in April due to leveraged bets on gold, when
the price of the metal swooned by 17 percent over a two-week stretch. What must
hurt is that the majority of the money invested in the Paulson gold fund is
believed to be the billionaire's own. Regulatory filings show that at the end of
last year Paulson's firm was the largest holder of the SPDR Gold ETF, with 21.8
million shares. Paulson made his fame and fortune after he made $15 billion for
his firm in 2007 by betting against subprime mortgages before the housing
Paulson started his gold purchases
in early 2009, betting that gold would rise due to the government money printing
machines. Paulson took a $1.3 billion stake in AngloGold Ashanti Ltd. (AU) and
$2.8 billion of GLD when the metal was trading around $950 an ounce. He was the
biggest holder of both at the end of last year, the most recent figures
available. Even with all the negative press gold is still trading more than 50
percent higher than when Paulson started investing in the metal.
To analyze if there is more pain to
come for Paulson in the coming weeks let’s take a look at one of the more
interesting ratios there are on the precious market – mining stocks vs. gold and
gold to silver ratio (charts courtesy by
Before we being, we would like to
point out that we believe that the long-term picture for gold remains bullish,
as the fundamentals remain in place. This, however, does not mean that gold
can’t move even lower temporarily.
The above chart (gold stocks’
performance relative to gold) provides a very bearish picture. Please note that
the trading channel and the next horizontal support intersect at a point much
lower than where this ratio is today. Of course, the existence of a target level
by itself is no indication that it will be reached; the trend has to be in place
as well. The point here is that the ratio has already broken below the previous
late 2008 major low and is now a bit more than 5% beneath it. This is a major
breakdown and it was confirmed. The implication is that the trend is still down.
With the trend being down and
accelerating and the recent breakdown being confirmed, there is a good
possibility that the miners will decline significantly once again. This makes
the previously mentioned target level a very important one. At this time it
seems likely that the ratio will move to its 2000 low – close to the 0.135
If gold stocks decline relative to
gold as they did late in 2000, and gold declines to $1,300 or slightly higher,
the target level for the HUI Index would coincide with a Fibonacci retracement
The GDX to GLD ratio chart (another
way to look at the miners to gold ratio), seems to confirm that the mining
stocks are clearly not leading gold higher also from the short-term point of
view. Volatile back and forth daily moves have been the norm recently, and
overall the situation is unchanged - still looks like a consolidation within a
bigger decline and most likely is one.
Additional confirmation comes from
the silver to gold chart which is an extension of our analysis from the essay on
silver’s underperformance against gold.
We see there has still been no sharp
drop in the ratio, which indicates that the silver bulls are not giving up just
yet (or that lots of short positions are not being opened just yet). This is
something, which is usually seen in the final part of a major decline, so it
seems that this decline has some time to go yet.
the situation for metals and mining stocks remains bearish and the correction is
likely still not over. If you're interested in our target levels for precious
metals and would like to be informed when to get back on the long side of the
market, please join
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
Radomski's, CFA reports you fully agree that he will not be held responsible or
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