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Gold Shares Poised For Recovery


Metal to follow miners in forward march.

Gold has had a pretty horrific correction over the past three days and has now revisited the bottom of its trading channel since August. My guess is that area is probably within $10 or so of gold's ultimate low for this correction.

As I wrote yesterday, corrections occur in every bull market. They can be particularly brutal in gold, but the stagflationary environment and the negative real interest rates from a Federal Reserve bent on inflating away the housing bust will continue to create an environment that is uber-bullish for gold.

Click here to enlarge image

The gold shares, on the other hand, will likely not only bottom out faster than the metal, but will recover from this week's sell-off much faster since they never discounted gold's run over the past four months from $800.

I've complained since November that the shares didn't appear to believe that gold's run to new all-time highs above $850 was for real. The valuation disparity between the shares and the metal appears to be resolving itself in a way I did not expect.

Ironically, however, what may be best for the gold shares is to have a horrific decline like this in gold that bottoms well above $900. This would finally convince the equity market that gold's new all-time high above its 1980 peak at $850 is not just a flash in the pan.

You can see in the chart below that the XAU/Gold ratio blew through to even below its August nadir yesterday and is down another percent today to 0.185 (although since the open, it has been rising).

Gold could take a month or two to recover from this correction, but the gold shares should recover much faster and will likely make new highs well before the metal does. The ratio below tells us this is the highest probability going forward.

Click here to enlarge image

We'll see how the day goes, but my bet is we'll see the shares bottom today. In fact, we're also seeing hints of that in many of the juniors like Metallica Resources (MRB), Golden Star (GSS) and Banro Corp (BAA). These junior miners trade at even cheaper levels relative to gold than the senior miners in the indexes, and are already up on the day even with gold down another $23 this morning.
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Position in Gold, Gold shares mentioned above.

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