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5 Dramatically Oversold Gold Stock Indicators


Based on these indicators and historical evidence, gold stocks should soon see higher levels.

Last month a plethora of gold stock indicators reached extraordinary levels. Let's take a look at five of them.

The Gold Miners Bullish Percent Index has data of the Gold Miners Bullish Percent Index. Its data for this indicator starts on February 14, 2008. The all-time low of the Gold Miners Bullish Percent Index is 0. It closed at that level on December 3-5, 2008 and April 12-19, 2013. From December 3-5, 2008 gold stocks went up 119% to 126% in less than a year.

Gold Stocks Underperform Oil Stocks By Over 50% in 131 Trading Days

The data for gold stocks (INDEXNASDAQ:XAU) starts on December 19, 1983. The data for oil stocks (INDEXNYSEGIS:XOI) starts on August 26, 1983. On April 17, 2013, gold stocks underperformed oil stocks by 50.48% over the previous 131 trading days. The lowest 10 readings for the $XAU: $XOI ROC (131) since December 19, 1983 occurred on April 12-25.

No. 11 was December 4, 1997. Gold stocks went up 44% over the next 140 calendar days.

No. 12 was June 14, 2004. Gold stocks went up 38% over the next 156 calendar days.

$XAU Close in Relation to Trading Range (59 Trading Day Average)

This indicator may require a bit of explaining. Let's say that during the course of a day, a stock trades in a trading range of $10 to $11. For this indicator, a close at $10 would equate to 0% and a close at $11 would equate to 100%. On April 17, the $XAU closed at an average of 35.49% of its trading range percentile over the previous 59 trading days. So in our example, the average close would have been $10.35. While that doesn't seem like a big deal, since 1983, there has been only one time period when gold stocks had such a confluence of subpar closes for such an extended period of time.

What happened next? Gold stocks bottomed at 96.66 on January 31, 1995 and peaked at 155.6 on February 7, 1996. While the indicator extreme did not mark the exact low, it was very close and it gave an alert to an upcoming 60% rally. It is interesting to note that over 18 years later, gold stocks are near not only the same indicator level but the same price level as well:

4/17/2013 35.49% 98.85

Note that the maximum price of gold during all of those aforementioned dates was $383.

Barron's Gold Mining Index to Gold

Instead of using the $XAU gold stock index, we are using the Barron's Gold Mining Index (thanks to The Barron's data is weekly and goes back to December 23, 1938 whereas the $XAU data is daily and goes back to December 1983. So there are tradeoffs with each approach. With this indicator, the Barron's data is most appropriate. The following list contains the 12 lowest ratios in history.

Gold stocks are the cheapest relative to gold in over 70 years. From April 24, 1942 to March 8, 1968, this indicator was in a secular uptrend. Since 1968, it has been in a secular decline. Are we now at the bottom of the mother of all trading ranges and due for a reversion to the mean? Or is the 1942 all-time ratio low a mere pit stop in a secular shift in the relationship between gold and gold stocks? While only time will answer this question, this indicator can probably be placed in the bullish side of the ledger for gold stocks until proven otherwise.

Barron's Gold Mining Index: Stocks ROC (26 weeks)

The following are the returns of gold stocks (not the ratio return) when they underperformed the S&P (INDEXSP:.INX) by 43.3% in 26 weeks.

In summary, past history suggests that one should give strong consideration to purchasing precious metal stocks.
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