Mary Anne & Pamela Aden
The Aden Sisters
Posted Sep 24, 2009
Courtesy of www.adenforecast.com

Gold, silver and gold shares are jumping up. Gold hit a record high this month and all three are in ‘break out’ mode. The time of truth is at hand and it won’t take much more strength to confirm that a stronger phase of the eight year old bull market has begun.

GOLD IS MONEY

We have often talked about gold’s role in the monetary system. For many years it was tossed aside as a barbaric relic and the thinking was that it was old fashioned. Nixon reinforced this in the 1970s when he closed the gold window by taking the U. S. dollar off the gold standard. An energetic economy then became most important.

But in spite of the generally strong U.S. economy and the growing global economies since the 1970s, the dollar has been weakening. Gold has been moving up quietly this decade and your average person or investor is still essentially unaware of its strength, but that will likely soon change.

GOLD: Strong in all currencies…

In today’s world it’s important that gold rise in all currencies. Why? Very simply, it will reconfirm that gold’s strength is powerful and real. We think this is ready to happen.

Looking at the left side of Chart 1, you can see that the gold price has tested the $1000 level twice since March 2008 when it first reached a record high. If gold now stays above $1004, it will clearly be breaking into record high territory and it’ll confirm a stronger phase of the ongoing bull market. You can bet this will attract attention and eventually mainstream investors will jump on board, driving the price much higher.

Interestingly, gold has also formed a head and shoulders technical pattern (see S, H, S). The rule of thumb is, if the NL resistance is broken on the upside, which it was when gold hit a record high, the price could rise the same distance as the size of this formation. In other words, gold could then continue up to near the $1400 level.

We’ll soon see what happens but most interesting is that gold is strong in euro terms as well (see Chart 1, right side). Note that it reached a new bull market high last February when it closed at its 1980 highs. The main point is, if gold can now reach a new record high in both dollars and euros it would be extremely bullish because it would be reaching a record high in the two most widely used currencies in the world.

…AND READY TO FLEX ITS MUSCLES

For now, what we call a “C” rise is ready to go. C rises are recurring, and they’re the best intermediate rises in a bull market when gold reaches new highs (see top of Chart 2). This is why the current C rise is so important, because it’s the first C rise since the financial meltdown last year.

The gold price is the central bankers’ only real discipline. The Federal Reserve has created more credit and injected the most money into the system this year than any other time in its 95 year history, in order to save the economy from a deflationary collapse. But the Fed’s actions, together with Obama’s spending and the massive stimulus from central banks around the world nearly guarantees that the end result will be inflation.

The economy is recovering at a heavy price. And this month’s gold rise suggests that inflation will eventually prevail. This will be especially true if gold breaks clearly out to new record highs. It will be saying that the government is actively creating inflation. This is also why the current C rise is so important.

Chart 2 shows that gold has the power and the room to rise strongly into record high territory. The leading indicator (B) is poised to complete a strong C rise and the gold price (A) shows that once a record high is sustained, gold could indeed jump up to the $1200 level as its first target. The long-term indicator (C) is also in a special situation that usually precedes a strong rise.

Once gold embarks on a stronger phase of the bull market, it’s not inconceivable that gold could eventually reach the $2,000 to even the $5000 level before the mega rise is over, looking out to the years ahead.

GOLD: Better than stocks, currencies & bonds

The stock market and the currencies have been good investments, but it’s important to know that gold is the best investment. It’s stronger than the currencies as you saw, and it’s stronger than the stock and bond markets. Chart 3 shows this clearly. Note that when comparing these markets, gold has been steadily stronger than the Dow Jones Industrials, and the U.S. bond market since 2001. Both ratios have been moving up since rising above the mega trend, the 80 month moving average, in 2003. This means that gold is solidly stronger than these other markets and its gains have been greater.

We are invested in the different market sectors because the trends are up and we’ll stay diversified as long as the trends stay up, but keep in mind that the strongest markets are in the gold and metals sectors. Most important, it’s not too late to buy.

Sep 22, 2009
Mary Anne & Pamela Aden
email: info@adenforecast.com
The Aden Forecast

Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.

For more information, go to http://www.adenforecast.com/

Jeff Clark
Casey’s Gold & Resource Report
posted Sep 28, 2009

If we’re right about where the price of gold is headed, the general public will someday clamor to buy all things gold. While gold stocks will be where the real leverage is, the rush will start with gold itself. As a gold editor, I have a very natural question: is there enough to go around?

According to the U.S. Census Bureau, there are 6.783 billion earthlings. Meanwhile, CPM Group, a highly respected industry organization, estimates there are 4.8 billion ounces of above-ground gold in the world. And this includes jewelry, electronics, and dental. So, even if everyone around the world volunteered to have their chain, cross, or tooth melted into a coin, we’re already short. Those towards the end of the line are out of luck.

However, it’s worse than that. Of all the physical metal ever mined…

• 2.1 billion ounces, or 43%, is found in jewelry, decorative, and religious items.
• Private stock - gold already held by various private parties - accounts for 1.1 billion ounces.
• Official reserves (central banks, IMF, etc.) stand at 1 billion ounces.
• Industrial use accounts for 530 million ounces.

Very little of this is likely to come available for purchase in coin form. After all, you’re not selling any of your gold, and neither are many banks or institutions. Most everyone is buying.

So for those who don’t yet have a gold coin (or you greedy investors who want more than one), this pretty much leaves us with mine production and scrap sources.

CPM forecasts that total new supply in 2009 will be around 122 million ounces. Only a small percentage of this is made into gold coins and bars, but if all of it were, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth this year. A product of this dimension is about half the size of that small button on your shirt collar.

Since this supply is only available annually, it means 0.018% of the global population - one in every 55 people - could buy a one-ounce gold coin this year. Or, said differently, it would take 55 years before everybody had one, assuming the population never increased (it is) and supply never decreased (it is).

But it’s worse than that. Actual 2009 coin production will be around 5 million ounces (excluding medallions or “rounds”), leaving two one-hundredths of a gram of gold (or 0.3 of a grain) available this year for each of the planet’s inhabitants. This is about half the size of the sesame seed that fell off your hamburger bun at dinner last night. It means that only 0.0007% of earth’s citizens - or one in 1,356 - can buy a one-ounce gold coin this year, and it would take 1,356 years for everyone to get one.

How’s that for a supply squeeze?

But it’s worse than that. Demand continues rising. Gold is more frequently in the news, attracting more customers every day. Hedge funds, which never before considered gold, are now buying physical metal (Greenlight Capital actually sold $500 million of GLD and bought physical gold). Central banks are net buyers of gold for the first time in 22 years. China is running TV ads encouraging its citizens to buy gold and silver. Last month Russia bought more gold than they actually produced. In a recent survey, 20 out of 22 fund managers bought physical gold for their personal investments. In other words, some investors are already scrambling to get it… and in big quantities.

But it’s worse than that. Most of the ramifications of the money printing and dollar debasement haven’t even surfaced yet. How will the general public react when the dollar is crashing and standards of living are threatened? What will they do when milk and gas prices surge to twice what they are now? How will the greater collective respond when they lose faith in government interventions? Where will they invest when they see gold and silver prices screaming upward and don’t want to be left behind?

The panic into gold by the general public hasn’t begun yet. Available supply is scarce and will get smaller. There won’t be enough.

Better get your speck while you can.

[The current issue of Casey's Gold & Resource Report has a few charts that should come with a warning. We examined just how small the gold and silver markets are, and "explosive" barely describes the potential. If you want to check it out for yourself, consider a trial subscription - 3 full months with 100% money-back guarantee. Click here for more.]

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By: Adam Hamilton, Zeal Intelligence LLC

One-thousand Federal Reserve Notes per troy ounce! This past week gold edged over $1000 to close at its highest levels ever witnessed. This much-maligned investment has nearly quadrupled since its secular bull’s humble beginnings in April 2001, a fantastic 297% gain compared to the S&P 500’s pathetic 7% loss over this 8+ year span.

With gold being the best-performing major asset of this decade, and now surpassing the once-unthinkable $1000 mark, many investors are growing wary of its future prospects. Is gold too high today? Are $1000+ levels unsustainable? Is gold’s secular bull nearing its end after this metal’s epic run? These first tentative steps over $1000 are really fanning the flames of doubt.

One major reason is the financial media’s coverage of gold’s all-time-record-high closes. Most investors know enough about contrarian theory to be instinctively nervous about any price hitting its highest levels in history. A price that soars to extremes soon comes back down. And gold’s recent closes have edged above its previous record from March 2008 of $1005, not to mention January 1980’s famous $850 that held for a whopping 28 years before being exceeded.

While this week’s $1018 was indeed gold’s best close ever, the media’s insinuation from this true statement is pretty misleading. Comparing prices today with prices in the past is certainly not a clean apples-to-apples exercise. Due to the Federal Reserve’s relentless and endless expansion of the US money supply, the dollar yardstick for measuring nominal prices is perpetually changing.

If you were old enough in early 1980 to remember price levels, you know exactly what I mean. Back when gold hit $850 initially, the US median household income was under $18k. Across the US, new houses averaged $76k while new cars were less than $6k! A candy bar only cost a quarter. It was a different world back then, with each dollar being far more valuable. So $850 today is worth much less than $850 then.

In order to account for the endless flood of new fiat-paper dollars distorting the price yardstick, the impact of inflation must be considered in any long-term analysis. $1000 gold today is only relevant and meaningful if we recast historical gold prices into today’s inflated dollars. When gold’s history is viewed in inflation-adjusted (“real”) terms, it radically alters the perceptions of and implications for today’s prices.

I first started building inflation-adjusted gold charts back in mid-2000 when gold was trading in the $290s. As I’ve updated this thread of research over the last 9 years, I’ve almost always used the US Consumer Price Index to adjust gold for inflation. This surprises some hardcore contrarians, because the CPI is horribly flawed and consistently understates true monetary inflation. I certainly agree, I hate the CPI!

Having the same government that is recklessly printing excess money purporting to objectively and honestly measure its economic impact is like the fox guarding the hen house. The conflicts of interest are egregious. The CPI seriously understates true inflation because the government has vast incentives to lowball it. Much of the federal government’s non-discretionary budget is effectively indexed to the CPI.

Therefore higher CPI numbers mean higher welfare payments and less money for politicians to spend on their pet projects. Higher CPI numbers translate into higher interest rates, driving up the carrying cost of Washington’s massive debt and again leaving politicians with less money for pork to bribe voters. Higher CPI numbers spook the financial markets and upset voters, reducing incumbents’ odds for re-election. And higher CPI numbers alert the populace to the devastating confiscatory stealth tax levied by Washington that is relentlessly eroding our hard-earned savings.

Anyone who believes Washington’s own CPI numbers are honest probably still believes big government is benevolent and “here to help”. The CPI is a joke. Still, I use it for my real analyses for two key reasons. First, despite the CPI’s countless problems it remains the most-widely-accepted definition of “inflation” by Wall Street and mainstream investors. Second, it is very conservative since true inflation is always higher than the government reports.

So the following CPI-inflated gold charts really understate gold’s true potential and ought to be very credible even to mainstreamers. Real gold is rendered in blue, with the normal non-inflation-adjusted (“nominal”) gold price rendered in red. When you look at gold’s entire modern history with a far-more-comparable pricing yardstick, today’s $1000 levels don’t look so intimidating after all.

January 21st, 1980’s legendary gold close of $850 translates into $2358 in today’s dollars! So what the financial media is gleefully calling an all-time high today, insinuating gold is radically overbought and due for a plunge, isn’t even halfway up to this metal’s real all-time high. As of Wednesday’s $1018 close, gold had merely climbed to 43% of the climax of its previous secular bull. Read More…

By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.

In the second quarter of 2008, when it became clear that bankrupted financial institutions would be bailed out by the federal government, gold did a funny thing. In the wake of a financial crisis of that magnitude, one normally would have expected asset prices, including gold, to plummet. Most observers expected the metal to dip from the $800 level down to $600, or below. Instead, gold held up well during the teeth of the crisis, and has recently increased to just over $1,000.

The biggest change in the gold market has been the unwillingness of certain governments to sell their gold. Some powerful states, such as China, are beginning to hoard gold and to become net sellers of U.S. Treasury securities. In addition, private investors are buying so many gold coins that fabrication plants are months behind on physical deliveries. In short, individuals, institutions and governments are losing faith in paper currencies, particularly the U.S. dollar. Despite the opportunity cost associated with trading interest-bearing government securities for pay-to-store bullion, they are buying gold.

Throughout much of recorded history, gold has proved to be the ultimate form of money. Due to its inherent scarcity, it has been the bane of governments who wished to spend more that they had or could borrow. Certain governments even diluted the gold content of their coins in order to dupe buyers.

The United States entered into federation with a sole reliance on gold as its legal tender. It was not until the Civil War that the U.S. government issues its first paper currency. However, this was not fiat money. All currency issued was backed by gold, and later by silver. But over the years, the backing was withdrawn as government looked to expand the money supply. By 1933, every $20 note was backed by only one ounce of gold at the Federal Reserve. That year, the Fed refused President Roosevelt’s request to further dilute the gold backing of dollars. In response, Roosevelt confiscated gold from all Americans. The Fed acquiesced and printed more paper dollars.

Not content, Roosevelt devalued the U.S. dollar by 75 percent against gold the next year, unleashing a great inflation. Every American who had surrendered gold in 1933 lost 75 percent. Those who owned no gold proclaimed Roosevelt a hero.

In 1971, President Nixon broke the U.S. dollar’s last link to gold, prompting the second great inflationary wave. Inflation became so bad that gold rose from $35 to $850 an ounce by 1981.

In more recent history, President Bush II and former Fed Chairman Alan Greenspan elevated the process monetary debasement into an art form, creating the largest asset boom in history and sowing the seeds of collapse in the financial system. They left the U.S. dollar so debased that the 1980 gold price of $850 is equivalent to $2,200 in today’s shattered currency!

It follows that, at $1,000 an ounce, gold stands at less than half its historic peak. In a recession, when cash is scarce and price levels are falling, it is amazing that gold stands as high as it does. One can only guess where the price will go when the trillions of dollars of electronic government bailout dollars start vigorously circulating.

If we were to return to a gold standard today, each ounce of gold held at the Fed would have to back a breathtaking $39,000 dollar bills. It is a far (1,950 times) cry from the $20 for each ounce of gold of just seventy-six years ago! Is it any wonder that the euro, the currency of the nascent European Union, stands just a shade below its all time high of $1.45?

These signs of chronic monetary decay have not been lost on individual investors or governments holding U.S. dollar surpluses. The key player in this respect is China, the largest holder of U.S. Treasuries – and now the world’s largest gold producer.

Recently, my friend Ambrose Evans-Pritchard reported in the London Telegraph on his interview with Mr. Cheng Siwei, Vice Chairman of China’s Communist Party’s Standing Committee. According to Evans-Pritchard, Mr. Siwei said, “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not [to] stimulate the market.”

This single statement should send shivers down the necks of all who believe in the paper currencies of debtor countries. Similarly, it should warm the heart of all those who already own gold. China has indeed resisted upsetting the international gold market with massive purchases. Quietly, she has merely ‘diverted’ part of her own production into her treasury vaults!

Also, China has sought to protect its citizens from the debasement of paper currencies by lifting restrictions on its citizens’ ownership of precious metals. They can be expected to be large buyers of gold and silver (’poor man’s gold,’ at only $15 an ounce).

In order to protect themselves from the ravages of governments who believe in massive deficit-financed entitlements, Western citizens should think carefully about whether to trust paper currency over real money. Its an easy decision to reach.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff’s 2007 bestseller “Crash Proof: How to Profit from the Coming Economic Collapse” and his newest release “The Little Book of Bull Moves in Bear Markets.” Click here to learn more.

More importantly, don’t let the great deals pass you by. Get an inside view of Peter’s playbook with his new Special Report, “Peter Schiff’s Five Favorite Investment Choices for the Next Five Years.” Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.

– Posted Thursday, 10 September 2009 | Digg This Article | Source: GoldSeek.com - John Browne Senior Market Strategist, Euro Pacific Capital, Inc.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Working from the firm’s Boca Raton Office, Mr. Brown is a distinguished former member of Britain’s Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher’s government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown’s advocacy, Thatcher famously pronounced that Gorbachev was a man the West “could do business with.” A graduate of the Royal Military Academy Sandhurst, Britain’s version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC’s Kudlow & Co. and the former editor of NewsMax Media’s Financial Intelligence Report and Moneynews.com.

Gold closed at $999 on Tuesday. Then, yesterday, it closed down $2.

There’s a time to buy gold; and there’s a time to sell it. Which time is it?

The question rose with the gold price itself. It needs an answer.

The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today’s money) in 1983.

We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.

Some people draw the wrong lesson from this experience – that gold is always a bad place for your money.

Today’s Financial Times:

“In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns.”

But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.

What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.

Was it smart to buy stocks or bricks and mortar during the ’70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money – maybe more. As for those who bought bricks and mortar, they lost too – but it’s hard to say how much.

And meanwhile, gold went from $41 an ounce to over $800.

Which would you prefer?

As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be.

For thousands of years gold has been the money of last resort. It is the money you can trust. They can’t make more of it. They can’t counterfeit it. They can’t put extra zeros on it and pretend it is worth more.

But it is most useful when other money goes bad. Inflation rates in the United States during the ’70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (outside the United States…it was still illegal for private citizens to hold gold in America) for, say, $45 in the early ’70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one-to-one that year. Then, if you’d held onto those stocks, you could have sold them in 2006 for $14,000.

Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million.

But let’s get back to where we are now. Still in a bull market in gold…or at the end of one? Are we idiots for holding it now…or idiots for not buying more?

As you know, we’ve begun a new project: the Bonner & Partners Family Office. It’s our own family office that we’ve opened up to a few non-family members. But just as soon as the non-family members came in the door they started asking questions. Specifically, they wondered why…after all the preaching we’ve done about buying gold…we don’t have more of it in the family portfolio.

One our new partners wrote a very shrewd comment. We’ll pass along a little of what he had to say, but first, some context. The feds are desperate to restart the economy. The only way they can imagine is by increasing the money supply…and inducing people to spend money. They want inflation, no doubt about it. And they’ll get it – no doubt about that, either.

The question is when. Our view is that they’ll get more than they expect, but later than they want it. We’re looking for another crack in stocks…followed by more fear and loathing in the economy. This will have two major effects. First, investors will turn to the familiar dollar for safety. Second, everyone will hoard money…speculation will cease…and prices will fall – including the price of gold. Our first writer disagrees:

“One mistake [your editor] might be making is his belief that we are already in another Great Depression. We probably will be in a depression or some other form of economic calamity, but not yet. Every Depression (or monetary contraction) in history has followed a similar pattern – expansionary monetary policy followed by a contraction of the money supply… While we have experienced a huge monetary expansion/easy money in the ’90s, we have not yet experienced a real monetary contraction (which is a scary thought). Instead, the central planners did the opposite and doubled the monetary base (keep the addict happy with more heroine). These extra paper dollars have to go somewhere, and we are seeing the results in higher prices for stocks, oil, copper, sugar, gold, so far…”

Well, yes…as long as the economy seems to be on the mend, investors’ “appetite for risk” improves. They want to speculate on the recovery. But then, when the recovery proves an illusion…they’re going to run for cover.

Then, another new partner came to help us roll our stone.

“Bill is correct, not from money supply & credit data, but from ‘black swan’ type events such as: how deflationary forces will play out for lenders and holders of mortgaged backed bonds both commercial & residential, in a disruptive resetting of interest rates for Option ARMs, ALT-As and various other prime borrowers in the next 6-12 months… Will we witness another series of major bank failures from this next round of resetting? And if so, how disruptive, in a deflationary sense, will this be?”

Either way, the result is the same. Market events – such as another big break in the banking sector – could bring a deflationary collapse. If not, the Fed itself may have to step in to protect the dollar. In either case, gold is not likely to reach its final, bubble phase until this contraction is over.

In the meantime, our advice remains unchanged: buy gold on dips.

We continue to laugh at recovery sightings. Yesterday, for example, the Fed reported to the nation that a recovery was underway. But even the Fed couldn’t ignore the fact that consumers aren’t spending money the way they used to. The New York Times comments:

“The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed’s warning about it deflated some of the market’s optimism. About 70 percent of the economy depends on spending by consumers.”

The other sticky wicket in this game is unemployment. Jobless ranks are swelling like a floating corpse. But the jobless numbers don’t tell the whole story. There are 34 million Americans who live on food stamps. One out of every nine people depends on the government for his daily bread. The Financial Times fills in the details:

“Less attention has been paid to those still in the workforce, whose incomes are also being squeezed. The average working week is now about 33 hours, the lowest on record, while the number forced to work part-time because they cannot find full-time work has risen more than 50 per cent in the past year to a record 8.8m. Wages and benefits have decelerated.

“The food stamp data suggest that ‘the labour market problems are more significant than you would expect, given just the unemployment rate’, said John Silvia, chief economist at Wells Fargo. ‘For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.’

“Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP. Economists fear that people may be unwilling to resume that role.

“Food stamps are distributed once a month on electronic cards that can be spent at many grocery stores. The $787bn stimulus bill added about $80 (€55, £50) to a family’s monthly allowance, which now stands at an average $290.

Nothing very original about keeping the masses fed with government food. The Romans figured it out 2,000 years ago. You have to distract the mob with pane et circenses (bread and circuses). Otherwise, they vote you out of office…or burn down the capitol.

“Everything, now restrains itself and anxiously hopes for just two things: bread and circuses,” wrote Juvenal.

Until tomorrow,

Bill Bonner
The Daily Reckoning

By: Adam Hamilton, Zeal Intelligence LLC

Last week when gold started flirting with $1000, the gold stocks caught a serious bid. On an impressive 3.8% 2-day gold rally, the flagship HUI unhedged gold-stock index rocketed 15.7% higher! And the volume in this index’s elite gold stocks was staggering those 2 days, 2.8x the 3-month average.

This blisteringly-fast surge easily drove the HUI up to new 2009 highs, eclipsing the 398 witnessed in early June. To see any stock index blast nearly 16% higher in a couple days is exceedingly rare, so naturally all this excitement captivated traders. But it also led to growing fears that this sector is overbought and richly valued, ripe for an imminent correction.

Ever the contrarian, I disagree with this increasingly popular assessment. Despite their big run, gold stocks are still cheap. The primary reason is the massive anomaly in gold-stock pricing driven by last year’s brutal stock panic. Now approaching the first anniversary of that terrible event, gold stocks still continue to gradually normalize relative to gold. Until this necessary process is complete, they remain great buys.

The foundation for this bullish case is the indisputable fact that gold ultimately drives gold-stock prices. In general, a higher gold price translates into higher profits for companies mining this metal. And in the stock markets higher profits always eventually lead to higher stock prices. Any company’s profits are the most important driver by far of its long-term stock price. And for gold companies, the gold price controls profits.

This strategic fundamental truth is certainly proven out technically. In the 5 years prior to the panic, the HUI’s r-square with gold ran 94.9%. Thus 95% of the daily HUI price action over this secular span was statistically explainable by gold’s own. There is no doubt that owning gold stocks is ultimately a leveraged bet on gold itself.

The HUI’s ongoing relationship with gold is easiest to understand when seen visually. My favorite tool for this is the HUI/Gold Ratio, the daily HUI close divided by the daily gold close, charted over time. The following HGR analysis is why I was buying and recommending gold stocks and silver stocks deep in the bowels of last year’s stock panic and why I continue to think they have excellent near-term potential today.

In these charts, the HGR line is rendered in blue and superimposed over the HUI itself in red. When the HGR is rising, it means the HUI is outperforming gold. Gold-stock prices are climbing at a faster rate than gold itself. And when the HGR is falling, it means gold is outperforming the HUI. Most of the time this happens when both gold and the HUI are correcting but the metal isn’t falling as fast as its miners’ stocks.

Until last year’s panics (yes there were two, a bond panic followed by a stock panic), the HUI’s relationship with gold was very well-established as the HGR reveals. For 5 years, the HGR generally traded in a tight range between 0.46x to 0.56x. In other words, the HUI usually meandered between 46% to 56% of the price of gold at any given time. And the actual 5-year pre-panic HGR average ran 0.511x. Read More…