The Gold Stock Indicator gained some ground today, suggesting that the recent peak of July 23rd will be retested. An increase above this resistance level will add critical support to the recent upside momentum.
In the middle of the gold bull market from 1969 to 1980, gold and gold stocks went through a decline that would make the current market moves appear tame by comparison. From December 30, 1974 to August 25, 1976, gold declined –50% and gold stocks (based on Barron’s Gold Stock Average) declined –66%. Even though the stock index declined two thirds, it was not unusual to see individual members of the average to have even greater losses.
In the chart below, we can see what happened to Western Deep Levels (WDEPY), a South African miner (source: Richard Russell, Dow Theory Letters, Letter 672, August 11, 1976, page 6) :
The stock rose from a level of $8 a share in 1971 to $34 a share in 1974. However, when the decline came in 1974, WDEPY fell –75% in two years. In the same issue of Russell’s Dow Theory Letters, there is a comment that is quite revealing as the August 11, 1976 issue was very close to the actual low. Russell said the following:
“As for the gold stocks, that’s another story. The utter, total, sickening collapse in gold shares would seem to be telling us that some shockers are in store. Shockers such as a few mines closing down…”
This suggests that at the point of mine closures, massive writedowns and significantly reduced production estimates is when gold and gold stocks may see a reversal to the upside. If our review of the data is correct and the interpretation of the news is accurate, the slew of recent mine closures adds tremendous credence to the idea that gold and gold stocks are at or near the bottom as indicated in our GSI from 1983 to the present.
Below are a few of the recent closures, writedowns and lower production estimates that have been announced so far:
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Goldcorp (GG) on July 25, 2013
This is the short list of precious metal companies experiencing the same or similar actions in an effort to avoid going out of business. Some gold companies may fail and die on the vine, while others will survive by the skin of their teeth. Those that survive are going to generate exceptional returns for investors over the next 3-5 years.
To solve the problem of risk of loss associated with those companies that won’t make it, investors need to either diversify their holdings among many gold and silver stocks or buy the Market Vectors Gold Miners ETF that trades under the ticker symbol GDX. Please consider any investment in precious metals a high risk proposition, at best.
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