Although gold and gold stocks declined, the Gold Stock Indicator (GSI) increased above the level from yesterday. we’re currently sitting slightly above the “stage 4 buy” level which is based on the 2008 low.
Our use of the 2008 low as a reference point is based on Charles H. Dow’s assessment of the best time to consider an investment:
“The point of importance for those who deal in industrial stocks is whether the capitalization of the companies into which they propose to buy is moderate or excessive, when compared with the aggregate earnings of the various concerns forming the combination in a period of depression. It is probable that consolidated companies will be able to earn as much in the next period of low prices as the companies forming the combine were able to earn in the last one; hence the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowances for economies under consolidation. Where the earnings so shown would have provided dividends for industrials now active, the fact must be regarded as a very strong point in favor of those stocks.[1]”
The consideration of investments “in periods of depression,” “periods of low prices,” and “economies under consolidation” with the reference to 1893 and 1896 are all consistent with extremes in the investment cycle. This definitely is the case for gold and more especially gold stocks. Dow is telling us that investment considerations need to look back to the prior extreme lows for the best approximation for where investments will likely go to the downside in the current cycle and when those investments could be considered the best values. Naturally, in the next decline from a gold stock peak, we will need to use the 2013 low as the worst case scenario of downside risk.
The following are the dates and levels of gold and gold stocks (XAU) that were at or lower than the current level in the GSI.
| Date |
Gold |
XAU |
| 10/27/2008 |
$730.50 |
65.72 |
| 6/24/2013 |
$1,286.75 |
87.33 |
| 6/25/2013 |
$1,279.00 |
87.22 |
| 6/26/2013 |
$1,236.25 |
82.35 |
| 6/27/2013 |
$1,232.75 |
84.35 |
| 7/8/2013 |
$1,235.25 |
84.98 |
| 7/9/2013 |
$1,255.50 |
85.99 |
| 7/10/2013 |
$1,256.00 |
85.71 |
| 10/8/2013 |
$1,329.50 |
88.94 |
| 10/9/2013 |
$1,304.00 |
88.79 |
June 26, 2013 was the lowest point ever reached in the GSI since 1983. While we’re not there yet, we expect that gold and gold stocks should bring us to the former low with some margin for error on the downside.
Citation:
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Dow, Charles. H. Review and Outlook. Wall Street Journal. April 27, 1899.
