I don't know how much credence to give what I'm about to present. It is an example of using inductive reasoning to estimate the future of a complex system based on inadequate past data and inadequate in depth knowledge of the internals of the system. In other words, we are in the usual situation as far as predicting market prices are concerned. Nassim Taleb would be horrified if I claimed that this was an accurate prediction.
There is no way to predict the future price movement of gold with certainty. As a side note, this is one thing that leaves me less than fully satisfied with Jim Sinclair's commentary: Sinclair claims certainty. I think this is a disservice to his readers, as I am with Taleb in believing that there is no "certainty" when it comes to predicting the future.
This piece provides the best evidence I know of for estimating how far the current run will extend. If you know of better data and analysis please leave me a comment.
Gold is running. It just broke $1000 (see below). Is it overbought? Will it keep running? Frank Barbera, who I admire, is interviewed in this week's Financial Sense New Hour. His view, if I summarize correctly, is that gold stocks are clearly overbought and gold looks overbought and that investors should be careful at this point.
RSI is a simple measure of price momentum. On Friday, the same day gold broke $1000, RSI broke 70. 70 is the classic overbought level for the RSI indicator. This article looks at what the RSI breaking 70 has actually meant recently in this gold bull market. Its conclusion is quite the opposite of Frank Barbera's.
Gold has been a bull market for years and its RSI has broken the 70 level three other times in the last three years (see below), in 2006, 2007 and right at the start of 2008.
Just eyeballing the above chart leads to the conclusion that, when the Gold RSI (on those occasions) broke 70, the price of gold continued to rise nicely. This piece looks in detail at what happened afterwards and quantifies those runs. It, starting from when the RSI broke 70, looks at the:
- number of weeks until that run's price peak.
- percentage gold price move to that run's price peak.
- number of weeks until the RSI touched or crossed 50 (neutral). This is given as an example trade exit signal.
- percentage gold price move to the RSI touching or crossing 50.
The table below quantifies the results. The target prices are arrived at by assuming the same percentage rise occurs for the current as for the run in question.
I find these results to be surprisingly consistent. At this point, I'm looking for gold to continue to rise for 6 to 10 weeks with a $1200 target price. I will then begin to look for a top and the right place to trade out. I'm looking at the gold RSI falling below 50 as a possible stop.
For me, my expectation of a continued rise in the price of gold (based partly on this analysis) is strong enough, given the fabulous fundamentals of the Jr
producer gold mining stocks I hold, to leave me fully
invested in those junior producers.
As you know, if you follow my posting on the World Of Wallstreet web site, these Jr producers are estimated to have a 2010 price to operating income ratio of 3 to 1 (or less) at $800 gold. I consider this greatly undervalued as gold mining stocks usually have an over 10 price to operating income ratio.
Thus, with this estimate of the current gold run, the positive fundamentals for gold and the margin of safety in these gold stocks, I believe I have a reasonable basis for expecting a positive outcome from my investment strategy. Everyone should certainly do their own due diligence and make their own investing decisions.
For the record, the stocks I hold and especially like are:
- Gold Resource Corporation (GORO.OB)
- Castle Gold Corporation (CSG.V)
- Semafo Inc. (SMF.TO)
- Metanor Resources (MTO.V)
I also hold and like, to a lesser degree, the following:
- La Mancha Resources (LMA.TO)
- Dynasty Metals And Mining (DMM.TO)
- Troy Resources (TRY.TO)
- Oceana Gold Corporation (OGC.TO)
- CGA Mining (CGA.TO)
- New Guinea Gold Corporation (NGG.V)
- Douglas Lake Minerals (DLKM.OB)
This is not a recommendation to buy any of these stocks or gold itself but is merely an analysis of a possible scenario for the price of gold, going forward.