Waiting for Gold Stocks

Ten years ago at Kitco, my first internet trader site experience, Glenn Kafka taught me the value of the gold/XAU ratio. I had been a gold futures trader, gold analyst, and publisher for some years, but Kafka's ratio pointed out a new way for me to capitalize on sentiment, which I was just discovering.  Gold stock buyers tend to have greater emotional and price swings than gold metal traders. Largely this is due to the fact that a lot of bullion and gold futures players are non-emotional commercial hedgers, both long and short.

>p>

In my view, gold is a story of the Kondratieff Wave, but Kafka's method, also backed by John Hussman more recently, is a decent way to capitalize on intermediate term (months to a few years) swings within the decades long Kondratieff Wave bull and bear markets. Whether or not you trade gold stocks or gold bullion or futures, the gold/XAU ratio is a good sentiment measure.

The two charts show the history of the ratio over the past few years. They suggest that gold stocks have not been crushed enough yet to be buys, which in turns says that gold has further down to go at some point.

These charts were made at different times with faciltities available to the public at StockCharts.com, but the ratio ranges are remarkably consistent since the new gold bull market began in 1999.

Another factor that tells me gold stocks or gold are not yet buys is the premium over net asset value (NAV) being paid by buyers of Central Fund of Canada (CEF) which holds gold and silver bullion. As of today the premium is still 7.5%. At the 2005 lows one could buy CEF at a discount to NAV. The chart shows CEF price and NAV going back many years.

John Hussman is an academic economist, and economists do not accept Kondratieff. The Long Wave is simply too long for data frameworks used by economists. But Hussman is also a money manager and has some excellent analysis for tradeable shorter term gold cycles:

http://www.hussman.net/html/gold.htm

Hussman currently is bullish on gold, and has gone to his maximum level of ~20% gold stocks in his Hussman Strategic Total Return (income) Fund. Read his well reasoned approach to gold. We differ in that he is expecting a period of staflation whereas I see a relatively less inflationary interlude in a long term inflationary bull market in which gold has and will continue to be weak for a while. In the longer term I think we both agree that gold will be stronger.