“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Monday, August 22, 2011

Gold to Crude Oil Ratio indicates profitability of Gold miners

Following are two separate charts tracking the ratio of  the price of gold to the price of crude oil.

The first is Brent Crude, the global benchmark for crude prices and the second is WTI crude, which is the Nymex benchmark and the one most often quoted by American wire services and news organizations.

The reason for the charts is that which Eric King and I discussed on this past Friday's KWN Weekly Metals Wrap where we talked about the severe undervaluation of the gold mining stocks. The point we were discussing was the direct impact that lower energy costs have on mining operations. The rise in the price of gold with a simultaneous fall in the price of crude oil, is lowering input costs for mining companies at the same time the price they are receiving for their finished product is rising rapidly. That is a surefire recipe for increased profitability moving forward. Given the fact that one of the arguments against buying the miners has been that their input costs have been rising at the same rate that gold has been rising, this effectively kills that argument.






It does seem from the price action of today's session, that some of the market players are finally catching on to this. If even one or two of the major shorts in the gold shares begin covering in size, the resultant buying wave will take prices of many of these shares through technical resistance levels on their price charts, resulting in further short covering as the hedgies which foolishly overstayed their welcome and attempted to squeeze the last 20% out of an otherwise profitable trade, begin to get snared by their own greed.

A closing monthly push through the all time high marked on the chart should see the miners do some rapid catching up to the gold price and reverse the downward trend in the HUI/Gold ratio.



9 comments:

  1. i'm just concerned that a big stock crash would get that baby thrown out with the bathwater.....as usually happens.

    of course last 6 weeks gold vs. DOW says 'usually' could be a thing of the past.

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  2. Dan --
    The first thing I do on Saturdays is fire up the computer and listen to your commentary/analysis on the KWN Weekly Metal Wrap. Goes great with my first cup of coffee. Thanks for all the work you do there and with you blog here.
    JP

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  3. Yea, I listen the the metals wrap first thing every Saturday also. Never miss it.

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  4. Well, if the mines get nationalised.. you'd wished you bought the product instead of the mine... the gubment doesn't want money printing in private hands

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  5. Flore, that's why you don't put all your eggs in one basket and try to buy miners in safe geo-political areas. And, I too never miss Dan's market wrap-up on King World News. Turd, you and Dan are the best. Thank you to you two, too. hahaha

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  6. Dan, thanks for your very useful ongoing analysis of HUI. Looks like the move is finally underway!

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  7. Thanks Dan for all your efforts. Question: Will the move in the HUI have a positive effect on gold mining shares in general or more specifically TRX? I have several hundred shares and am considering picking up more at the current prices. I am not sure if you can, legally, comment on TRX but I wanted to ask. Once again, thank you for all you do for us, especially the Weekly Metals Wrap at KWN, one of the bright spots of my week.

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