After more tan 9 years of bullish stock market, there are still seemingly cheap sectors on stock exchanges. Wednesday, gold mine shares fell sharply, the Arca Gold Bugs (HUI) index, for example, 6.1 percent to 143.25 points. This is a two and a half years low, the index was last time in February 2016 at this point.

Real lows in 2016

Are gold mines very cheap, then? I’m hunting really dead investments, which are near 10-15 years low, and gold mines, are not, actually. They was on many years low in January 2016, the mentioned index fell shortly below 100 points, to a point not seen since July 2002. (13.5 years bottom, to be exact.)

The interesting point is that gold mines index was in the last 16 years 90.7 percent of the time over the actual level. (Based on monthly data.) The mining shares are not at a historic or multi-years bottom, but close to it. Observing only the charts, they seem to be really cheap. The today’s level is relatively close to the bottom, and gold price is higher now than end of 2015/January of 2016.

What can drive it again?

By the way, after the low in January 2016 (minimum at 99,19), the same year, in August 2016, the index skyrocketed to a 286 points maximum, almost tripled. But:

historical price charts are great for predicting the past (Forbes?)

Which arguments are there underpinning a new bull market in gold and gold mining stocks? There are many factors like production costs, political risks in mining countries or general stock market sentiment, risk appetite. But miners are following gold price in first place, and gold price is following – the US Dollar.

1. No more in harmony

That is a very clear connection in a middle term, means, 1-2 years, you don’t need any math, you see the strong correlation on the chart. In longer terms, the harmony is not so tight between the two assets. Sometimes gold gets independent, decouples, as in the beginning of 2016.

Gold and Dollar index – a very strong tie Source: Stooq.com
Basically, gold price goes up when the Dollar weakens, and vice versa. So, one reason of a rising gold price can be if the actual strengthening trend of the dollar stops. That can happen for various reasons, but the opposite is also possible, there are many arguments on both sides.

2. The dying bull

One reason can be a strong and longer lasting bear market, this events mostly trigger the demand of gold. Marketwatch wrote today, “the bull market in U.S. stocks will on Aug. 22 become the longest in history”. But if this bull dies in weeks, months or years, nobody really knows.

3. Political turmoil

US tensions with Iran, China, Russia, trade war, other unknown political turmoil can also lift the gold price. But the fact is that in last years, this effect faded, the gold seemed to loose its old safe harbour (safe heaven) role. It wasn’t reacting anymore to several political issues.

4. China, China, China

In the 1st quarter of 2016, China markets turmoil pushed investors out of stocks and into gold. There are so many fears about China, credit bubble, slowing economy, trade war, I suppose a simple sparkle can trigger a similar movement. When China’s credit bubble really bursts, Turkey fears can appear like a little breeze before the hurricane.

5. Don’t stay on the wrong side

Various sources mentioned that short positions in gold are at record highs. If a short covering begins, it can drive the price very high, very quickly. Gold in SPDR Gold Shares (GLD) ETF stays also on a low level. For example Mining.com

6. Earnings of the mines

Falling prices, multi-years lows are not enough. If the investment itself contains no value in the background, it is only like a Ponzi-scheme. But gold mining in general seems to be basically profitable. As two authors wrote:

gold miners are in a much better place than where they were just a few years ago … Valuations are relatively inexpensive, AISCs have improved notably, and gold miners should make a lot more money as the price of gold regains its upward trajectory Seekingalpha
the gold price is still significantly higher than the AISC, so gold mining margins are very safe here for the time being Seekingalpha
(AISC: all-in sustaining costs)

7. Interests and inflation

Growing interests rates are reducing the demand of gold, but increasing inflation is generating more buying interest. The difference of interest and inflation, the real interests can be important here. The fed rate hikes in US can stop next year, but the US inflation is moving on an upward path. The 10 years treasury bills yield seems to be unable to stay above 3.0 p. a.

8. The HUI/Gold ratio

This old indicator is very low now, by 0,12, lower as in 2000, and almost so low as in the Autumn of 2015. (As HUI was a great buying opportunity.) Not actualized recently, but an interesting graph here Some authors mentioned the high level of the gold/silver ratio, too, which also can be a sign of a turnaround in precious metals.

Opposite view

Others, chartists, in first place, are expecting the existing trends to continue. This means, even stronger dollar and lower gold price. For example, here

Conclusions

Gold mines appear to be very cheap and on the long run can be a profitable investment. “Time to get contrarian” – are saying some fundamental style investors. But on short term, the strength of the dollar and a longer lasting stock market bull, eventually surging interest rates represent a dangerous treat.

May be, you think, Bitcoin will rally much more, and it is possible, I’m holding some, also. But you should never put all your money in the same investment, not even in the same investment class.

Update

Very interesting new critics to gold miners, dilution of shares, surging shares count here: Gold Miners Look Cheap If You Ignore History

Motto:

Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows. Jim Rogers in Investopedia

Other posts in this series:

Buying At Prices Of 2009? – Turkey
The Curse Of The Disaster – Uranium mining

Disclaimer:

I am not a financial advisor and this content in this article is not a financial or investment advice. It is for informative purposes only, or simply to make you think, entertain, increase testosterone and adrenaline level. Consult your advisers before making any decision.

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