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Gold stocks moving closer to major breakout – Roy-Byrne

Jordan Roy-Byrne reckons gold stocks underperformance could be changing very soon. Interview with The Gold Report.

The Gold Report: Based on your technical analysis, you called the bear market in December 2007 and the bottom, followed by a rally in February 2009, weeks before the market turned. Your Daily Gold Premium market portfolio was up 10.5% in June of this year compared to an overall junior gold stock market that was down 9.5% during the same time. How have you fared in the last five months and what trends are you seeing in the next year?

Jordan Roy-Byrne: At the end of last week, our premium service model portfolio was up about 9% on the year. Market Vectors Junior Gold Miners ETF, the junior gold stock exchange-traded fund (ETF) I use to compare performance, was down about 18% and Market Vectors Gold Miners ETF, the large-cap gold stock ETF, was down about 1%. The last few months have been difficult for a lot of equities. As far as the trends, I try to focus on relative strength. The large-cap gold stocks have been consolidating for most of the year. Silver had that intermediate top early in the year with a parabolic blowoff move. Since then I’ve been focusing more on gold. In the near term and into next year it looks like gold is going to outperform silver. The larger gold stocks have been showing better performance than silver stocks and juniors. Relative strength is very important. You’ve got to find and focus on the leaders because they will lead the next move higher.

TGR: In a recent newsletter, you said that gold stocks are moving closer and closer to a major breakout, which is likely to produce a multiyear acceleration that would set the stage for the birth of a bubble. Can you explain what you mean by that statement?

JR-B: The Market Vectors Gold Miners ETF and the AMEX Gold BUGS Index, used by some analysts, reflect the large-cap unhedged gold stocks. They’ve been in a consolidation phase since the fourth quarter of last year. Even a three- to five-year chart shows that the consolidation has been in a tight range, which is generally bullish. Every time the consolidation makes a low or goes to the bottom area, the weak hands are selling out. So, the stronger hands accumulate more and more shares and eventually the buying demand overwhelms the selling and you get a very strong breakout.

Sentiment indicators, such as how much money is invested in gold stocks, tell me that it’s an under-owned sector. There may be more and more people moving into the metals, and gold specifically, but the gold stocks really haven’t performed well in the last year or two. So, if we get this breakout, it’s going to produce a strong move for probably two years.

A bubble would start after a strong move for a couple of years followed by a long consolidation or a sharp pullback. The next move higher would signal the beginning of a bubble. Looking at market cycles and at other people’s research, a lot of market cycles tend to last 17 or 18 years. This bull market for precious metals is in its 11th or 12th year-a point when it is going to start to accelerate. So, we’re not that not far away from the beginning of the bubble, which could be in two to three years.

TGR: Did gold stocks really get that far ahead of themselves that they needed to be in this long consolidation?

JR-B: They did need to be in a long consolidation because we had a very strong move from the 2008 bottom. Market Vectors Junior Gold Miners ETF went from about 15 to 65. That’s a large move in only about two years. After a very strong advance, it takes a lot of time to work off the overbought condition. It can be worked off either as a sharp, short correction or over time with consolidation. Market Vectors Junior Gold Miners ETF or the AMEX Gold BUGS Index has not had a sharp correction to work off those huge gains. So, the consolidation has gone on over time. I do think that these stocks are very undervalued, with improving fundamentals. I look at the gold:oil ratio as a leading indicator for what kind of margins you could expect for the gold producers. Oil represents 25% of the cost of mining, so, it’s critical that silver or gold outperform oil and do better than the other cost inputs.

TGR: The performance of the juniors versus the established companies seems to indicate that there’s not much speculative interest yet in the juniors. What’s going to happen there?

JR-B: That’s a great point. The sector is still very under-owned and the juniors are underperforming. It also depends on how you classify the juniors. Personally, I prefer the established juniors-companies maybe with a $200 million (M) market cap or a little larger, because at that point you know that they’ve made it. The true juniors, with a $20-30M market cap are stocks that are really risky. They perform well when you get a huge increase in speculation, as we saw in ’06 and ’07 and obviously, early ’09 when everything came off the bottom.

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Posted by on Nov 26 2011. Filed under Gold stocks. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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