Current USERX price = 17.64, Down 1% since the last report 3 weeks ago.
Introduction (repeated from prior Reports):
I have been using my unique SKI indices to predict price changes in the precious metals' market for more than two decades. And my indices continue to mark the critical points. I have initiated a subscription website since 1/13/06 (yes, Friday the 13th) after having posted free updates for years at the most informative gold site, 321gold, since its inception approximately seven years ago. SKI is a timing service; although almost everyone seems to believe that market timing is impossible, that IS what the SKI indices have done for 34 years.
The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found here. Basically, the indices compare today's price to prices from a specified prior time period. The name of the index specifies the time period (e.g., 92-96 index = compare today's price to prices from 96, 95, 94, 93, and 92 trading days earlier). Although I use the oldest gold mutual fund, USERX, for analyses, the predictions are applicable to the broad precious metals' market. I do not recommend or analyze specific stocks, but my subscribers from around the world regularly discuss individual issues on our Forum. In addition to the truly unique SKI indices, I also use "run patterns" to guesstimate turning points in the precious metals' market. A "run" refers to a pattern of daily up and down market closing prices. If the market has 3 consecutive days of higher closing prices, the run is "3 up". If prices then decline for 2 consecutive days, the run becomes "3 up and 2 down". If prices then close higher the next day, the run changes to "2 down and 1 up". Some people have referred to run patterns as "worms". A run pattern is only completed after the direction of closing prices has changed. I have compiled a listing of every run pattern that has ever occurred and generated probabilities that the end of the run marks a high or a low, moderated by the indices themselves.
In the last gold stock SKI Report on 3/29/08, I described how the SKI indices were stopped out of their buy signal as the major 92-96 index generated its sell signal on 3/18/07 when USERX closed at $19.17 and Jeff sold his gold at $1007. This Special Report for 321gold discusses whether the gold stocks are going higher after the quick plunge following that sell signal and their recent underperformance relative to gold bullion. I dislike articles that make you scroll to the bottom of the article to find the purported answer, so the quick answer is "Not Yet" according to the SKI indices.
With your understanding that the situation can change between now and the next report in 3 weeks, all of the SKI indices are on sell signals. Prices have not changed to any meaningful degree over the past 3 weeks, but this past week was rather volatile and could have whipsawed many investors/traders. This report will describe this past week's price movement relative to the SKI indices and then provide a longer-term perspective.
In regards to this past week's activity in the gold stocks, two weeks ago (on 4/05/08) I wrote to subscribers that "In 8-9 trading days, all of the indices will be crossing in the low to mid-$18 area for USERX and it appears that prices are going back up to that time and price area". The SKI indices did NOT allow me to be clearly bullish over those 8-9 trading days or to make money based upon that expectation, but when the back prices on all of the indices converge, the prediction is that a critical point will arrive. Frankly, my #1 goal is to avoid losing money. My #2 goal is to make money and while I never suggest that anyone will get rich in a year, the goal to better Warren Buffett's 20+% profits per year over the long-term HAS been achieved over the past 23 years.
The gold stocks rose 4-5% last Wednesday (4/16/08). It all looked and felt bullish. But it was 8 trading days since the 4/05/08 prediction and prices rose directly into ALL of the indices. It was a rare event. USERX closed at 18.43 on that day and the indices' prices were:
Yes, there was no guarantee that prices would decline, and I did not go short. But I did write to subscribers that "prices have risen into a rather amazing resistance point that ended up being at the very confluence of SKI index Price X Time that I had been pointing towards for several weeks." Prices were repelled in the next two days, but the gold stocks held up well relative to gold bullion. My wife (yes, still in pain and disabled, but now having the time to watch gold!) lamented that I was a "chicken" for not having shorted the precious metals and stocks at that point, but she is a novice. The #1 goal is to avoid losses. I have witnessed many 70-80% declines and many rises of 50-100-500% in the gold stocks. These variations are nothing unusual and are not particularly significant in the long-term picture.
The SKI indices have traced out a pending head-and-shoulders top in the gold stocks. The left top was the 1/14/08 high at USERX 18.83 marked by index sell signals. SKI then bought after that decline, buying on 2/13-2/14/08. The ensuing rise to 19.93 on 3/14/08 was followed by the master 92-96 index sell signal to mark the "head"; that 92-96 index sell signal, reported in the last Special Report, was "supposed to be" important! Last week's rise into all of the index resistances marked the right top of the pattern? The "neck" (the breakdown point of the formation) is at the prior lows of USERX 16.89 (2/05/08) and 16.95 (4/01/08). The formation has not been completed; the breakdown has not occurred AND INTERESTINGLY, SKI MAY GENERATE A TRUE BUY SIGNAL IN ABOUT 2 WEEKS IF THAT NECKLINE IS BROKEN TO THE DOWNSIDE. I know that last statement may be confusing, but if prices can stay rather flat over the next 5-6 trading days, SKI WILL buy a subsequent immediate decline.
The long-term perspective:
You probably wouldn't be reading this article if you didn't have a bullish long-term perspective and I concur with that perspective. However, we (gold stock investors) have not had a great return over the past two years. And relative to gold bullion, the gold stocks have performed very poorly for two freaking years. USERX topped in May 2006 at 17.96. The current price is 17.68 (lower than the May 2006 high), but that doesn't include its 14% dividend on 12/20/08. Therefore, the current price (ala the HUI index) is about 12% higher than 23 months ago. The junior gold stocks are lower than May 2006. All of this has occurred while gold bullion is about 22% higher than May 2006. What's going on?
Fundamentalists will answer that question by stating that gold is safer than the gold stocks, that higher oil prices and production costs have hampered the gold stocks' performance, and that the introduction of gold ETFs (ala GLD) have reduced the investment demand for the gold stocks. SKI and Jeff say "horse manure". Technically, that top in May 2006 was an historical event, a SKI death run high. From an historical perspective, as I have written many times, it takes about or at least 2 years to resolve the psychological effects of such a death run. IT HAS BEEN 23 MONTHS AND WE ARE GETTING CLOSE IN TIME! Although SKI isn't bullish yet, we are getting close!
Historically, the gold stocks have provided about 2-4 times the leverage of gold bullion (in both gains AND losses). Gold has risen from about $250 to $1000 over 8 years. USERX has risen from $2.31 to $22.36 (the $19.93 high + $2.43 dividend). So gold has risen 400% and the broad gold stock measure (USERX) has risen 860%. From a long-term perspective, THE RELATIONSHIP IS NORMAL EXCEPT FOR THE PAST TWO YEARS SINCE THE DEATH RUN. This relationship hasn't changed in the 30+ years that I have followed the gold stocks. Gold is safer and more conservative than the stocks if one doesn't leverage one's gold bullion position. But the gold stocks provide greater leverage and THEY WILL OUTPERFORM GOLD BULLION AGAIN (period; end of prediction).
From a time perspective, the relative underperformance of the gold stocks to gold bullion is approaching a conclusion. Although SKI is not bullish at this time, the bearish effects of the SKI May 2006 death run should be approaching the historical end-point. That time, according to the SKI indices, has not been reached, but should be approaching, especially if prices decline, as they are "supposed to". My wife cried in May 2006 because she knew from experience that the gold stocks were going to be difficult for several years. Now she cries because she is in pain and is disabled, but I'm telling you that if prices can just decline soon, the life run bottom is approaching and you, I, and Lisa (my wife) will be rather happy (from the financial perspective)!
Best wishes, Jeff