Current USERX price = 19.29, Up $1.02 (5.6%) 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 www.321gold.com. 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 36 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 written on Sunday 9/19/10, I described the set of three long-term SKI indices and how the gold stocks had risen into the final SKI resistance index, the 663 index (comparing the current price to the prices from 660, 661, 662, 663, and 664 trading days earlier). The indices were all aligned in a continuing bullish manner, but if prices had declined, the indices had provided the opportunity for a subsequent great rise ala 1979. That wasn’t a forecast. It was a potentially great opportunity that did not occur. Instead, the gold stocks have simply continued to rise modestly in a move to overcome that final resistance index.
Today, in addition to updating the status of the indices, I’d like to describe the unusual nature of this gold stock rally. It’s been unusual because it has been surprisingly weak compared to historical standards. The strength of any rally will, of-course, be highly dependent upon where one starts the measurement. I use a consistent standard: The day that SKI executes a buy signal.
The 5+ year buy signal occurred 2 years ago on 9/11/2008 via the historic “life run low”. Since then, USERX has risen 87% (including dividends). That’s a pretty good 2-year return. However, the prior 4 life run lows since 1974 have typically eventually yielded 500-1000% gains until the top (e.g., the August 1998 buy to the May 2006 sell was approximately 900%). For comparison purposes, the rise in gold bullion since 9/11/08 has been 82%.
The multi-year SKI 218-222 index buy signal occurred a day after the low on 8/18/2009. Since that time, USERX has risen 56%. Again, an excellent one-year return, and this index should make a lot more over the next year or two. Gold bullion has risen 43% since the 221 index buy signal.
The approximate one-year 92-96 index buy signal occurred on 6/08/10. Since that time, USERX has risen 18%. Gold bullion has risen 8%.
And lastly, the most recent intermediate-term (several month) 35-39 index buy signal occurred on 8/26/10. Since that time, USERX has risen 15%. Gold bullion has risen 9%. Historically, 35-39 index buy signals have always yielded gains of about 1% per trading day. It’s now been 30 trading days since that buy signal. Therefore, the rise has only averaged .5% per day. That wonderful for most traders and investors, but it’s the weakest of any bull market intermediate-term rise since the beginning of my data set in 1974 (the origination of USERX, the oldest gold mutual fund). The detailed historical data, including the duration of these intermediate-term rises and subsequent declines is provided in my website’s archives section (members only).
The above data clearly show that despite the nice gains relative to other market sectors, the gold stocks have been under-performing their historical norms since the end of the last true SKI bull market in May 2006. That was not the case in the three bull market periods from 1998-2006. Furthermore, the gold stocks are supposed to significantly outperform gold bullion on a percentage basis; historically, the gold stocks rise at about three times the rate of bullion. That’s why we buy them! But that historical ratio has only been 1-2 times the rate of gold bullion’s rise.
Many other analysts have also noted the strange nature of the rise. Some conclude that it presages a crash: When the gold stocks under-perform bullion, they are a lead indicator for a subsequent decline. Other analysts conclude that the relationship between the gold stocks and gold bullion will revert back to the historical standards: Therefore, the gold stocks are about to skyrocket and “catch up” to gold. Some fundamental analysts suggest that the availability of GLD and other ways to more easily invest in bullion has taken some of the investor demand away from the gold stocks. And other fundamental analysts have concluded that the current economic climate is being dominated by currency concerns; “Paper” investments (e.g., stocks) are being avoided on a relative basis. My personal investments have reflected this trend. It may surprise you, but despite being called “Mr. Gold” by some folks, from 1985-2008 I only put money into gold stocks and gold futures (for leverage; long and short). But starting at the life run low, I bought my first gold coins at $740 and I’ve been accumulating physical gold for the first time in my life in addition to the gold stocks.
You may be expecting that since I run a website that focuses on timing the gold stocks, that I will conclude that the gold stocks are going to explode and dramatically outperform gold bullion (especially since the major gold stock indices have finally made new all-time highs this past week). But I do not “know” that because all of the historical ratios in the financial arena eventually change and do not necessarily return to their prior levels. I do know that the SKI indices are all bullish and that a “crash” in the gold stocks and gold are not expected. I also fully expect that the gold stocks will continue to have some leverage over gold bullion and that the two have never diverged for more than a few days or a week. Ratios change, but the timing of the gold stocks has always applied to gold bullion.
The current historically weak intermediate-term 35-39 index rise has reached its historical minimum duration as of this past Friday (10/08/10). There was the key reversal down day last Thursday (that has turned many folks bearish). It occurred on a generally bearish 1 Down and 2 Up run pattern from last Wednesday. But such run patterns only have a 40% probability of marking a meaningful high and typically yield only a 3-5% decline in the gold stocks. Interestingly, the gold stocks’ decline at the end of last week was sufficient to hit/touch the 663 index support again! If prices do decline this coming week, a new short-term 663 index buy signal will be generated. And then a rise will yield another 663 index sell signal as those back prices will include the March 2008 highs! Therefore, if prices decline a little, SKI will yield a buy signal but will then give new resistance on a short-term rise. Hopefully, this touch of the 663 index support will provide for a further rise this coming week so that we won’t have to overcome that final resistance index again.
During 92-96 index SKI bull markets, the gold stocks have always (that is “always”) corrected back to the 16-20 index and the 35-39 index. That should/will be true even if prices rise strongly this coming week and avoid the 663 index buy signal. If you are looking for a reasonably safe entry to buy or add to your gold stock or gold bullion positions, that correction (of typically 10-15%) will be the SKI time to buy (or add to) gold stock and bullion positions.
If you are interested in following and learning more about the SKI indices, I'll write another Report in three weeks or you can shell out the big bucks for a SKI subscription. Weekly Updates are available by subscribing for a month (or longer if you're wise and cheap enough to want to save money) at my website www.skigoldstocks.com for the princely sum of $25 (for a one month subscription) or more ($200 for an annual subscription). I also provide more frequent intra-week messages/alerts at a slightly higher price along with access to our informative Forum and a managed gold futures program. The precious metals are in a very long-term (decade+) up-trend but are the most precarious, volatile, and psychologically difficult market in the world (in my opinion). That's the way it's always been.