March 15, 2012
Barron’s Gold Mining Index Forecast
The behaviour of gold stocks during this gold bull market is really not that different to the gold bull market of the 70s. It was not until almost the end of the bull market (in 1979) that the gold stocks really started to take-off. Those who think gold stocks will not rise during this bull market will be disappointed, and need to consider the evidence presented here.
Below, is a long term chart (from sharelynx.com) for the Barron’s Gold Mining Index (BGMI):
On the chart, I have highlighted two fractals (or patterns), marked 1 to 6, which appear similar. What makes these two fractals so special is the similarity of the circumstances in which they exist.
Both patterns started where the Dow/Gold ratio peaked, as well as where the gold bull markets started.
There was a significant peak in the Dow (1973 and 2007) between point 1 and 2 of both fractals. Both peaks in the Dow came about 7 years after the peak in the Dow/Gold ratio. After point 2, on both fractals, the oil price made a significant peak (1974 and 2008), about 8 years after the peak in the Dow/Gold ratio.
Based on the fractals on the chart, we could still have more than two years before we could get a top in the BGMI, like we had at the end of 1980. That is more than 14 years after the Dow/Gold ratio top (beginning of 1966 to the end of1980 vs the end of 1999 to some time in 2014).
If you compare the two patterns, then it seems we are currently just past point 6, which is similar to the beginning of 1979. The correction since the beginning of 2011 is in the closing stages, and price should advance significantly over the next couple of years. If the patterns continue their similarity, then we should expect the BGMI to reach levels more than double its current peak.
In a previous article, I have illustrated why current levels could be a good time to buy gold stocks (HUI).
“And it shall come to pass, that whosoever shall call on the name of the Lord shall be saved”