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4 Indicators That Show Gold Prices Are Set To Surge

August 16th, 2013

buyers and sellersPeter Krauth: We’ve been recommending gold shares for months now, ever since prices collapsed in April. But timing’s getting critical, because now the market is telling you gold is set to surge…

The first piece of evidence hit my radar on August 1st, moments after Barrick Gold released its $8.7 billion “news.” (More on that in a minute.)

The Commitment of Traders report – perhaps the best leading indicator for gold prices - delivered the second piece of evidence: a staggering 70% spike in “red flag” futures trading. And the third and fourth pieces of evidence just arrived.


But before we look at each of these events in detail, here’s what you need to know:

Any one of these indicators is bullish on its own. So when all four signals flash at once, please don’t wait.

A “Gold Convergence” like this hasn’t happened in 12 years…

Indicator No. 1: A True Bottom

Calling market bottoms – and tops, for that matter – is typically a 50/50 proposition… unless, of course, the market hands you an overwhelming element of proof, just like it did on August 1st…

On August 1, the world’s largest gold miner, Barrick Gold (NYSE:ABX) said it was writing down $8.7 billion on a single project, Pascua-Lama, located on the border between Chile and Argentina.

Barrick’s market cap is just twice the hit it’s taking on Pascua-Lama.

What’s more, on that same day the company announced it was cutting its quarterly dividend, and would defer expansions and divest certain assets to reduce costs.  Things could hardly look worse for a gold miner.

But the amazing thing is, in the wake of all this awful news, Barrick’s stock hardly budged.

And that can only mean one thing…the bad news is already priced in. Price action in a number of other large gold miners has been similar.

Indicator No. 2: Record Short Positions

One of the best indicators of the direction of the gold price is the Commitment of Traders (COT) report for gold. Because they tend to move in herds, speculators are almost always wrong at extremes.

According to recent COT reports, speculators are so bearish on the gold price, their short positions are 70% higher than they have ever been throughout this 12-year secular gold bull market.

Given the massive leverage many futures contracts are traded on – up to 16 to 1 – just a 6.4% rally in the gold price would obliterate all the capital of those fully leveraged contracts.

Just a small percent rise in the gold price can lead to a massive short covering, which would feed on itself, pushing gold still higher and faster.

Short covering rallies can lead to violent upside surges.

And right now, gold hasn’t been this hated since its bull market began in 2001. After the extreme bearish sentiment of 2008, gold rallied 70% in a little over one year.

Indicator No. 3: Gold Stocks-to-Gold Ratio

The Gold Stocks-to-Gold Ratio (HUI) is flashing its best bullish signal in 12 years. By comparing the HUI to the gold price, you get a sense whether gold stocks are pricey or not relative to gold.

Gold Price

The last time we saw this ratio at current levels was back in late 2000, at the very beginning of this secular gold bull market. From that bottom, gold stocks catapulted by over 430%.

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  1. richdumdum
    August 19th, 2013 at 20:02 | #1

    @Vaughan

    I agree CDs are a bad way to go, but I think REITs can only go so low before they become a bargain, after all, we are recovering from historically low housing prices due to the popped housing bubble (and people always need a roof). As far as commodities, I never understand gold/silver. There is no logical basis for it’s price, it could climb high because people believe it will. I prefer to stick with things that are useful like Oil, Natural Gas, or even Pork bellies as commodities go.

    But stocks are not really high. EPS levels now are at the moderate end of normal. I don’t hold a crystal ball, but stocks are usually a good hedge against inflation. Since inflation is by definition the cost-change of a basket of goods over time, inflation leads to proportionally increased corporate revenues/expenses and EPS growth for profitable companies (assuming stable/improving employment and stable consumer sentiment).

  2. Vaughan
    August 16th, 2013 at 16:31 | #2

    Possibilities for you “richdumdum”
    Well bonds are getting crushed. Right? Reits are getting crushed. So how long will stocks stay so high??? If there is serious inflation going on in the next 4 years but the fed-backed stocks don’t hold up quite so high… and interest rates finally rise, you can… invest in CDs at a guaranteed loss to inflation, or you can bet on commodities. I’m not big on physical gold or silver (I own none). And I’m not a futures guy. So I’m looking at gld, slv and oil/uso to survive. How else do you bet on commodities?

  3. richdumdum
    August 16th, 2013 at 15:50 | #3

    None of your points are convincing to me. THe amount of misinformation about Gold boggles my mind. I don’t know if gold is going up or down, but your points are ridiculous:

    1. Barrick’s write-off: just because a gold producer is writing off a mine is already in the price, doesn’t have anything to say about the price of gold.

    2. Record short position: record shorts means record numbers are betting against the price of gold… and this makes you bullish on gold? That’s backwards.

    3. Gold-stock to gold ratio: Uhm, unless you believe gold stock is not backed by real gold, then this ratio is meaningless.

    4. Gold to oil: Commodities do tend to move in tandem, but don’t forget oil is “consumed” gold really isn’t, so the value of this ratio is questionable.

    The price of gold is whatever people are willing to pay for it, that’s it. Gold has no real value. It’s in gold bugs interest to make people think gold is valuable using whatever crazy “proof” they can try to sell to unwitting investors….

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