Ratio to the gold price is still about as cheap as it has ever been during the past decade
It's time for a pause in the gold-stock rally – not a dramatic selloff, just a brief pause.
As you can see from the following chart – which compares the Gold Bugs Index (or "HUI") to the price of gold – the sector is still dirt-cheap...
Even after the big rally over the past couple months, the gold stock-to-gold ratio is still about as cheap as it has ever been during the past decade. The only time gold stocks have been cheaper was during the panic selloff in 2008 and the May and July declines this year.
So the longer-term picture remains bullish for the mining sector. It's the shorter-term picture that causes concern...
The price of gold has already started pulling back. Its $20 drop yesterday pushed gold back down below where it was trading before the Federal Reserve announced a third quantitative easing program. And as I mentioned last week, gold probably has even farther to fall. Gold mining stocks should fall along with it.
But most of the selling pressure on the stocks is likely to follow the action in the gold sector bullish percent index (BPGDM).
The BPGDM is a short-term momentum indicator that helps determine overbought and oversold conditions. It reached into overbought territory (above 70) during the recent rally. And it just turned lower from overbought conditions and generated a short-term "sell" signal.
Here's an updated chart of the BPGDM...
Gold stock traders have endured a few short-term sell signals over the past year (the red circles on the chart). But those declines have led to wonderful gold-stock buying opportunities.
I expect we'll get something similar this time, too.
Stockhouse.com: Taking
it to the street
