HUI to Bottom Soon

I think we'll see a HUI bottom between 325 to 330.

Is it time to give the gold miners another look. As with every investment idea, there are pros and cons and in the end, an element of luck and chance is involved, but I think there are some interesting fundamental factors that argue in favor of the miners getting their groove back soon.

Let's review some of the Pros and Cons for investing in the miners at around here or a bit lower.

PROS:

• The miners have been selling off yet again and as the sell off has progressed, valuations are becoming more attractive.

• As a significant contrarian indicator, there is very little interest in investing in gold miners these days. Traditionally, gold miners give 2 to 3 times leverage in the movement of gold, but during the last 12 months, returns from the main gold mining index are below that of Gold itself, which is a significant anomaly and gives a good idea about how little interest there is in this sector right now. The miners are considered by at least one important indicator, the Gold to XAU ratio, to be extremely undervalued relative to the price of the metal.
  
• The fundamental picture remains sound and has probably improved since 6 months ago. Briefly reviewing the fundamental picture: (1) US trade and domestic debt continue to be high, (2) inflation continues to be an issue, it's not spiralling, but it's not going away completely either... inflation has not had a super spike as some people feared, but on the other hand, the Fed hasn't totally dealt with this issue either so that it has continued to act like a gnawing cancer, rather than a heart attack, (3) U.S. economic growth has slowed, creating pressure on the Fed to lower interest rates, and high interest rates (or should I say interest rates that are higher than in Europe and in Japan, since 5.25% is not "high" by historic standards) are one of the few remaining pegs keeping the USD afloat (though I recently read an interesting argument that lower interest rates will decrease the debt load owed to foreigners in the future, so that we can't say for sure that lower interest rates would be USD negative), (4) geopolitical factors continue to argue for a risk premium in Gold, Iraq, Iran are the main issues obviously, but there continues to be trouble in important oil producers in Africa and South America, among other issues Generally speaking, although it could be debated, I think we continue to live in a world where there is a greater chance of some horrible disaster or war breaking out, than for some incredible peace to break out, if you know what I mean.

• Chart factors are quite favorable--though technical analysis is a bit like astrology. Sometimes it works well, sometimes it doesn't. Adam Hamilton recently posted an interesting piece at www.zealllc.com in which he argued that the HUI has already started its inexorable climb to 550 or higher!

CONS (or should I rather call them risks)

• May to August are seasonally the weakest months for physical Gold demand. In fact, last May was simply a total catastrophe and people still have painful memories of that. Traditionally, physical gold demand (most of it jewelry demand) accounts for 70% to 80% of total gold demand so weakness in this type of demand is significant. However, there are two counter arguments to that (1) I believe that the next wave up in Gold will be driven primarily by USD currency hedging concerns rather than women buying jewelry in India, and (2) I think last year's painful May dropoff and the specter of weak physical demand during the summer, creates a kind of psychological wall of worry that markets like to climb.

• A gold rally would depend in large part on the USD breaching levels against competing currencies that have never been seen before. I think this is possible, and in fact inevitable, in light of what I have learned about the economic outlook and current status, however, betting on it happening in any particular time period is "risky" in the sense that it's difficult to predict when exactly it will happen and betting at the wrong time, could end up costing.
  
• The USD is very oversold. You've probably heard of the Euro making new all time highs against the USD recently. A relief in the USD is possible, which could potentially be Gold negative. My counter to that is that there is a pretty good chance that any relief rally would fizzle, as neither the fundamentals nor the chart of the USD index are very encouraging going forward. I'll be looking for the 82.5 to 83.0 level on the USDX to stop any USD rally.