Gordon Brown’s Bottom and Gold’s Double Bottom.
The 30th Olympics began in London this morning. Over 10,000 athletes will be competing for one thing…a gold medal.
Sadly, the gold medals handed out at the Olympics haven’t been solid gold since the Swedish held the event in 1912.
So how much is a gold medal worth? These days, not much. The gold medal hanging around an athlete’s neck will have a face value of $706.
No, we’re not missing any numbers. The low value of the medal is simply because of the minimal gold content. The International Olympic Committee mandates each gold medal have ‘at least’ 1.34% gold. And the host country decides if they want to add anymore.
In this case the Brits have decided to stick with the minimum amount. Not surprising, seeing as former UK Chancellor of the Exchequer (Treasurer), Gordon Brown, sold half of Britain’s gold from 1999-2002, at an average price of USD$275 an ounce…when gold was at a 20-year low. This event has become so infamous among gold bugs that it’s now called the ‘Brown Bottom’!
But anyway, the remainder of the winner’s prize is made of 92.5% silver and about 6.16% copper.
Meaning the 400 gram medal contains a tiny 5.3 grams of gold.
However, all the work and effort for 5.3 grams of gold hardly seems worth it. And so, rather than training five hours a day in a swimming pool or running round an athletic track, we’ve found a better way to get access to the precious metal.
Adding a few gold shares to your portfolio.
We know, right now it doesn’t look good for precious metal mining stocks.
Take the Junior Gold Miners ETF [NYSE: GDXJ] for example, down 22% this year. And the HUI Index [NYSE: HUI] has lost 20%.
As a result, holders of gold mining shares have had a rough ride. And according to Dr Alex Cowie, editor of Diggers & Drillers, there’s one reason for that:
‘Gold stocks have been crunched by disappearing margins thanks to rising production costs and falling gold prices.’
But the crunch may be over for shareholders.
‘Interest in gold stocks is picking up again,’ said Alex, ‘and could be about to start a long and overdue rally.’
As Alex pointed out to his subscribers recently, we ‘…are in a traditionally slow period for gold due to the Indian monsoon season…this could end as soon as next month.’
And the Erste Bank Gold report claims the same thing. However, it also adds a price target for gold over the next twelve months:
‘The foundation for new all-time highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold… In the short run, seasonality seems to argue in favour of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side.’
This is the good news investors needed to hear, says Alex. ‘This report comes at a good time. It gives good cause to hang on, just as gold stock investors are reaching ‘the point of maximum despair’ after more than 12 months of terrible performance.’
However, one bullish report does not cause a bull rally.
But there’s been a turnaround in a key gold bugs indicator to suggest one might be about to happen. This could be the next leg up for the gold price.
And the HUI Index may be presenting you with the perfect buying opportunity.
Also known as the ‘Amex Gold Bugs Index’, the last couple of trading days shows a potential ‘double bottom’ forming.
This is a technical term that simply describes the price dropping, then rebounding. Often followed by a decline to either the same or similar level. And then finally, one more rebound. Think of a double bottom as looking like a ‘W’.
When these double bottoms happen, it often hints the start of a new rally.
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Part of the reason gold bugs use the HUI is because it’s made up of 18 gold related mining stocks, with short term hedging. The constituents all hedge their gold production within 18 months.
Because of this short term outlook, the HUI is useful in spotting short term movements of the gold prices.
And any spike in the gold price should lead to higher prices for gold stocks. Alex says:
‘Gold and silver stocks should and traditionally do outperform gold and silver as metals. That’s because, when gold and silver prices rise, the companies that mine it see an increase in revenue without an increase in costs.’
If this double bottom pans out, it will present a great buying opportunity for gold stocks, and Alex is ready to take advantage of it. He has five gold stocks on his watch list that he considers ‘highly undervalued‘ and any spike in the gold price could see some serious gains for stock holders.
To find out more on why Alex is backing gold stocks, click here.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.