From MIDAs tonight.

On Sept. 15, gold was trading at approx. $1,009/oz. Gold then rallied to $1,024, fell under $1,000/oz, and finally rallied to approx. $1,009/oz again. You could say that gold was basically flat during this time period. Below are several stocks that I track.

For KGC, SLW, and SSRI; the shorts reduced their positions below the Barron's reporting threshold. For example, the shorts reduced their position to a figure less than 5,671,900 shares short in KGC. As you can see, the short position in ABX was drastically reduced. The only big increase was in the GLD ETF.

Using the cafe search feature, I found a great chart that was originally provided by Bob Moriarty. The chart provides 25 years of data showing when the gold and silver stocks are undervalued and when they are overvalued. Below is a graph of the gold and silver stocks as indicated by the XAU gold index divided by the price of gold.

It should be noted that this graph ended on Sept. of 2008. The data actually became much more extreme after Sept of 2008. Later in 2008, the $xau/$gold ratio dropped all the way to 0.0852. The severe decline in the gold and silver stocks in 2008 was so extreme that the data point of 0.0852 was literally off the graph. The action of the gold and silver stocks in 2008 was even more extreme as compared to after the stock market crash in 1987.

As of 10/13/09, the $xau/$gold ratio stands at 0.1684. There were only 3 other times in the last 26 years where the gold and silver stocks have been this undervalued as compared to the price of gold. One time was the off the chart event of 2008. The second time was at the start of the current bull market in 2001. The third time was in 1986 just prior to a massive rise in the gold stocks where the ratio doubled from 0.17 to 0.34. So far in the current bull market since 2001, we have yet to see a rally where this ratio has gone to 0.30 and above. We are way overdue for an event like this.

We have the shorts starting to cover in the bigger gold and silver stocks while these stocks are extremely undervalued. The gold price has finally broken out to the upside after a 19 month consolidation. Based on past history, we should get an extremely strong gold and silver stock rally to the upside over the next 6 months or so.
Paul