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February 14, 2005

The Gold Bottom Is In
by Michael Swanson

Last Thursday, the XAU closed above 91 to break the downtrend line that has acted as firm resistance on the gold stock index since November. Meanwhile, the XAU/GOLD relative strength ratio, which tends to be the best indicator of the overall trend in the gold market, also broke its own downtrend line on Thursday. The XAU/GOLD relative strength ratio tends to lead both the gold stocks and the metal itself.

After these two breakouts occurred, volume and momentum in the gold market accelerated bringing the XAU to close 10 cents below 95 on Friday. The XAU is now poised to test its new resistance zone of 100-105 over the next 10 trading days.

Once this happens, I'd expect the XAU to enter a phase of sideways consolidation much like it did during the summer of 2004.

During this time, I will carefully watch the trend of the XAU/gold ratio. I expect this ratio to form a resistance line just as it did between last June and August. And once it is broken, the full launch of wave 2 of the gold bull market should begin.

I fully expect that signal to announce the beginning of a rally that will take the XAU up over 100% from current levels by the end of the year.

Commercial Gold Futures Traders Cover

Besides the chart action of gold stocks, the action in the commercial futures market has signaled that the 2005 bottom is now in place for gold.

On Friday, the Commitment of Traders Futures report for gold was released. The report shows the closing gold futures position for Tuesday, February, 8, 2005.

According to this report, during the 5 days leading into last Tuesday commercial traders closed out -11,768 short position and opened 7,604 long position. Commercials traders are now net 48,000 shares short. This is important, because commercial futures traders are very adapt at timing the bottoms and tops of the gold bull market. During this bull market, the commercials have been 40,000-54,000 shares short at major bottoms.

Incredibly the speculator futures traders, which tend to be wrong at important market turning points, added 12,185 short positions and closed out 4,758 long position during this same time.

Just as the commercials are covering, it seems that sentiment for gold is getting more bearish. I've gotten emails from dozens of people who were saying that gold is done for good.

This is the type of defeatist thinking that happens at bottoms. But it's the panic selling that this type of fear creates that brings buying opportunities in sectors that are in their own bull markets like gold is now.

Gold will go up no matter what the DOW does. Gold investors don't need to worry about a tech wreck. Gold doesn't have anything to do with the DOW or the Nasdaq. It is in its own world apart from them.

It is a real bull market. And if you can think back to 1999 and the type of money that tech stock investors made back then, you can imagine the huge opportunity that the gold market is presenting you right now.

This is like October of 1998. You remember how the Nasdaq had a big correction in the final months of the summer of 1998 and then bottomed that October? After that bottom, the Nasdaq started to go up and never looked back. That is, until March of 2000.

Well it is now October 1998 for gold and gold won't look back for at least another year.

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm.

Michael Swanson,
WallStreetWindow.com

Disclaimer: Michael Swanson is the President of USA Capital, Inc., which provides management, support, and research for institutional investors, hedge funds, and mutual funds. The ChartWizard is also an employee of USA, Capital, Inc. Both Swanson and employees and associates of USA Capital, Inc. may have a position in securities which they mention on WallStreetWindow or any of its services. In such cases, appropriate disclosure is made. Under no circumstances should the information received from WallStreetWindow represent a recommendation to buy, sell, or hold any security. WallStreetWindow contains the opinions of Swanson and the ChartWizard and is provided for informational purposes only. Neither Swanson, the ChartWizard, nor TimingWallstreet, Inc., which owns WallStreetWindow, provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on WallSteetWindow may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of WallStreetWindow, the ChartWizard, or Michael Swanson are not necessarily indicative of future performance.

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Copyright © 2004-2009 Michael Swanson

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