Gold Price Analysis from the Mining Stocks' Perspective

By: Przemyslaw Radomski | Tue, May 10, 2011
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Based on the May 6th, 2011 Premium Update. Visit our archives for more gold & silver analysis.

In our previous essay (Freefall in Silver, What's Next?) we described the current situation in silver and today we would like to provide you with a mining-stock-related follow-up.

Gold and silver markets appear to be consolidating after a slid in the immediate past. If there is anybody happy in the world about the declines in precious metals it must be Warren Buffett who keeps on buffeting gold at every opportunity. Here is what he said at the recent Berkshire Hathaway' annual general meeting. You can fondle it, you can polish it, you can stare at it. But it isn't going to do anything. Gold really doesn't have utility. I'd bet on a good producing business to outperform something that doesn't do anything.

A very well-known phrase of Buffet's about gold which we have quoted previously, is that gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Of course Buffet said this when gold was trading for a fraction of its current cost. He must be scratching his head and asking himself why he didn't buy it when it was less than $300. We guess that we will start worrying the day Buffet says he's buying gold. That could be the ultimate signal that it's time to sell as it seems that absolutely everyone is already in the market if even the most die-hard gold bears are buying.

Whatever be the logic behind taking positions in precious metals markets, one thing is true, 'a lot of things are happening in precious metals market'. Off-beat, let's see how gold and silver mining stocks perform amid the fluctuations in precious metals market. Let's turn to the technical portion with analysis of the XAU (Gold and Silver Mining Stocks) Index chart (charts courtesy by http://stockcharts.com).

$XAU Index

Actually, the above chart analysis is just a warm-up before the following chart, as in this case, the only thing that can be seen is that gold and silver mining stocks have once again moved to their 2008 highs. This factor alone should make you consider betting on higher precious metals prices in the short-term. More details are visible on the HUI Index chart.

$HUI Index

On the above chart we see additional important trade signals than the fact that 2008 highs have been touched. The index has moved to the long-term rising support line (marked dashed line) and the RSI indicator (at the top of the chart) has declined to a point which has marked previous local bottoms. Consequently, an upturn from here appears quite probable regardless of the following medium-term move.

Please take a look at the SP Gold Stock Extreme Indicator for more details.

SP Gold Stock Extreme Indicator

The chart provides extreme readings, however recently it has been providing accurate buy signals. This signal greatly increases the odds that the local bottom is in and that a short-term rally is likely. We described its performance in the March 18th 2011 Premium Update (just after it flashed the previous buy signal)

In the Gold Stock Extreme Indicator, we see a quick move above the dotted line. This has coincided with local bottoms for gold stocks every time this line was crossed since 2008. As we can see, not each and every bottom was indicated, but when we have actually seen SP Gold Stock Extreme Indicator flashing a buy signal, each time a short-term rally followed. This happened on most occasions prior to 2008 but every time since. 100% accuracy simply cannot be ignored.

Overall, the gold and silver mining stocks' charts suggest a short-term bounce from the current levels similar to what is likely for gold and silver. The way this bounce plays out could provide many of the missing details which might impact the precious metal sector on the whole and determine if we are still in the final part of the rally or has a major decline already begun.

Summing up, while the next medium-term move still appears rather uncertain (with a slight bearish bias), it seems that from the short-term perspective gold, silver and gold and silver mining stocks are likely to be impacted in a positive manner from the support levels currently being reached.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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