Gold's Breakout or Gold Stock's Breakdown?
Based on the March 30th, 2012 Premium Update. Visit our archives for more gold & silver analysis.
Gold seems mercurial lately sliding up and down causing some gold investors to grey prematurely. Technical analysis is not an exact science nor does it act as a crystal ball, but there is comfort and even beauty to be found in patterns that asset themselves every once in a while. And now we are in such a self- similar pattern and continue to believe that higher prices for gold are imminent. We have written previously about the long-term buy signal from the SP Gold Bottom Indicator along with many other signals that suggest that now is the time to go long with a portion of one's speculative money. The recent ups and downs in gold prices this week do not invalidate our position.
Speaking of ups and downs, gold futures traded lower Wednesday probing for a bottom along with most other commodities after failing to trade above the psychologically important $1,700 an ounce level in the previous session. Gold shot higher earlier that week after Fed Chairman Ben Bernanke signaled U.S. interest rates would remain at current ultra-low levels for a few years. Bernanke is already on the record saying he'll keep US rates low until 2014. That week he reiterated the message, saying, "Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies."
If we look back, at the end of February gold was especially hard hit, following Ben Bernanke's announcement that there would be no additional quantitative easing. This caused the price to fall below its 200-day moving average, a rare occurrence. Our subscribers were well prepared with a Market Alert the day before urging them to stay away from speculative long positions. In previous times when the price fell below its 200-day moving average (about 30 times over the past ten years of the bull market) gold stayed down for less than two weeks.
The fundamentals for gold are in place-- rising wealth in China, Europe's financial instability and high fiscal deficits in the U.S. Real interest rates are still negative in many countries and we now have Bernanke's assurance that they will stay that way in the U.S. for the foreseeable future. Although the U.S. debt situation has not been front-page material for a while let's not forget that the Fed's balance sheet is deep in the red. The European Sovereign debt crisis is creeping back into the financial news headlines this week, with Spain in focus amid its financial problems. Even though the markets seem to feel that the worst is over, any significant heating up of the EU debt crisis would support safe-haven gold buying.
Now let's move to the technical part of today's essay which is today dedicated to gold and gold stocks (charts courtesy by http://stockcharts.com).
We begin today's essay with a look at the very long-term chart (you can click the chart to enlarge it if you're reading this essay at sunshineprofits.com). This chart is basically unchanged this week, so last week's comments still hold true. Gold prices moved sharply higher early last week and then corrected this move. The RSI level suggests that gold prices still have a way to go, and this is consistent with what we see in our analysis of the self-similar pattern from 2006-2007. All in all, the very long-term implications remain bullish.
Since short-term (!) moves in gold are practically always seen along with similar moves in gold stocks, let's take a look at the latter and check if they confirm the bullish outlook.
In this week's medium-term HUI Index chart, we see that the bottoming process appears to still be in progress. This is quite comparable to what was seen in the 2006-2007 self-similar pattern. With the short-term correction period for gold and silver likely over, it's probable that higher price levels will be seen soon for gold stocks and the HUI Index will likely move to the 550 level in the weeks ahead. Please note that gold and mining stocks moved higher after we created the above chart.
The final chart that we would like to feature in today's free article, is the one featuring the Gold Miners Bullish Percent Index. Both indicators (RSI and Williams %R) based on the index are still confirming the current buying opportunity. This is not surprising, given the fact that the miners have not moved higher last week. Please note that these indicators do not signal the bottom with perfect precision. They flash when the bottom is close at hand, and this is still very much the case this week.
Summing up, the bullish case for gold is still present this week.
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Thank you for reading. Have a great and profitable week!