A Deeper look at Gold bullion and Gold Stocks

By: Sol Palha | Wed, Mar 9, 2005
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"How do you know so much about everything?" was asked of a very wise and intelligent man; and the answer was "by never being afraid or ashamed to ask questions as to anything of which I was ignorant." - John Abbott, American Actor

Prices taken were taken towards the end of each year.

Symbol 2001 2002 2003 2004
GOLD 278 347 415 428
GSS .60 1.87 6.97 3.87
PDG 1091 11.50 17.88 18.86
NEM 18.95 29.03 49.16 44.41
XAU 56.00 80.00 115.00 111.00
HUI 70.00 150.00 250.00 240.00
MNG .48cents 1.28 2.62 1.16
CBJ .47 1.43 3.10 2.63
KGC 2.10 7.35 7.99 7.01
RANGY .94 3.05 5.41 1.73
AEM 9.90 15.32 12.18 13.16

If you look closely you will see that the biggest moves took place from the end of 2001 to the end of 2003. From the end of 2003, there were huge negative divergences being flashed by most gold stocks. The biggest one was the inter market divergence; Gold bullion kept putting in higher highs but Gold stocks did not respond in kind. We knew than that most likely 2004 would be a dead year for bullion and as such we did not issue any Stock plays in our main trading portfolio. We issued some high-risk plays for those who were willing to take on higher amounts of risk. The results were mixed with some wins and some losses but no spectacular wins were made. We did issue some straddle plays in our main portfolio and we did this only because towards the latter part of the year we started becoming neutral on Gold. Straddle and strangle option plays are best initiated when our indicators are in the neutral zone. A quick look above reveals that if you had listened to the loud mouthed pundits you would have lost money by jumping into Gold stocks in 2004. However Gold bullion did actually close a tad bit higher. On that note if you are a contrarian you should have a core position in Gold and Silver bullion. If you don't already have one make sure you allocate some money to one and open up positions on any decent pull back.

What amazed us is that no one noticed this huge divergence or if they did notice it, they did not publicly acknowledge it. Perhaps they were hoping that Gold stocks would go higher with Bullion, after all one must have faith in something right. Actually the answer is a screaming NO. You should never have faith or hope when it comes to investing, those are two of the worst traits to have when it comes to the markets. Only those who seek to lose enter the markets with faith and hope. So now in retrospect we can all smile that we did not jump in and load up on Gold, instead we did the opposite. We bought oil and energy stocks, some biotech and nanotech stocks.

Right now we are seeing very small signs of positive divergence on the hourly charts for some Gold stocks. However we noticed that there is still not enough Gloom in the Gold bug sector, so we will sit and wait a bit longer. Every time gold goes up a bit these bugs jump up and start to scream "Alleluia." Now that Gold is back in the 430 ranges they are getting excited once again. We feel that this rally will actually lead to one more down swing and then the markets will put in a nice bottom formation. At that point in time we will start looking for entry points. We actually spoke about this rally in Gold bullion a few weeks ago.


Continues to correct, but it is flashing several minor positive divergence signals on the hourly charts. Some of our other indicators are suggesting that it could suddenly spike to the 435-440 ranges one final time before resuming its correction. This would coincide perfectly with our views that the dollar could see a downward move that would take it below the 82-price zone. From Market update Feb 1, 2005.


We are drawing closer to the day when we will finally issue new buys on Gold and Silver stocks, but we are not quite there yet. So the best thing to do is to simply sit and watch the action. Try to find the strongest stocks, look for the ones that correct the least when gold pulls back but appreciate the most when it takes off. Make sure you understand our stance; we are not bearish on Gold, there is a time to buy, to sell and to sit still. Right now it's the time to pay close attention. We are still holding core positions that we took in late 2002 to early 2003. Another very important factor to remember is that this is a commodity based bull market and not just a Gold or Silver bull. Since there are so many commodities out there its logical to assume some will take off while the others correct to build strength for the next run up and vice versa.

"We are what we repeatedly do. Excellence, then, is not an act, but a habit." - Aristotle BC 384-322, Greek Philosopher


Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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