Dots, Dots and More Dots
This review is based largely on a buy/sell signal I discussed back in July in a piece titled "Gold: Connect the Dots". As I stated then, when the price of gold is making new highs, it seems to be a good time to sell gold stocks - - and when gold has tumbled back down to the breakout level it is a good time to buy them. In July, it was time to buy - - now it appears time to sell. Let's look first at the price of gold:
The vertical red lines show the peaks and their respective technical conditions. The horizontal blue lines show the Confirmation Low (c-low) levels, with the red horizontal line and blue circle marking the anticipated c-low for the next cycle. The red circles are there to emphasize that we are in dangerous territory as far as technical indicators go. Could gold continue on upwards? Of course! But we are playing odds … and the odds are not in favor of much more upward movement. Several times in the last year I have stated my expectation that gold would reach $520 in 2005. I still think it will, I just don't believe it will stay long at the party before correcting!
Let's take a look at the HUI:
The vertical blue lines correspond with the vertical red lines in the previous chart. Had we sold at those times we would have been happy indeed! It's hard to do when every drop of your golden blood being seems to be screaming "THIS IS IT! YOU'RE GONNA MISS IT IF YOU DON'T BUY AND HOLD!" But as I said before, we're playing the odds, and the odds favor a substantial correction. This is a good time to reduce to your "core" position if you have one.
There is one more factor to consider, and that is that gold has now broken out in all major currencies. This is no small bit of news! The breakout heralds a shift from a US Dollar based bull market in gold to a global bull market in gold - - or, as many analysts are calling it, "Stage II". Whatever you want to call it, every gold (and silver!) investor should pay attention to this event; it is of huge significance. So, with this fuel added to the bull, perhaps the correction in gold stocks will take a different form. Let's zoom in on the HUI:
There is a year-long Inverted Head & Shoulders pattern that bodes very well for long-term investment in the gold stocks. The only real question now is whether we have already formed the right shoulder, or is a dip to the 200 area in our future? I think with the global currency breakout we may see more of a running correction than a steep drop. This has the potential to develop into a freaky hybrid between an Inverted Head & Shoulders (12/04-12/05), an ascending triangle (08/05- January? February?), a Cup & Handle with the ascending triangle as the handle AND the double bottom hits in 05/04 and 05/05! I must emphasize that this is speculate - - and "obvious" patterns have a habit of being deceptive - - still, it would be truly fantastic to see all that come together and then serve as a massive launch point up towards the 350 level! Only time will tell - - I will remain on the sidelines until gold hits the anticipated c-low, or breaks out to such a degree that it becomes obvious I was completely wrong. I sure hope it's the former!