Gold Stocks Enter the Buy Zone

By: Michael Swanson | Tue, Oct 3, 2006
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Yesterday the XAU and HUI both closed up fractionally while gold fell 3 1/2 dollars and is now trading down 4 points in pre-market action. The action strongly suggests that gold stocks bottomed Monday of last week, because the action in the gold stocks tends to lead the action in the metal. It is bullish when the stocks outperform the metal as they did yesterday and bearish when they lag while the metal rises. The XAU/gld and HUI/gld relative strength ratios have been firming up all week.

For the past several days I've had a hunch that gold stocks bottomed last Monday, but have not acted on it, because I needed confirmation like we are seeing now. Short-term though it does appear that further weakness in the stocks and metal are likely. Gold is breaking a short-term support level today and the XAU and HUI are about to break short-term support uptrend lines on their 60 minute charts. This suggests a short-term pullback for 1-3 days should occur. This shouldn't shock you, because gold needs to digest its recent move before it can decisively rally above $600 an ounce.

I believe the action we are seeing now is very similar to the action we saw on the June bottom in gold stocks. After making a bottom back then the stocks perked up and then pulled back for a few days before going higher. During this pullback gold acted weaker than the stocks. The same thing should happen now. I bought in June and then sold almost my entire position when gold stocks broke down at the beginning of September, therefore escaping most of this correction.

Once the XAU bottoms here we should see it rally back up to the 150 area by the end of the year - and if 150 breaks it will be off to the races. That's why I'm excited about this entry point and am watching the action very carefully. I expect to be buying within the next 72 hours, and maybe even today.



Michael Swanson

Author: Michael Swanson

Michael Swanson,

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