Time for Gold Shares to Shine!

By: Greg Silberman | Sat, Feb 17, 2007
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Article originally submitted to subscribers on 11th February 2007...


Nearly 8 months have passed since Gold made its exhilarating move to $725.
It has taken months for Gold to work out its over-bought condition, to dampen investor's enthusiasm.

But wait, Gold is heating up again!

Chart 1 - Gold challenging resistance

Gold recently moved above important resistance at $650.
It's now working its way through congestion in the $650 - $675 zone (blue lines). Based on the low readings of MACD and RSI (green lines) it looks as if it has every chance of taking out $675 and soon.

And then?

Then it's back up to test the old May '06 highs of $725.

As Gold moves ever higher the rhetoric and media attention (both positive and negative) will grow.
When Gold breaks to new highs the speculative juices will flow and many a NEW investor will be drawn in to the Gold Story.

What they will find is a massive amount of confusing and conflicting information.

Some analysts will be telling them to buy Gold the metal. Their argument, Gold Stocks will fall with all other Stocks.
Others will be saying buy Gold Stocks for leverage.
And yet others will convince them to steer clear of such a risky investment in Gold.

Who to believe?
When in doubt step back and take a look at the Bigger picture:

Chart 2 - HUI Gold ratio consolidating since 2004

The HUI Gold ratio charts the performance of Gold Stocks vs. Gold the Metal.

From the above monthly chart we see that from 2001 - 2004 Gold Stocks led the Metal higher.

From 2004 to today the Metal led then the Stocks then the Metal again.

However, every time the Metal has outperformed the Stocks (chart moves down) the declines have halted at the 50-month moving average (blue line).

Also, of interest is how Gold Stocks outperformed the Metal from 2001 - 2003 (green rectangle) when the S&P (below) was being hammered lower.

Current interpretation:

We should see a bounce off the 50-month moving average and the HUI:Gold ratio should move up to re-challenge its old high of 0.63. Nobody knows yet whether we will better the old highs, but there is evidence that we will:

Chart 3 - Gold Oil ratio - BREAKOUT from reverse H&S

The monthly chart of Oil vs. Gold paints an interesting picture.
Since 2004, the Oil Gold Ratio has been mapping out a large reverse head and shoulders formation. It broke above the neckline at the beginning of 2007 and portends to a higher Gold vs. Oil price (target is 14.5).

A lower Oil price is great news for Gold miners as it reduces the cost of one of their MAJOR Operating expenses - Energy!

For such a condition to exist, we would have to see the price of Oil languish at recent correction lows whilst Gold strengthens. The only scenario I can imagine that happening would be a continuation of the current economic slowdown. Weaker growth leads to weaker energy prices and higher margins for Gold miners. This in turn causes Gold Stocks to outperform the Metal.

If we are right to anticipate a period of out performance by Gold Stocks relative to the Metal, then we would also be right about expecting a Stock Market tumble resembling the 2000 - 2002 meltdown.

For new Gold investor the answer is to have a core position in the Metal and an investment in large, medium and small miners depending on one's risk profile.

More commentary and stock picks follow for subscribers...



Author: Greg Silberman

Greg Silberman CA(SA), CFA

Greg Silberman

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © 2006-2008 Greg Silberman

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