Printer Friendly

eMail Article

May 04, 2006

Gold Is Getting Overbought
by Michael Swanson

Today I browsed half a dozen of the largest financial websites on the internet. Almost every single one of them had an article about the gold bull market. At the end of the day, on Fox News, I continued to shake my head as I saw Tobin Smith make bullish comments about gold stocks. A year ago, in case you don't remember, he was laughing at them.

If you've been a member for a while you've certainly heard me mention that this many people making bullish comments about a market (gold or whatever) must be a sign that the top is near.

But here's the difference. Last year, we were in phase one of the gold bull market. Now we seem to be in phase two and in phase two people can be bullish and the market can continue higher. We certainly seemed to be going higher now. The dollar is showing signs of re-entering its bear market, which will provide a further catalyst for gold purchases, while worries about Iran, inflation, and higher oil prices are also putting a prop underneath the market.

However, even in bull markets you get pullbacks. And there are some important signs that we are on the verge of a pullback in gold. First, after rallying over 130 points since March 10, gold has simply become overbought. Although we got a little bit of a dip in April, we have not seen gold digest these recent gains. At some point it will need to in order to move higher.

Secondly, gold stocks are starting to lag the metal. Yesterday gold closed up 13 points and many of the large cap gold stocks finished in the red. Most of the others were barely up at all. The XAU gold stock index finished the day up 1% while gold closed up 2.1%. If this trend continues today I will be very worried about a correction.

For the past week, the XAU gold stock index has been lagging the metal. While gold has rallied like mad, gold stocks have barely followed suit. This is the type of setup in the past that has led to intermediate-term corrections lasting several months. Indeed this type of action led me to sell most of my gold stocks back in December. But things turned out to be different back then to clue us in that we are now in a stage two bull market.

Over the next few weeks I expect the metal to pullback and provide an entry point in the gold stocks. We have two recent pullbacks that can provide a model for what might happen. Back in December, the XAU lagged gold as gold blasted higher and made what appeared to be a parabolic top at the time. That action accurately warned that a correction loomed. And it came, with gold falling almost 90 points and back below 500. However, gold stocks held up during that drop and gold snapped back and rallied into the end of the year.

If a similar move were to happen here we would see the XAU quickly pull back to the 146-150 area while gold falls into to its 580-520 support zone.

Another type of correction is the one we saw occur in February and March. That would be a more serious correction that would cause the XAU to fall about 15%. We saw corrections like this occur repeatedly from 2001 and 2005 when gold was in stage one of its bull market.

I think the first scenario is more likely. Either way, I'm going to make a dozen or so gold stock recommendations once we get a safe entry point in gold stocks.

Michael Swanson,
WallStreetWindow.com

Disclaimer: Michael Swanson is the President of USA Capital, Inc., which provides management, support, and research for institutional investors, hedge funds, and mutual funds. The ChartWizard is also an employee of USA, Capital, Inc. Both Swanson and employees and associates of USA Capital, Inc. may have a position in securities which they mention on WallStreetWindow or any of its services. In such cases, appropriate disclosure is made. Under no circumstances should the information received from WallStreetWindow represent a recommendation to buy, sell, or hold any security. WallStreetWindow contains the opinions of Swanson and the ChartWizard and is provided for informational purposes only. Neither Swanson, the ChartWizard, nor TimingWallstreet, Inc., which owns WallStreetWindow, provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on WallSteetWindow may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of WallStreetWindow, the ChartWizard, or Michael Swanson are not necessarily indicative of future performance.

WallStreetWindow does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements made on its web site or in its email alerts. The information provided should therefore be used as a basis for continued, independent research into a security referenced on WallStreetWindow so that the Subscriber forms his or her own opinion regarding any investment in a security mentioned by WallStreetWindow. The Subscriber therefore agrees that he or she alone bears complete responsibility for their own investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from WallStreetWindow.

Consequently, the Subscriber understands and agrees that by using any of the WallStreetWindow services, either directly or indirectly, TimingWallStreet, Inc. shall not be liable to anyone for any loss, injury or damage resulting from the use of or information attained from WallStreetWindow.

Copyright © 2004-2009 Michael Swanson

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »