Gold Mining Stocks Are Ready for the Breakout
James Turk
Price changes in the gold mining stocks often act as a leading indicator for moves in the price of gold. Thus, by following the stock price of these companies, we can often see them move before the price of gold. In other words, the gold mining stocks are said to 'lead' the gold price itself.
I have seen this phenomenon time and again over the years, and it is apparently happening again now. Take a close look at the accompanying chart of the XAU Index of gold mining stocks.
The XAU has completed an important 'head & shoulders' bottom, which is clearly marked on this chart. This pattern reflects gold mining stocks being dumped by weak hands, which are then at the same time accumulated by strong hands.
This huge pattern has developed over six years. We can see the left shoulder forming from late 1996 to the end of 1999, the head, which formed from 2000 until mid-2002, and the right shoulder, which formed over the past year. This right shoulder - and therefore this entire pattern - was completed today by the XAU's close of 91.18, which was a new 5-year high. By any perspective, this is a beautiful chart to us gold bulls.
A 'head & shoulders' pattern is usually a reliable indicator of important changes in market direction. This pattern suggests that the gold mining stocks are about to break out of an important base. Normal technical analysis establishes 140 as an upside target, which I expect to be reached in 2004. Thus, I am expecting approximately 55% appreciation in the XAU Index as its first move out of this base. If the relative valuation of the gold mining stocks compared to gold itself is any guide, a 55% move in the stocks should equate to about a 40% move in gold, which compared to today's Comex closing spot price of $365.60 ($11.75 per goldgram) establishes a gold price target of $511.84 ($16.46/gg), a rate of exchange between gold and the dollar not seen since 1987.
Lastly, as I am fond of saying, no one knows the future, so use the above information with caution. Just as there is no certainty to the future, there is no certainty to the resolution of 'Head & shoulders' patterns. But one purpose of these alerts is to keep you posted on those factors that affect the price of goldgrams, and I have found in my experience over the years that the gold mining stocks are an important indicator for the price of gold itself. So I am sharing with you my observations, on the chance that they might prove helpful.
Right now the gold mining stocks are painting a bullish picture not only for themselves, but for goldgrams as well.
Published by GoldMoney
Copyright © 2003. All rights reserved.
Edited by James Turk, alert@goldmoney.com
August 22, 2003
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