Since the bull market in physical gold started in February 2001, the gold price has gone up 44%.

Gold shares, as per the Amex Gold Bugs Index, led the way as the low was reached in November 2000, three months before the gold price took off. It surged 305% since those dark November days.

It is therefore obvious why people who want to make a "killing" prefer gold shares to gold even though where there is bigger potential there is also bigger risk or more volatility in both directions.

In any case, in order to make money with gold shares, you have to be right on the price of gold and as to where gold shares are in relation to the price of gold.

So let’s try to find out where we are.

The long-term picture

The long-term chart clearly shows that gold-shares as per the AMEX GOLD BUGS INDEX moved into a solid up-trend in November 2000 and is here for everyone to see.

We also notice that in spring 2002, investors and speculators became over-enthusiastic and pushed gold share prices to dizzy heights. A sobering correction followed. The index had fallen 40% by July and even gold bugs wondered whether Elliott Wave followers may turn out to be right after all.

While the price of gold has reached new highs in recent days, the AMEX GOLD BUGS INDEX just went back to the previous high established in June of last year – for many a disappointing performance and an indication that we can expect a sharp correction.

Nevertheless, we can safely argue that the gold shares are about as much overextended as the gold price. If the gold price corrects, the prices of the gold shares will of course correct more, but that is about all. The gold price is what is called "overbought" and this has to be wound down. It could be a short sell off or it could be a sideways correction for some weeks or months.

An intermediate or long-term investor should just sit tight.

The medium-term picture

Medium-term, the AMEX GOLD BUGS INDEX has corrected the excesses of last May in an orderly fashion. Through August, we had a nice counter-trend and the subsequent sell-off in October exhausted itself above the July low.

It has worked itself steadily up towards the resistance level around 150 and while a correction down to 130 can not be excluded, the next significant move will be the break of the resistance zone.

We think it wise to sit it out instead of playing the next (minor) down leg.

Selling at the top is one thing. Buying back at bottom another.

The short-term picture

Short-term, the AMEX GOLD BUG INDEX pushes against the resistance zone around 150 which will give way sooner or later. May be sooner if Bush decides "to be" there rather than "not to be".

How to participate in the unfolding bull-market in gold

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Peter Zihlmann
www.pzim.com
forex@pzim.com

January 31, 2003