In yesterday's dispatch I wrote:
The HUI uptrend is still in tact and the under-performance of the shares vs gold is running into its very end.
Yes, you're reading this right, the gold shares are on the verge of outperforming the yellow metal again within days from now. This doesn't mean that the shares can't go down any further from here but the down moves will be limited against potential down moves in gold. END.
Well, we didn't have to wait for long since that's exactly what happened today. Gold dropped by $25 while the HUI managed to end up at……….
So what does this all mean?
Let's first review yesterday's HUI chart in which I pointed out that the HUI uptrend which started in May 2005 was still in tact:
I wrote:
This chart says:
END.
Now let's zoom in to the last three month of the chart and see what happened today, the B-uptrend line provided again support just like it did in March this year:
As you can see the HUI bounced off against the long-term uptrend line which started in May 2005.
Could this be the rebound of the HUI?
Well, as said before, the gold/HUI imbalance can also be solved by a much further dropping gold price and a slightly dropping HUI, eg such a performance as we have seen today.
So in order to answer that question we have to take a peek at gold first in order to determine its downward potential here.
Gold last move started by the end of March at $551. It moved all the way up to $730. Now, a 50% FIB retracement would bring it (gold) down to $640 while a 61% FIB retracement would bring it down to $619.. Although the latter can't be ruled out it doesn't seem likely to me. Why not? Well, gold's 50 dma has provided solid support for gold ever since September 2005 and gold's current 50 dma stands at 616. Gold's 50 dma is rising by about 2 pts a day. So within a few trading days gold's 50 dma will be surpassing the $619 FIB level.
Now let's first take a peek at gold's one year chart in order to see the importance of gold's 50 dma.
Now let's zoom into the last three months of this chart and add the FIB retracement levels.
This chart clearly demonstrates a huge support area in the $619 - $640 range. (50 dma arriving there within days)
Now with gold trading at $657 the downside seems to be limited by another $17 - $37. Now even if that were going to happen what do you think will happen to the gold shares?
My guess is not much since the Gold/HUI ratio has reached its peak and is dropping now. Today's phenomenal action in the gold shares (HUI only drops a mere 3 pts against a dramatic $28 fall in gold) proves this point.
Mow whether or not gold continues its descent from here on towards the $620 - $640 area doesn't bother me since the downside potential for the Gold shares is limited, but according to some credible market insiders the correction in gold could be over much faster as you might think.
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Stay tuned for more to come…
Enjoy your weekend,
Best regards,
Eric Hommelberg
The Gold Discovery Letter/
The Gold Drivers Report
E-mail: ehommelberg@golddrivers.com
Web-site: www.golddrivers.com
May 20, 2006
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