In the past five years we have seen the XAU and HUI go through two long periods of consolidation that ended with powerful new bull runs. During both periods of consolidation the XAU traded between its 200-day upper and lower bollinger bands, just like it has done for over the past year. Once the XAU closed above its upper band and stayed above it for over a week a new bull run began. The XAU appears to be headed towards this upper band once again. A close above it on a weekly chart will mark the beginning of a new bull run.
These bull runs actually started when the XAU/gld, HUI/gld, and GDX/gld ratios broke out of ten month plus downtrend resistance lines. When these ratios are declining it means that gold is outperforming the gold stocks. Gold stocks tend to lead the action in the metal so the trend of this ratio is a powerful indicator of the overall direction of the gold market. This ratio has been in a decline for over a year, but on Friday all three of the downtrend lines for these ratios were broken. This is an extremely powerful buy signal, which indicates that the trend is up.
Going forward I expect to see the XAU and HUI to quickly attack their 200-day bollinger bands. They will then pause somewhere around them, likely a bit above them, to digest the recent gains. If they hold up at this level and continue higher gold stocks will be poised to rally for the rest of the year.
We've been waiting for some strength to come back into the gold market. Recent weakness early last month even prompted me to go to temporarily go to cash in fear of a breakdown and other prominent gold writers also gave warning signs. We haven't broken out yet. The ultimate buy signal of a rally above the 200-day bollinger band hasn't come yet. But last week's rally in gold stocks certainly puts the train right back on the tracks. I bought last week and plan on buying more as the weeks go on.
While gold stocks broke their April downtrend resistance lines last week gold hasn't done so yet. A close above 660 on the metal will cause the metal to breakout and follow last week's rally in gold stocks. It would be nothing for gold to rally back up to 700 and if gold stocks rally at the same rate as the metal than the XAU will rally up to 154. So a move above 150 for the XAU in the next few weeks is certainly plausible.
Large cap gold stock Newmont rallied over 5.50% on Friday on huge volume. Newmont has been under performing the XAU and HUI for the past year and a half and has been in a sharp downtrend since March of 2006. The pivot resistance point of this downtrend is 42.50. It will likely pause a bit once it reaches this level. But if it breaks it - and I expect it will - then Newmont will begin a new uptrend. It's next resistance point after that is 47.38, the 1/3 retracement of its entire decline since its 2006 peak.
Newmont rallied in part on news last week that it finally closed its entire hedge book and is planning to eliminate its merchant banking division. Under the forward-sales contracts, Newmont had committed to deliver 1.85 million ounces of gold in 2008, 2009 and 2011 at prices ranging between $381 an ounce and $392 an ounce, according to a Securities and Exchange Commission filing on Friday. It spent $578 million to close out the contracts as of June 30. With the contracts eliminated Newmont's earnings will increase exponentially in a gold bull market.
The thing is there are several large cap gold stocks such as Newmont that heavily weight the XAU and HUI that have acted sickly for a long time and are building up to make large moves higher. If they rally they will easily push the XAU and HUI up since they impact it so heavily. The indices have the potentially to really run.
I bought some gold stocks last week in the WSW Power Investor portfolio and plan on buying more. I notify all Power Investor members when I make a trade in this portfolio so they know when I buy or sell. Now is the perfect time to take a risk-free trial. Just click here.
9 July 2007
To find out what gold stocks Swanson is buying now join his free weekly gold report. Start now: http://wallstreetwindow.com/weeklygold.htm
Disclaimer
Michael Swanson is the President of TimingWallStreet, Inc., which owns WallStreetWindow. WallStreetWindow contains the opinions of Swanson is provided for informational purposes only. Neither Swanson nor TimingWallstreet, Inc. 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 in this article may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of TimingWallStreet, WallStreetWidow, or Michael Swanson are not necessarily indicative of future performance. Michael Swanson, entities that he controls. family, and associates may have positions in securities mentioned in this article of on WallStreetWindow and may close them at any time.
TimingWallStreet, Inc. 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 in this article so that the Subscriber forms his or her own opinion regarding any investment in a security mentioned in it. 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 broker before making any investment decision and to help you evaluate any information you may receive from this article.
Consequently, the Subscriber understands and agrees that by using any of TimingWallStreet 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 TimingWallStreet or any of its services.