Golden Bull Buy Signals 2The past six weeks or so have been quite challenging for gold and gold-stock investors as the anticipated normal bull-market pullback has been underway in earnest. The psychological landscape in the gold world is quite different today than it was back in early February.
Six weeks ago gold and gold stocks were flying high and greed reigned supreme as folks salivated at the tantalizing prospect of $400 almost in reach. As a maverick contrarian speculator, I am not ashamed to admit that the gold euphoria was making me nervous at the time. In fact I wrote the original "Golden Bull Buy Signals" essay on February 7th to warn our clients and subscribers of the gold greed.
It feels like ancient history today, but six weeks ago gold was approaching $380 and the popular HUI unhedged gold-stock index was trading above 150. Earning undying hate and endless malicious flames from the gold fanatics who will brook no resistance to their plans for utter world domination, I dared to utter the following heresy…
"Because gold and gold stocks have run so far so fast in recent months, and gold is far above its new uptrend channel, and gold-stocks are bumping the top resistance line of their own new uptrend channel, I believe it is reasonable to expect a healthy pullback in the coming months. This pullback could conceivably drag us all the way back down to the 200dmas, today around $325 on gold and 125 on the HUI. This will be terrifying for gold and gold-stock investors not expecting it, but for those who are the buying opportunity will be immense at the next interim low."
While I am constantly forced to absorb a tremendous and relentless amount of flak for daring to be a contrarian, I have no regrets about trying to trade the markets accurately to help our clients and subscribers earn profits to finance their personal dreams. It is never easy being out on a limb and being considered crazy by the thundering herd, but contrarianism by its very nature is black-sheep limb-walking.
In both the February and March Zeal Intelligence newsletters published for our subscribers, I warned about the growing probability of a gold pullback and the need to ratchet up stop-losses and be psychologically prepared to be stopped-out of our positions temporarily. If a pullback is almost certainly approaching there is certainly no sense allowing it to eat up one's hard-earned speculation profits!
Thankfully this strategy proved correct, and we were blessed with realized final gains of 38%, 33%, 59%, 41%, and 30% on our outstanding gold-stock positions! In addition to these five reasonably healthy wins, we did suffer one 16% realized loss. Overall thus far in 2003 we have been blessed with a 31% realized return in our official Zeal Intelligence stock trades, all in gold and silver stocks. It pays to not ignore the pullbacks!
Today as gold has plunged back down under $335 and the HUI under 120, gold and gold-stock sentiment is no longer drowning in unbridled greed. Gold and gold-stock investors and speculators need to carefully ponder the last six weeks and learn a priceless lesson that will serve them incredibly well in the future…
No bull market moves up in a straight line, there are always periodic pullbacks when sentiment waxes too euphoric. Conversely, no bear market moves down in a straight line, there are always periodic bear-market rallies when sentiment grows too fearful. Financial markets are not linear over the short-term!
Next time you find yourself in a situation where it seems like practically everyone is greedy or practically everyone is scared, make sure you have psychologically prepared yourself for this contingency so a loud warning klaxon blares in your skull. It doesn't matter whether you traffic in gold, or stock indices, or bonds, or pork bellies, but when the vast majority of your peers are greedy or scared it is time to prepare for a short-term countertrend move.
Thankfully though, now it finally seems like the chronically impatient and pathologically greedy "gold to da moon in the next 10 minutes" lunatics have crawled back into their holes and vacated the scene. Gold and gold-stock sentiment seems much more reasonable these days. Miraculously, there are even rational discussions about gold emerging on Internet gold forums, with ice-cold logic and reason drowning out the euphoric madness so common six weeks ago.
With this appealing emotional backdrop, with much of the anticipated gold and gold-stock pullback from the short-term overbought levels out of the way, this week seemed like an appropriate time to update and revisit our "Golden Bull Buy Signals" charts. We have been blessed to "prudently steel ourselves to expect the coming squall and ride it out with minimal discomfort" as I suggested in the original essay.
The long-awaited Golden Bull Buy Signals are shaping up rather nicely and the ideal moment to leap back in to the gold and gold-stock fray in fresh new speculations is rapidly approaching.
The charts graciously bear the tidings of this exciting news. First we will examine the Golden Bull Buy Signals in gold itself and then in gold stocks. Because gold stocks are ultimately nothing more than leveraged plays on the metal itself, the most important pieces to the speculation-timing puzzle lie within this Ancient Metal of Kings.
If for some reason I was forced to park all of my hard-earned personal capital into only one single investment for the next decade, it would most definitely be physical gold under my own immediate physical possession and control. The gorgeous chart above reveals why. Gold's awesome uptrend channel since early 2001 is a textbook-perfect picture of the early stages of an immensely powerful secular bull market!
Once again it is absolutely crucial to realize that no bull market rockets up in a straight line until its final terminal bubble climax stage near the very end. Normal pullbacks are to be expected and welcomed as fantastic speculation and buying opportunities, not perplexing events to be feared.
There have already been about five major gold rallies in our young gold bull market to date, all numbered above, and subsequently five major pullbacks right after these very rallies. Provocatively, and indeed in tell-tale bull-market signature fashion, each major gold pullback only managed to bludgeon gold down to a higher low. The very definition of a bull market is a series of higher lows and higher highs in any given price over a year or longer.
While Wall Street employees and government bureaucrat sycophants still refuse to acknowledge the new bull market in gold for selfish political reasons, pretty much everyone else is beginning to understand the reality of the new gold bull shown in such crystal-clear terms on any gold chart today. A new gold bull is no longer a mere hypothesis, but a fire-tested indisputable fact. Hallelujah!
Since the gold bull is for real, investors and speculators really only have one strategic way to play it. All long-term investors need to do is buy gold, wait a few years or more, and sell it at much higher prices. Piece of cake! Tactically-minded long-term investors can farther increase their overall returns by trying to buy gold after its pullbacks rather than near the tops of its periodic major rallies.
Gold speculators are not as concerned about the long-term as much as short-term trading. All the speculators need to do is buy gold after the pullbacks and hold it for a few months until gold surges higher and short-term gold sentiment once again waxes a bit too greedy. Then they can ratchet up their stops as we do at Zeal and prepare to get stopped-out or they can outright sell if they are confident that the latest interim high has already been reached.
These strategies are merely variants of the core essence of all investing and speculating, the ancient wisdom of Buy Low Sell High. As this essay is about the Golden Bull Buy Signals, for the sake of this discussion we are concerned about where and when exactly to Buy Low.
As in the earlier version of this essay welcomed with such vehement popular derision, I still find myself entranced by gold's 200-day moving average, the heavy black line on the graph above. In the entire gold bull market to date, gold's mighty 200dma has proven to be rock-solid support. Indeed, as discussed last time, the 200dma for gold runs parallel with and forms its technical lower support line.
In the graph above it is readily apparent that every single time the price of gold touched or even closely approached its 200dma, it was an ideal time to buy for both long-term investors and gun-slinging speculators. Today gold's 200dma is running around $329, so we are getting tantalizingly close to this long-awaited Golden Bull Buy Signal once again. If you seek to add to your own gold positions, you may wish to carefully watch gold relative to its 200dma for the buy signal which could be triggered very soon.
On a side note, it would not surprise me if gold falls a bit below its 200dma this time around. A lot of traditional technicians, including me, want to see the Ancient Metal of Kings head down and bounce off of its old $325 Maginot Line nemesis that relentlessly confounded us to the upside for so many years. If we could get a $325 bounce it would be a powerful bull-market confirmation, proving that heavy old resistance is now evolving into solid new support levels for gold. I hope it happens!
Provocatively, gold closely approaching its own 200dma is not the greatest Golden Bull Buy Signal advertised in its bullish chart. There is another buy signal that is more subtle and requires much more patience to wait for, but it is more powerful and immediate and therefore more appealing to short-term speculators. It is flashed when gold's 50-day moving average, shown in red above, converges with its 200dma.
This exciting event has only happened twice so far in our young gold bull to date, and both episodes are noted with red arrows above. It is interesting to observe that both of the most powerful gold rallies to date, rallies 3 and 4 combined as well as our recent awesome rally 5, both emerged out of a convergence between gold's 50dma and 200dma.
This moving-average convergence Golden Bull Buy Signal seems to emerge because gold tends to consolidate its gains in a sideways trading pattern for a time after each new interim all-bull-market high is achieved. One of these convergence zones is highlighted above with a red-shaded oval. This sideways consolidation allows gold-market players to grow comfortable with new price levels and build the base necessary to launch the next major gold rally.
While there is certainly no guarantee that gold will loiter long enough to allow its 50dma to converge with its 200dma this time around, if we do happen to witness this awesome buy signal in the coming months it may be the best indication that a major new gold rally to new heights is imminent. Interestingly, gold's 50dma has already apparently topped and has turned south indicating that this awesome Golden Bull Buy Signal could indeed be triggered again in the coming months.
If gold was to plunge to $325 before this pullback ends and its next major rally takes it up 12%-25% as in the past, we could be looking for the next interim tops somewhere around the $365 to $405 range before the end of this year.
With $400+ gold being a high-probability bet within the coming months, it is hard to believe that only 2 years ago we were languishing at the depths of bearish despair around $255 and the prophets of doom declaring sub-$200 gold imminent were coming out of the woodwork! How times change. If today's gold action ever makes you feel down, all you have to do is remember how you felt in early 2001 and it will make even the worst gold pullback feel fantastic.
Speaking of languishing, gold-stock behavior continues to confound and confuse many. As I have worked with our private consulting clients around the world in the recent months, it has become increasingly evident that a major source of concern is the gold stocks. The primary bone of contention is the fact that the HUI was not able to achieve new levels in early February much better than its June highs, even though gold was over $50 higher. What is going on?
Like many gold-stock investors and speculators, I too have been pondering and puzzling over the apparent lagging of gold stocks relative to gold during the latest gold breakout. I have to admit that I don't find it particularly troubling, however. I have had a working theory for a couple months now that I initially shared with our Zeal Intelligence subscribers in early February that may help explain this apparent anomaly.
While this theory is discussed in depth in the February issue of Zeal Intelligence, in a nutshell I think that gold stocks were way overbought last summer. Gold broke $300 and then $325 for the first time in years in rapid succession and the euphoria surrounding these noteworthy events was enormous. The near vertical rise of the HUI as gold approached $325 was breathtaking, as is quite evident in the graph above.
At the time some folks even thought that a gold-stock bubble had been born, but thankfully that didn't prove to be the case. The reason we can be so confident that there was no gold-stock bubble is also apparent in the chart. After this vertical gold-stock rally gold stocks didn't totally collapse and begin a long bear market like the NASDAQ, but they began to carve a successive series of higher lows validating their concurrent bull market with gold itself.
I believe that gold-stock investors should mentally erase gold's trading last summer above the HUI top resistance line shown above. Sentiment was extreme, greed was everywhere, and gold stocks simply became overbought and ran up far too fast too soon. This was inherently unsustainable of course, and the HUI was forced to consolidate sideways for over a half year after this spectacular vertical rise.
If you imagine the chart above with everything over the HUI resistance line erased, a typical bull-market pattern emerges with no anomalies. The recent early February HUI highs were within its uptrend and were indeed much higher than its old resistance levels around 120 during its breakout last summer. Last year's awesome gold-stock rally simply overextended itself and it needed to wait for gold to catch up.
The HUI's mega-rally that topped last summer ended up implying magnificent gold-stock to gold leverage of around 10-to-1. This extreme level of leverage can be appropriate for certain junior gold mines at certain times, but it is probably quite excessive for an entire index including major mature gold producers.
In contrast, if we measure the HUI's implied leverage on the all-important underlying gold price from November 2001 to January 2003, it weighs in on the order of 5-to-1. This means that a 10% rise in gold during this time period would translate into a roughly 50% rise in the HUI. This level of gold-stock leverage is much more reasonable and much more sustainable over an entire bull market than 10-to-1 leverage.
So perhaps the apparent lagging of gold stocks to gold recently is nothing to fear as it is merely illuminating the outrageousness of last summer's vertical gold-stock ascent so early in its bull market. Vertical ascents and bubble blowoffs are to be expected at the end of major bull markets after they have run for many years, not way back in the early initial stages of a bull like we sojourn through today.
As the chart above shows, the HUI is running up nicely within its gorgeous uptrend pipe, carving higher lows and higher highs. The slope of the entire graph is much more reasonable and in line with gold's advances to date than the left half of the chart ending at the mega-HUI spike of last summer.
Interestingly the HUI also exhibits the same Golden Bull Buy Signals we witnessed above in gold itself. Any time the HUI approaches or bounces off its 200dma it is a good solid buy signal. Like in gold, however, an even greater buy signal is flashed when the HUI's 50dma converges with its 200dma as highlighted in the graph above.
In terms of the first lesser buy signal, the HUI today is definitely well into buy territory! For the first time in the whole bull market to date the HUI recently pierced its 200dma to the downside, frightening many. While only time will tell whether this breakout to the downside will be short-lived or sustained, I suspect that the HUI is pretty close to its ultimate interim lows today.
This downside breakout is actually not too surprising in light of the incredibly distracting market noise of the war. It is hard to remember a time of such similar widespread confusion across all the financial markets as we are witnessing today. Just like September 11th, major geopolitical developments can sometimes spawn funny market behavior, but they can never alter the already existing underlying primary trends. After the initial euphoria over Washington DC's annexation of Iraq wanes, odds are that all major existing financial market trends in all major markets will continue on their old courses unmolested.
The second and more powerful Golden Bull Buy Signal for the HUI, when its 50dma converges with its 200dma, hasn't happened yet. I suspect it will be triggered in the near future, however, as the HUI's languishing under its 200dma today is really dragging down its 50dma rapidly as is evident above. As the two converge both investors and speculators can eagerly look forward to an ideal time to deploy fresh new gold-stock positions after being stopped-out in the recent pullback.
We are closely watching both gold and the HUI and will be loading up on fresh new trades for the subscribers to our premium Zeal services when the opportunity feels ripe. We have been greatly blessed to ride all the major gold and gold-stock rallies up in this bull market to date and we are eagerly anticipating deploying our capital for the next upleg.
In the meantime, gold and gold-stock investors should zealously ignore the distracting war noise and focus on the crucial underlying fundamentals and technical trends. We have suffered through an anticipated sharp gold and gold-stock pullback, but these are normal in all bull markets and are nothing to fear.
The coming investment and long speculation opportunities in both gold and gold stocks as this pullback ends will be simply awesome! The powerful Golden Bull Buy Signals are relentlessly approaching.
Adam Hamilton, CPA
March 21, 2003
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