Weekly Gold Market Outlook
A Gold & Currency Digest
To Correct Or Not to Correct?
Who can believe those copper prices, eh? I think there's a bullish message in there for gold… scope, baby.
I'll issue an update this weekend. I just wanted to say that there are some mixed (chart) signals out there. The base metals look invincible (though that's usually a sell signal). Even the gold stock averages are trading well - the HUI/Gold ratio bounced nicely today - the sluggish action in some of the blue chips (Newmont and Anglogold) notwithstanding.
On the other hand, some signs of exhaustion in the precious metals charts - at least in the very short term - have shown up this week. In light of events, it is reasonable to expect a correction here. The gold market is overbought on a short term basis, and silver is now overbought on both the short and intermediate term basis. Stoked by speculation about the launch date of Barclay's silver ETF, some geopolitical nonsense, and fresh weakness in the USd, the front month silver contract peaked at US$13 on Tuesday while COMEX gold futures hit an intraday high of around US$608.
I hate to speculate on the size of a correction at this point, because I'm not convinced there'll be one; but I'd be surprised if it were anything other than a short term correction (i.e. one that marks an end to the 10 month advance).
…at least with respect to gold (a case could be made for an intermediate peak in all the other metals).
Yes the gold stocks are overvalued for today's gold price, but gold is still undervalued with respect to the amount of money that has been pumped into this system over the past ten years - the spectacular gains in the other commodities alone suggests gold still has upside to go. Whatever gold price the gold stocks are discounting today, they may well end up being right, or even conservative. The fact that the commodity boom is running on the erroneous notion that economic growth and an increase in real wealth (whether in China or the US) are behind it means only that gold is undervalued, not that it is rising as a general commodity play - I believe that investors are only now flocking to gold as a hedge on a general commodity play, but that the inflation reality driving these advances is underpriced regardless.
I'm not saying gold should go up because other commodity prices are; rather, I'm saying that gold should go up for the reason that the other commodities are really going up, which is not the same reason the market generally thinks so.
What the other commodity gains suggest is that these things can move farther than any of us originally imagined.
It feels too obvious to call a correction here, and Wall Street lore has it that the holiday-shortened weeks are usually countertrend anyway. There is risk due to the age of this advance, and because of the positive correlations between gold and the other commodities (and stock markets). However, our allocation is hedged and prepared for anything up to an intermediate correction in the gold sector - and the other markets as well. So the million dollar question from where we sit is whether that's all she wrote, or whether we'll see our targets and beyond yet? I don't know, but my hunch is that if we don't get a correction here, in the next few days, I think we'll go higher soon, and continue through June.
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
April 13, 2006
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