Weekly Gold Market Outlook
A Gold & Currency Digest
Gold Shares Threaten Big Breakouts
It is interesting that the gold shares are on the verge of breaking out of a two year holding pattern, just as the USd is poised to reverse a primary sequence. It's not anomalous really, since as we've pointed out in the past, gold bull markets aren't just about foreign exchange rates. Indeed, the gold sector charts look so good I'd bet that both the USd and gold sector will continue on in their positive correlation before betting the USd chart suggests a failure in gold stocks. The South African and Silver producers continued to lead the group this week… the former have been relative strength leaders since May/June, confirming the fact that this gold rally is driven by foreign currency gold trends. Over the past 10 trading sessions: Harmony, Silver Standard, Randgold, Gold Fields, Eldorado and Glamis have led the pack at the mid to large cap levels. All of them, excluding Silver Standard, are in the BGI index (which is my 10 favorite picks in the sector). On a gold rally to my US$525 target, however, I would overweight Gold Fields, Randgold, Agnico Eagle, Harmony and Newmont.
Durban Deep is not in our portfolio because it doesn't meet the general risk criteria but the speculative plays are probably going to do better than others; DRD is due for a run as the Rand gold price catches up with the rest.
Naturally, I am bullish on all ten stocks in our index.
But I am singling out some names based solely on the merit of their recent relative chart behaviors and where I perceive most upside in the fundamentals. For the current move, the currency fundamentals alone suggest that we'll see more upside in the non US gold producers (South African and Canadian producers in particular), while the silver stocks may be a good bet if you're bullish on the regulatory approval of Barclay's silver ETF.
Stillwater mining (SWC) might be a good way to play the platinum / palladium group if you don't want to buy a Russian (?) or South African producer, yet want some exposure to the white metals.
But I'm most bullish on the precious metal gold.
At any rate, the likelihood of a major gold stock break out is good.
If the gold stock averages break out (resistance = 250-258 for the HUI; 115 for the XAU) here, a lot of calls are going to be made that the move is the beginning of the second phase of gold's bull market. But I don't think so.
Despite the length of the consolidation in gold stocks it is the trend in gold that determines such phases.
The last consolidation we saw in gold prices was but an interruption to the November 2004 breakout, and not the kind of thing that separated the prior advance from the current one. I believe wholeheartedly that we are still in the midst of the first phase of this bull market… somewhere in the last few innings perhaps. It is true that the gold sector was pretty much ignored last year and for most of this year, and that this represented a correction of sorts - the higher highs in USd gold prices being stealth in a sense. However, while that was a healthy fact for the inevitable extension of the trend, historians won't be able to spot it when they are separating the bull market sequences (on the chart) at some future date. They will see 2 or 3 year consolidations in the foreign currency price of gold but none in the USd gold price between 2001 and 2005 (so far). The most likely scenario in my outlook is that gold is headed for a climactic blow off to end the current first phase that began in 2001, leaving little doubt in anyone's mind that a long term bull market in gold has begun. Is there a more perfect way to end the first phase of a bull market than by forcing all "technicians" to at least acknowledge the new bullish trend?
I can't think of any. Besides, we gotta' get Prechter long before letting this thing really correct!
The technical implication of a breakout in both averages above (HUI & XAU) is for a 50% further advance, which means approximately 375 for the HUI and 165 for the XAU. If this were the beginning of a new wave in gold, I would bet on the full extent (plus) of those objectives. However, at the moment my targets are 300 for the HUI and about 135 for the XAU. I expect these targets to be met at just around the time that gold prices are passing the US$525 mark, which is my official target for phase one. I think we'll see the US producers lag this move and then lead the pack lower, despite higher gold prices, some time before the full objective of the breakout is met. However, should the first phase include a parabolic run to something like US$600, which is quite possible, or higher, exceeding my intermediate target, then we're going all the way to the technically implied objective on the gold stocks, making it the best phase 1 ever. For now, at any rate, the gold stocks remain a strong buy.
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
November 17, 2005
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