Gold Stocks Move Higher Ahead of Summer Gold Market Rally

May 11, 2001

Gold stocks showed their first signs of life Wednesday, already providing preliminary confirmation of our earlier forecast for May to be the "magic month" in the gold sector. As is plainly evident from the charts of most actively traded gold stocks, the gold market is ready to explode upward this summer.

While it may seem atypical and perhaps even contradictory to many investors, the fact that gold and stocks can move higher together (short-term at least) is not out of the question. Fundamentally, the latent strength of the gold sector is a manifestation of the massive accumulation of physical gold and mining stocks that has been underway for several years now and has intensified in the last year-and-a-half. This incipient gold bull market is a premonitory warning of the economic and financial depression that is gradually descending upon the U.S. The year 2001, however, as we predicted in January in our first GOLD-EAGLE commentary of the year, will largely prove bullish for stocks but only because this year is an alternate year in the two-year equities cycle. In other words 2001 will serve as a bear market rally year in which stocks recover some of their losses from the previous (though not all), and there will be just enough upside to lure the unsuspecting bulls back into the game just in time to get mauled next year.

For long-term gold investors, this year will be a time of vindication and a cause for celebration as the size of the average gold stock portfolio will steadily increase in value throughout the year, beginning this month.

Wednesday was a big day for traders who happened to be long any number of actively traded mining stocks. Several leading gold stocks spiked higher during today's trading session on high volume, some as much as 20% or more! Echo Bay Mines (ECO) was one of the low-priced golds that saw a magnificent day in percentage terms. Traders in this stock on the long side of the market must surely be pleased with today's trading action, and unlike previous day's like today in recent months, this one seems to be the real thing. Based on our analysis, an upside continuation is likely. From a cyclical viewpoint, April and May are months in which the dominant short-term (i.e., the 3-month, or quarterly, cycle) and intermediate-term cycles are due to bottom. In some cases (namely Echo Bay) the cycles have already bottomed, and a case could be made that today was the beginning of what will be a broad-based gold stock rally over the next few weeks. However, as with anything relating to the market, we must await confirmation by a follow-through of today's impressive across-the-board action.

Gold Fields Ltd. (GOLD) was one of those actively traded gold stocks that saw an impressive day today, rising nearly 7% on big trading volume. Today's close in Gold Fields was enough to penetrate a benchmark overhead resistance level and clear the way for a bull run over the next couple of weeks. GOLD's dominant 3-month cycle was due to bottom this months, and based on today's action, has apparently already bottomed. GOLD is a buy.

From a long-term view, the chart for Agnico Eagle (AEM) looks beautiful and reflects very well the massive accumulation of shares in this stock. The two-year chart for AEM (below) shows the well-developed formation of a bowl-shaped accumulation pattern. A move to $9-$10 would seem logical, followed by a pullback of perhaps $1-$2, then the rocket ride really begins (likely by early summer).

Another gold stock which mirrors this chart pattern is that of Hecla Mining (HL), which had perhaps the biggest trading session of all the major golds today (up 22%). Indeed, Hecla now rates a strong buy.

Our favored blue chip mining stock-Placer Dome (PDG)-is still under active accumulation and will undoubtedly afford buyers with one of this year's biggest profits in the gold sector. Placers dominant short-term 3-month cycle is due to bottom next in early June so any significant move to the upside probably won't occur until then. Of interest, the two-year chart for PDG will show that every time PDG's 3-month cycle bottoms there is usually a quick upside spurt of several points. Make sure you are long PDG later this month if not now.

Like the gold market itself, the XAU index has overcome successive layers of downward trending resistance (i.e., supply). The chart pattern is that of a "fanline" retracement, that is, three consecutive downtrend lines broken by rising prices. Also, the XAU has double bottomed, with the second bottom higher than the previous one-bullish. Although a short pullback could be in the works for the XAU in the days ahead, there is really nothing standing in the way for a nice upward move in this index now that the confining overhead supply has been taken out. Expect a nice sustained upward move to commence in the XAU over the next 4-6 weeks and lasting into the fall.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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