first majestic silver

Junior Gold Stocks Key

President of Graceland Investment Management
August 6, 2013

ECNS (English China Daily News) reports that “all may not be well”, in the Chinese gold market.  When gold crashed in April, crowds of Chinese citizens were seen buying gold, but they may not have realized how much further prices have fallen since then.

Small investors throughout China now find themselves stuck with depreciated gold assets as vendors tighten their purse strings, many of which are conducting trade-only deals.  A woman surnamed Liu was shocked to discover that the gold beads she had purchased for 390 yuan ($63.61) a gram at a Hong Kong market back in April were now only worth 264 yuan a gram at Beijing's Caishikou Department Store on July 24, reported the People's Daily.” – ECNS News, August 6, 2013.

Small gold investors in China may not be as committed to holding their gold, as India’s citizens are, and they may be starting to worry about drawdowns of 30%, and more.

Small Chinese gold investors appear to be somewhat demoralized, and I wouldn’t count on them to buy any more price declines in size, at least for now.

Regardless, my view is that Western gold investors need to focus on today more than tomorrow.  The $1100 - $1200 zone seems to offer good support for gold, and the $1300 - $1400 area could be ideal for profit booking. 

To fine tune this rough “range trade”, please see above chart.

As gold rose to key HSR (horizontal support & resistance) in the $1320 area, my stokeillator soared to about 90.  I warned bullish investors that gold needed to rest, and that’s exactly what has occurred.

As of this morning, the lead line of my stokeillator is down to the 55 area.  It could approach the important 20 zone, within just a few days.  That’s where minor trend price surges tend to originate from, and they typically last for 1 to 3 weeks.

Technically, silver looks a bit stronger than gold right now.  To view the current set-up, please see above chart.

The stokeillator (14,7,7 Stochastics series) lead line is at the 39 level.  Rallies can start from here, but unless you have no silver at all, I would try to wait a few more days before buying.

Junior gold stocks are the favourite asset class of many investors in the gold community, and a major upside breakout appears to be “near, but not quite here”.

You are viewing the GDXJ daily chart.  From a technical point of view, the more times that the price touches a downtrend line, the more important an upside breakout becomes.

On this chart, GDXJ has touched the downtrend line four times.  Since GDXJ began declining from the $100 price area last fall, there have been minor trend rallies (one to three weeks in terms of time), but nothing more substantial has occurred.

Watch that red downtrend line very carefully.  A breakout above it could trigger an intermediate trend move, favouring the bulls!

Going forwards, I think the senior gold stocks will lag the juniors, for both fundamental and technical reasons.  The price of gold is less important to an exploration company than it is to a producer, at least in the short term. 

That’s the GDX daily chart.  A potential inverse head and shoulders bottom pattern began forming, but the rally from the head area has failed too quickly.  The pattern is now a bit of a mess.

Also, note the position of my stokeillator.  The lead line is still quite high, sitting at about 55.  Patience is required.  Bullish investors should hope that if GDX moves under $25, it forms a double bottom in the $23 area.

Since the current downtrend began almost a year ago, each GDX rally has failed to exceed the previous minor trend high.  When that finally happens (hopefully on the next upside move!), the intermediate term downtrend will be defined, at least technically, as finished.

In the meantime, that day is not today.  It’s very important not to get overly excited trying to call “the low”.  The low will be defined by a trending pattern of higher highs and higher lows that comes after the low is reached.

My suggestion is to focus your “prediction energy” on predicting whether gold stocks appear to offer value, rather than when they could go “parabolic”. 

Gold stocks do offer value, but parabolic moves usually happen only when massive short positions get force-liquidated by banks, brokers, and dealers.

You are looking at a Bloomberg/CFTC table of speculative positions in various commodity markets.  Speculators clearly have huge net short positions in five commodities, but not in gold or silver. 

Unless speculators build a large net short position in the gold and silver futures market, a parabolic move to the upside is not very likely, at least at this point in the economic cycle. 

The significance of an upside penetration of the GDXJ downtrend line is probably underestimated, by most technicians.  Many junior gold stock investors are probably demoralized, and focused on bullion as a “growth with safety” trade.  I think this focus on bullion is a mistake.  The coming upside penetration of the GDXJ trend line should be the key that opens the gold stocks gulag door, and sets all the prisoners free!  The only question is, are you ready for a breakout?

 

Special Offer For Gold-Eagle readers:  Send me an Email to [email protected] and I’ll send you my free “Aussie Triple Play” report.  Three great Australian gold stocks look ready to breakout to the upside, and begin a trending move of higher highs and higher lows.  I’ll show you the tactics to use for each of them.

 

Stewart Thomson

Graceland Updates

 

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Stewart Thomson is president of Graceland Investment Management (Cayman) Ltd. Stewart was a very good English literature student, which helped him develop a unique way of communicating his investment ideas.  He developed the “PGEN”, which is a unique capital allocation program. It is designed to allow investors of any size to mimic the action of the banks.  Stewart owns GU Trader, which is a unique gold futures/ETF trading service, which closes out all trades by 5pm each day. High net worth individuals around the world follow Stewart on a daily basis.  Website: www.gracelandupdates.com.


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