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Putting Gold and Gold Stocks in Proper Context

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Analyzing the sector in its current context in comparsion to the past.

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The precious metals complex had a great rebound at the end of the summer but is now in the midst of a correction. Recently my firm wrote that the correction was nearing an end. We believe that to be the case. A short-term bottom could occur sometime this week. However, the precious metals sector was unable to retain much of the very strong momentum it previously had. Thus, the metals and stocks will need some time to confirm support and generate positive momentum before they have a chance of breaking to new highs. That being said, we wanted to take a broader view and analyze the sector in its current context in comparsion to the past.

Gold is likely to end up in its longest consolidation, which would surpass the 2006-2007 and 2008-2009 consolidations. Note the chart below and our observations on the three consolidations. Gold's current position is weaker than the previous two consolidations but that won't be of concern as long as the metal holds above the 400-day moving average at $1650. Whether gold holds at $1650 or bottoms at $1600, the metal is likely to remain in this consolidation for a while.



Checking the gold stocks (INDEXNYSEGIS:HUI), we see that the 400-day moving average provides excellent context. The gold stocks put in a strong double bottom and rallied up to the moving average. The market is now correcting the previous overbought state. In the three previous examples, the market began its rebound off of a major bottom (2000, 2005, 2008) and encountered initial resistance at the 400-day moving average.



We focus on 2005 and 2008 because those are most applicable to today's situation. In 2005, the HUI traded around the moving average for almost three months before pushing up to the previous all-time high. A similar thing happened in 2009. The HUI wrestled with the 400-day moving average from May until September before eventually rallying back to all-time high.

To conclude, there is nothing to be worried about in regards to precious metals. First, we should note that the shares have been showing more strength than the metals, which is always a very good sign for the near future. Second, the metals and more specifically the shares have been acting exactly as they did within a similar context in the past. After a rebound from a major low, the shares typically correct and wrestle with the 400-day moving average before embarking on a move to previous highs. Traders and investors are urged to be patient and accumulate at support when sentiment is constructive. Now while the market is wrestling with the 400-day moving average is the time to do your research and find the companies that will lead the next leg higher and outperform the market indices like the HUI, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (NYSEARC:GDXJ).

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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