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Four Reasons Gold Stocks Are About to Rise
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Are you uneasy about gold stocks? After the
Federal Reserve raised interest rates last week, gold fell
19 points. We found out on Friday that as of June 28, 2005
commercial shorts had a massive 165,000 contract net short
position against the metal. After gold dropped some people
cried manipulation. Others just shook their heads at what
seemed like another beating for gold bugs.
I know most people are a little shaken up right
now. My advice - Don't be. I'm more confident and optimistic
now about what the future holds for gold stock bulls than
I have ever been before. In fact, over the past few weeks
I've been buying gold stocks hand over fist.
At any moment, gold stocks are going to turn
up and begin another giant bull run. That statement might
sound bold to you. You might find it hard to believe, especially
with the recent drop in gold, but let me explain to you why.
1) Gold is Going up Now Against All Currencies
Since May, gold has been rising along with the
dollar. We have never seen this before. In fact gold is now
going up against all major currencies. It broke out against
the Euro a month ago and just broke out against the Japanese
yen.
This is a change in the macro trend in gold.
For the past few years, the gold bull market has primarily
been driven by a bear market in the dollar. As the dollar
has dropped, institutional investors have sold their dollars
and bought gold as a hedge. Now that currencies all over the
world are starting to drop against the metal, investment demand
for gold is going to become international.
Since the May bottom in gold, the yellow metal
has become the world's best performing currency.
2)Long-term XAU Chart Spells Breakout
Since their May bottom, gold stocks have had
the largest rally off of a bottom that they have made during
the past three years of this gold bull market. The rally has
been nothing but amazing.
That rally came to an end when the XAU hit resistance
at 95. This 95 level is major resistance as it is the intersection
of the 150-day moving average on the XAU and the resistance
point of the downward trendline connecting the November and
March peaks in the XAU. It also represents a fibonacci 50%
retracement level of the November high and May low.
The 95 level has held down the XAU for the past
three weeks. Once the index closes above it you will see a
key breakout in gold stocks that will take it to the 105-110
area.
3)Gold Stocks Are Outperforming Gold
Gold stocks tend to lead the metal. Since 2002,
we have seen three major uptrends in gold stocks. A fourth
one is just beginning right now.
Notice the green price relative to gold (XAU/gold
ratio) on the chart above. When this line is rising it means
gold stocks are outperforming the metal. Each of the three
major uptrends in gold stocks began when the stocks started
to outperform gold. For seven months the stocks lagged the
metal. This relationship switched in May.
What is amazing now though is that gold stocks
are growing stronger when compared to the action in the metal.
Even though gold fell down to 421, over the past week, gold
stocks barely fell at all, with the XAU standing firm above
90. In fact on Friday, when gold fell over 9 points, the XAU
managed to close in the green.
One has to ask oneself, if gold stocks are acting
like this when gold drops, what are they going to do when
gold goes up?
I'll tell you... They are going to explode in
value. This is a pure powder keg.
4)A Breakout for the XAU Appears Imminent
When it comes to the price action of stocks,
one rule is that large moves are preceded by sharp drops in
volatility. When a stock or market trades in a more and more
narrow range the forces of supply and demand become equal.
Eventually one side grows stronger than the other and the
volatility rapidly expands causing a large move in the stock
or market.
Think of it like a rubber band. If you take
a rubber band and stretch it you usually apply equal pressure
to both sides of the rubber band. If you let one side of the
band go it will quickly snap back to the other side.
The XAU has reached an extreme low in volatility
over the past four weeks. The indicators that I use to measure
volatility are called bollinger bands. When they narrow it
means that volatility has shrunk to an extreme level.
The last time this happened was back in March,
when the XAU was making an important peak. It then quickly
fell over 10% in three weeks.
Another large move is about to happen. In fact,
judging by the bollinger bands, it is likely to happen at
any moment. This time though, it should be to the upside because
of the strong performance of the gold stocks against the price
of gold. Notice back in March they were actually underperforming.
Now they are outperforming.
The XAU is knocking on 95. It should bust right
on through any day now. You need to be fully prepared and
ready. This is not the time to get nervous or scared about
gold stocks. It is the time to get excited. The fuse is lit.
To find out what gold stocks Mike Swanson holds
and plans on buying subscribe to his free Weekly Gold Report
at http://wallstreetwindow.com/weeklygold.htm.
****
Disclaimer
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that any of the information contained in this article may
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may have positions in securities mentioned in this article
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