| 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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