No earnings rally. The DOW got smashed last
week and we don't think we are at a bottom yet. We're close.
But not close enough. We're on a buying watch though. Every
day we are updating WSW Pro subscribers on whether or not
we think the bottom is in.
Right now everyone is watching the DOW, but
don't forget about gold. Unfortunately, there is a lot not
to like about the way gold is acting right now. After having
a nice run last Fall, the XAU gold stock index had a sharp
correction between November and the first week of February,
while gold fell down to 410.
After making an important bottom in February,
the XAU rallied up to 104 and the price of gold almost hit
450 in the middle of March. Since then however it has been
a tough story for gold bulls. The gold stocks started to once
again lag the metal near the March high and the XAU has been
falling ever since.
It is clear that gold and the gold stocks are
undergoing a short-term correction. Some think that both will
hold their February lows and form a double bottom that will
lead to a huge rally later this year. Others fear that the
February lows won't hold and gold will get totally smashed.
Some think the gold bull market is over. CNBC no longer even
talks about gold.
There are two troubling signs. First, the gold
stocks are continuing to lag gold. This is bad, because the
action in the stocks tends to lead the action in the metal.
As long as the stocks continue to trend down quicker than
gold, the downtrend will be in place.
Secondly, commercial futures traders remain
heavily short in gold. They are very apt at timing the market.
For the past four years, every time they have been heavily
short gold the metal has dropped. They have also covered at
major bottoms timing them correctly too. It doesn't pay to
bet against them.
When gold hit 410 in February, commercial traders
covered their positions. But as gold rallied back up towards
450 they piled on new short positions. What is troubling is
that, even though gold has been dropping for the past four
weeks, the commercial traders have barely covered at all.
As of April 12, 2005, the commercials are 142,000 contracts
net short. Bottoms haven't come until they have been net short
much less, 40,000 - 75,000 contracts. It will likely take
a drop in gold to at least the 400-410 to cause them to get
their short positions to that lower level.
We are in a short-term downtrend and downtrends
come to an end in one of two ways. Either they end in a final
selling climax or in a slow base building sideways process.
That would mean Gold would have to fall to 410 or even below
it, with the XAU gapping down big one morning and then reversing
on high volume to rally into the close. This is exactly how
the gold bottom came a year ago in May. Downside for the XAU
is probably 10% from here, with a fall of around 5% most likely.
A slow bottom would happen with the XAU trading
in a 5-10%% range, say between 89 and 94, while the metal
acts weak and falls to the 410-415 area. For this type of
bottom to occur however, the XAU will need to reassert strength
against the metal. The XAU will have to begin to outperform
gold. This isn't happening at the moment and is the least
likely scenario. But it could happen if the XAU is simply
so oversold now that most of the sellers have been flushed
I am not sure exactly how gold is going to make
its next bottom. I can't predict the exact price it will happen
at. I just know what it needs to do in order to bottom and
what it will look like when it comes. Whichever way it decides
to bottom, it should do so within the next few weeks and I
plan on buying more gold stocks when it does happen.
When that bottom comes, gold will be lined up
to rally going to the end of the year. It is easy to get caught
up in the negative emotions that are created by a correction.
As long as the correction continues, more and more people
will throw in the towel and give up on gold completely. That
is what corrections do; shake out the weak hands.
But the fundamental story for gold is still
very much intact. In fact, it is stronger than ever.
The trade deficit is still growing. The dollar
is still in a bear market. What's more, gold has a seasonal
tendency to rally in the Fall and into the end of the year.
In the past two years, gold made important bottoms in the
April/May time frame and then made yearly highs in December.
This dip in gold stocks and gold will end up
being a buying opportunity. It should be the final bottom
before gold rallies for the rest of the year. And it doesn't
matter whether it happens as a double bottom, a slow base
building bottom, or a final quick selling washout.
Keep your eye on the ball. I'll bet that the
size and force of the next big gold rally will take a lot
of people by surprise.
To find out what gold stocks Mike Swanson holds
and plans on buying subscribe to his free Weekly Gold Report
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