-- Posted Monday, 2 October 2006 | Digg This Article
In my pieces ‘Gold – It’s a Bull Market Stupid’ and ‘Selling Juniors? - You Must Be Kidding!’ I made a strong case for an upcoming major ‘BUY’ opportunity anytime soon based on the extreme low relative values for both gold and the HUI.. So where are we now? Did things improve since last week? And if so should we buy now?
Well, let’s first take a peek at the updated gold chart itself since gold still finds itself in a down trend which started early May, but for how long?
As described in my previous pieces the rGold chart projected a maximum down-side potential of $560. Let’s review first what I said last week:
Excerpt Gold/HUI comments September 24
Although encouraging gold is still not out of the woodworks since it still has some hurdles to overcome.. Gold rallied several times to its 200 dma at $592 last week but couldn’t overcome that hurdle.. So first we would like to see gold to take out its 200 dma again to the upside..
END.
Well, this week gold did manage to slash its 200 dma ($595) to the upside indeed and rallied all the way up to $607
Fine you’ll say, buy now?
Again the answer is still no. Although slashing its own 200 dma to the upside is very encouraging, fact is that gold still remains in its down-trend which started early May.
I would like to see the down-trend (D-line being) broken to the upside which would mark the end of gold’s major correction which started early May 2006! The D-line will cross gold’s 200 dma within two weeks from now, so if gold can hold its 200 dma support from here on then we could have a break-out within those two weeks from now.
Will it happen?
My bet is yes since the short players will be having a hard time pushing gold much further down at these depressed levels due to an overwhelming physical demand.
In my previous update I mentioned that UBS reported an unbelievable physical demand, this week the Arab News reported similar news:
Fall In Prices Ignites Demand for Gold
Arab News: (Sept 25)
Excerpt:
“The demand has shot up by 100 percent over the last fortnight itself, “ said Girish Choksi, an Ahmedabad-based trader, adding that daily purchases had doubled to 1,000-1,200 kg in the western state of Gujarat, from about 500 kg. “By the time Diwali comes in October, there will be plenty more purchases of gifts, jewelry and even gold bars,” he added.
Mukul Sonawala, president of the Bombay Bullion Association, said sales could even rise by 5 percent in the whole of 2006 over last year’s 750 tons due to the surge in festival buying. “The monsoon rains have been good, stock markets are booming and there is a lot of money in the hands of people,” he said.
END.
It’s my strong believe that once gold take out it’s May down-trend it will mark a major ‘BUY’ opportunity for the gold shares. Here’s why:
First of all let’s examine the correlation between gold and the gold shares. You would expect the HUI to go up when gold goes up and vice versa.. Although some people do challenge this relation ship reality simply proves otherwise..Yes, there’s a very strong correlation between gold and its shares indeed..The chart below doesn’t require any further explanation:
This chart proves beyond any doubt the strong correlation between gold and the HUI.
Fine you’ll say, but that’s just a one year overview, what about the last 5 years?
Believe it or not but the 5 year chart shows an extreme tight correlation between gold and its shares as well..
Now if you examine this chart carefully you’ll notice that both major HUI upswings were being characterized by the HUI outperforming gold. The problem however is that at the start of such a huge HUI upswing most investors are sleeping and waiting for gold to go up first.. Now take a close look at the May 2005 period. The HUI started to rise while gold was still trading sideways and continued to do so for many months to come.
Now how could we have recognized the May 2005 ‘BUY’ opportunity for the HUI? Well, as stated above not by looking at gold itself since it was trading sideways only..
Readers know I often refer to the relative HUI chart in order to determine major bottoms for the gold shares but this time I would like to offer an other interesting chart which plots the relative gold value against the HUI.
Why this combination?
Well, as we’ve seen above there’s a strong correlation between gold and the HUI. We also saw that the gold chart itself is not of a big help in order to spot major HUI bottoms. But what does the relative gold chart say about potential HUI bottoms?
Well, after plotting the rGold chart on top of the HUI a stunning image emerges:
Now what does this rGold/HUI chart tells us?
The answer is simple: All major HUI ‘BUY’ opportunities were being characterized by a major low in gold which translated itself in rGold values between 0.95 – 1.00
Furthermore you’ll notice that the window-width (period of rGold below the 1.00 mark) of BUY opportunities is less than two months. The last time rGold dropped below the 1.00 mark was on September 14 and clocked a low of 0.97 on September 19. In other words, the window of ‘BUY’ opportunity opened already two weeks ago and according to its own history it could be closing within a couple of weeks from now.
So what do we have here:
- Gold chart says gold could break-out within two weeks from now
- rGold/HUI chart says window of HUI buying opportunities is open
So does that mean you should be buying gold shares now?
Well, as stated earlier I would like to see gold breaking out first but as the rGold/HUI chart suggests we can’t be far from an ultimate bottom either. In other words, the downside risk of buying gold shares at these levels is low..
Some high quality gold stocks already broke their recent down-trend and are on their way to news highs. Some of our TGDL discovery TOP 10 stocks are on the verge of breaking their recent down-trend as well and we will alert our members accordingly.
Eric Hommelberg
The Gold Discovery Letter,
The Gold Drivers Report
www.golddrivers.com
Readers interested in receiving our break-out alerts can join us today as of little as $15 a month. Technical break-out alerts are one of the main features of the Gold Discovery Letter which has furthermore a strong focus on tracking down major discovery cases. The TGDL Discovery portfolio has gained already +400% this year. Subscription info can be found HERE
-- Posted Monday, 2 October 2006 | Digg This Article
