-- Posted Monday, 24 September 2007 | Digg This Article

Encouraging signs from current Gold prices continue to build the case for a sustained move in Gold Stocks.

It’s Déjà vu all over again!

For nearly 2-years the 370 level on the HUI proved to be tough resistance. But then suddenly, last week, it burst above 370 and swiftly moved to re-challenge 400.



Chart 1 - HUI (top); HUI vs. Dow (red); HUI vs. Gold (blue)

As we find ourselves rechallenging this important level we need to put aside all semblance of hope, look ourselves directly in the eye and ask – is this going to be the breakout in Gold Stocks that we’ve long been waiting for?

The signs are encouraging:

• The HUI looks like it has formed a double bottom against the Dow (red line) and should outperform going forward.

• The heart stopping moment in August when Gold Stocks broke below major support against Gold Bullion (blue line) seems to have been a false breakdown. The ratio has recovered and the test of support looks to have been successful. As discussed in Gold Stock Investing & Current Gold Prices the out performance of Gold Stocks against Gold was key ingredient in the last great Gold Bull market from 2001-2002.

Some more encouraging signs:



Chart 2 - Gold In Yen (top) ; Gold vs. Industrial Metals (bottom)

One of the strongest currencies over the last 2 months has been the Japanese Yen as the much trumpeted Yen carry trade has been unwinding. It is therefore promising to see Gold denominated in the Japanese Yen challenging its highs.

At the bottom of chart 2 is the Gold versus Industrial Metals ratio. This is another important indicator as Gold is a counter cyclical asset which performs best when economic conditions are deteriorating (Industrial metals are well correlated with the economic cycle). In Contrarian Stock Market Investing Guide part II we showed that there was a strong correlation between the above ratio and the Japanese Yen. Therefore, further strength in the ratio implies a stronger yen which to date has coincided with a stronger Gold price.

The ongoing credit crunch is slowly playing on investors nerves and it doesn’t seem to be going away in a hurry. It is dawning on investors that no amount of interest rate cuts will cause banks to start lending at their old frenetic pace. In other words, the problems are systemic and as we have predicted for over 2 years, Gold will ultimately be the safe haven of choice.

The HUI is now overbought and a minor correction would probably be helpful to the technical picture. The necessary ingredients for a sustained move in Gold Stocks now look to be in place and we continue to encourage subscribers to average into positions over the next few weeks.

More commentary and stock picks follow for subscribers…

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Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.

Please visit my website for a free trial to my newsletter.

Click here: http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
-- Posted Monday, 24 September 2007 | Digg This Article

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