The Opening Bell: Gold Stock Rally Beginning
Mike Swanson (7/09/07)
It is starting to be fun to own gold stocks once again. On Fridaythe XAU and HUI broke out of a resistance downtrend line that goes back to April on highvolume. Gold stocks are showing the classic signs of putting on a key breakout. For over ayear now they have been trapped in a long consolidation phase, with 125 and 150 markingrespective support and resistance. Now another test of the 150 level within the next fewweeks appears to be imminent. If the XAU can decisively rally through 150 then a new bullrun in gold stocks will finally begin. Let me show you this on the charts.
In the past five years we have seen the XAU and HUI go through two long periods ofconsolidation that ended with powerful new bull runs. During both periods of consolidationthe XAU traded between its 200-day upper and lower bollinger bands, just like it has donefor over the past year. Once the XAU closed above its upper band and stayed above it forover a week a new bull run began. The XAU appears to be headed towards this upper bandonce again. A close above it on a weekly chart will mark the beginning of a new bull run.
These bull runs actually started when the XAU/gld, HUI/gld, andGDX/gld ratios broke out of ten month plus downtrend resistance lines. When these ratiosare declining it means that gold is outperforming the gold stocks. Gold stocks tend tolead the action in the metal so the trend of this ratio is a powerful indicator of theoverall direction of the gold market. This ratio has been in a decline for over a year,but on Friday all three of the downtrend lines for these ratios were broken. This is anextremely powerful buy signal, which indicates that the trend is up.
Going forward I expect to see the XAU and HUI to quickly attacktheir 200-day bollinger bands. They will then pause somewhere around them, likely a bitabove them, to digest the recent gains. If they hold up at this level and continue highergold stocks will be poised to rally for the rest of the year.
We've been waiting for some strength to come back into the goldmarket. Recent weakness early last month even prompted me to go to temporarily go to cashin fear of a breakdown and other prominent gold writers also gave warning signs. Wehaven't broken out yet. The ultimate buy signal of a rally above the 200-day bollingerband hasn't come yet. But last week's rally in gold stocks certainly puts the train rightback on the tracks. I bought last week and plan on buying more as the weeks go on.
While gold stocks broke their April downtrend resistance lines last week gold hasn't doneso yet. A close above 660 on the metal will cause the metal to breakout and follow lastweek's rally in gold stocks. It would be nothing for gold to rally back up to 700 and ifgold stocks rally at the same rate as the metal than the XAU will rally up to 154. So amove above 150 for the XAU in the next few weeks is certainly plausible.
Large cap gold stock Newmont rallied over 5.50% on Friday on huge volume. Newmont has beenunder performing the XAU and HUI for the past year and a half and has been in a sharpdowntrend since March of 2006. The pivot resistance point of this downtrend is 42.50. Itwill likely pause a bit once it reaches this level. But if it breaks it - and I expect itwill - then Newmont will begin a new uptrend. It's next resistance point after that is47.38, the 1/3 retracement of its entire decline since its 2006 peak.
Newmont rallied in part on news last week that it finally closedits entire hedge book and is planning to eliminate its merchant banking division. Underthe forward-sales contracts, Newmont had committed to deliver 1.85 million ounces of goldin 2008, 2009 and 2011 at prices ranging between $381 an ounce and $392 an ounce,according to a Securities and Exchange Commission filing on Friday. It spent $578 millionto close out the contracts as of June 30. With the contracts eliminated Newmont's earningswill increase exponentially in a gold bull market.
The thing is there are several large cap gold stocks such asNewmont that heavily weight the XAU and HUI that have acted sickly for a long time and arebuilding up to make large moves higher. If they rally they will easily push the XAU andHUI up since they impact it so heavily. The indices have the potentially to really run.
I bought some gold stocks last week in the WSW Power Investorportfolio and plan on buying more. I notify all Power Investor members when I make a tradein this portfolio so they know when I buy or sell. Now is the perfect time to take arisk-free trial.
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