Looks like Christmas may have come early for gold stocks the world over.
There is actually quite a bit of buzz going on in the gold stock sector and not many investors are aware of this. You see, for quite some time, gold stocks have been driving investors mad for many reasons. First and foremost is the observation that this sector has NOT been able to keep up in pace with gold - a shortcoming that was particularly upsetting last year. Secondly, the recent comeback in the equity market has provided no matching behavior in gold stocks – except of course whenever gold fell, in which case gold stocks were happy to follow...
But despite all of this negative buzz going on about gold stocks, I strongly believe that the market may have hit a long-term low last week, which may signal the beginning of a long overdue comeback for the sector. Hence this could be the time. This could be the great opportunity to get in and lock in some low prices.
First of all, let’s take a look at the large caps (by viewing the HUI), which have really been going through some hell the past 6 months. The HUI is a gold "BUGS Index." BUGS stands for "basket of un-hedged gold stocks." The gold "BUGS Index" is the AMEX's index measuring gold companies that do not hedge their gold production beyond a period of a year and a half. Let's take a look at the following chart courtesy of TheDailyGold.com:
Recently, the HUI dipped again, making a new 52-week low, which is nothing new for this severely oversold market. But THIS time the new low didn’t cause any kind of major penetration with a continuing momentum downward. Also, in the past two weeks, the HUI has been forming what technical chart readers call bullish hammers, which are a sign of a reversal. Technical readers also believe that the HUI has hit a 38% retracement level, which for now let's just say is basically an invisible level that operates much like support and resistance levels do. Finally, analysts are looking at the 40-month moving average, which has had a historical and dependable track record. While “40” months may seem rather arbitrary, a line drawn using this period can be seen as providing key support at a major bottom in 2007, resistance in 2008 and early 2009, and then support in early 2010. MOST important, is the fact that all of these indications are occurring at the same time and thus exhibiting what professionals call "confluence" (confluence: a gathering, flowing, or meeting together at one juncture or point). Confluence further strengthens the power of each individual sign into one much larger and stronger say in the matter.
Next up, let's take a step away from the big caps and look at the junior markets. For this, we will take a look at the GDXJ and the ZJG.TO (junior gold miners ETF's). Please keep in mind that, although the companies within the GDXJ and ZJG.TO are actually mid caps and small caps and not juniors, they can still offer us a decent indication of the latter. The weekly chart below (courtesy of TheDailyGold.com) shows both markets forming double bottoms. As you may have read from Gerald Williams' prior article on what double bottoms are, this chart formation signals the strong possibility of a bullish run to follow. ANOTHER important signal to take notice of here is "positive divergence." By that, we mean that although the HUI made new lows, both the GDXJ and the ZIG.TO did not.
Some day Gerald will cover positive divergence and negative divergence in the technical teaching section, but for now let's just say that a positive divergence is also a sign that the instrument, which is diverging from (moving differently than, but in a positive/bullish manner) the other instrument is going to have a bullish run too:
Although everything that I have mentioned plays heavily upon technical... technique and much less on fundamental news, it is important to take home from this the fact that, "the time that one can potentially rely so heavily upon EITHER technicals or fundamentals only, is whenever it is very strong." Makes sense. If technicals boldly state that there is a bullish run to come for the Dollar, but the news says that we just started the next Great Depression, then you can most likely rely on the fundamental news exclusively. I'm in no way implying that the technical readouts above are anywhere near equivalent to a depression announcement, but I can say with full certainty that they are 'pretty strong.'
So strong, in fact, that they may even DRIVE UP THE PRICES OF PRECIOUS METALS THEMSELVES - especially gold and silver. This is almost unprecedented in the mining sector during these past several months which can only best be described as... atrocious for mining investors.
Regardless, I mainly want you to begin looking into the possibility of expanding your portfolios into new territory if you haven't already done so. If diversification can reduce overall risk at the price of profit then, heck, let's pay that price!
Get in While the Gettin's Good!
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