Continuation of the gold bull (near term) ?
(Originally posted on SI to respond to Slider)
Slider you have argued the bear case quite well. I concede many of your predictions could come to pass. So rather than rehashing the bear case let me show why potentially the opposite may occur or at least the pullback may not be as severe.
1) GLG, GG, AU and RGLD all made new highs recently (unlike the HUI which was stopped at the previous high). If you assume that these are the leaders then it would follow that other plays within the sector will follow their lead before any significant pullback.
2) Reading the current HUI chart from Nov 2001 to present as ascending triangle I believe is invalid due to presence of large amounts of white space. Also if using HMY as an example since the HUI doesn’t have volume then HMY’s volume doesn’t fit the typical trend for an ascending triangle. HMY seems to track the current HUI trend better than most.
3) If the current chart does not represent an ascending triangle I would argue that chart pattern most represents a symmetrical triangle from July 2002 to Nov 2002. This symmetrical triangle ranged 155 to 93 or 62 pts. Breakout occurred at roughly HUI 125. Add in 62 for approximate target of 190. According to Bulkowski average for sym triangles hitting price target after upside breakout is 81%.
4) Even assuming the current pattern is an ascending triangle we don’t have more than 2-3 months till the apex and as we can see with the past symmetrical triangle breakout it can occur well before the apex. Given the gold FA I would argue that the best plan is to hold a modest position until trend lines have been violated in either direction (currently 120 and 155 respectively)
5) A delayed start of the Iraq war favors the gold bulls. Those who have hedged the war with gold and gold stocks must (or will likely) hold positions until not only the start of hostilities, but until the outcome of the war becomes somewhat certain. A longer delay allows the fundamentals that are present in the current gold bull to overwhelm the current commercial short position since fewer longs exit relative to the recent price gains. The potential exists for this war to be delayed until summer or even next fall.
6) Long term uptrend line (Nov 2000) on the HUI is currently around 120 to 125. A pullback to 95-105 would violate this trendline while if anything the FA has become much stronger in favor of gold during the last 6-12 months.
7) ABX, PDG, NEM and other hedgers still have well over 1 year’s full supply of hedges to buy back. They are all praying for another pullback to anywhere close to 330-335 in which to cover again. Due to their degree of hedging these companies have created an artificial dampening effect on the HUI/XAU. I could be wrong, but believe this underlying buying support was not present in the ’93 to ’95 run.
8) 325 to 330 resistance held 4 times during the present run. This area should provide very strong support in any pullback. Looking back to the previous times gold was around 325 to 330 during the past year and the HUI levels we have approximately (June 1, 140), (July 15, 130), (Sept 15, 130), (Dec 1, 120). Approximate support with gold at 325 to 330 is about HUI 130. The recent lows on the HUI (92-105) were only achieved w/ gold at 302 and 310 respectively.
9) I would contend that recent Dollar weakness specifically the break of the uptrend line from ’95 is largely responsible for gain in gold and the break over 330, not the pending/potential Iraq war. I would argue that for gold to see 302 to 310 again near term that the Dollar would have to break back above this trend line. Given that most are calling for the Dollar to stay weak if not weaken further to help combat deflation I find this unlikely.
10) Most of the gold FA is not going away anytime soon. The best way to catch gold bulls and bears alike off guard would be to cause a near term spike in gold and gold shares over the 360 and HUI 155 level. See some of my previous posts on options outstanding on both NEM and the XAU.
11) An HUI breakout could occur if NEM were to break the 32.75 mark. Looking at the 2 year chart of NEM the past year very closely resembles the period when NEM was struggling to break 25. It had a triple top breakout. Now the mark is around 30. I think a triple top breakout is more likely than a triple top (which are rare). Also looking at the options on NEM it would seem unlikely that NEM would close significantly below 27.5 by March expiration.
12) As illustrated from this past Friday’s action in the broad market a falling market does not necessarily help gold and gold stocks, but I would argue that in general it’s supportive. Based upon the VIX, and other factors noted before I think it’s more likely that the next 6 months will bring about a retest and a potential break of previous market lows. Alan Newman and a few other good market timers are calling for this as well.
Many of these points reflect TA vs FA. I think the FA is getting to be well known at this point so I didn’t really want to argue as much from this perspective since we’re all more or less in agreement on the long term FA.
I’m not a raging gold bull ST here by any means. The safest position to take would probably be a small to modest position and buy after a breakout of HUI 155. Some of the upside would missed, but if this breakout occurs there should be enough laggards to play as to still make it very profitable. However, I’ve had better gains in the gold sector when I didn’t try to time the short terms moves as much as the intermediate to long term.
In the past I’ve been as high as 100% gold stocks so I consider my present position at about 33% to be modest. I would probably put a sell stop in around HUI 120 right now, but this level will be rising over the next couple of weeks.
