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[roguedolphin]

12/19/05 - TraderMike: A Shakeout in the Gold Market

http://216.104.181.206/wallstreetwindow/articles/tradermike121905.htm

Two weeks ago I warned that gold was about to make a climatic top and informed you that I sold almost all of my gold stocks. Last week we saw gold fall over 40 points as it briefly dipped all the way back down below 500 on Friday. Toward the end of the week, however, gold stocks firmed up against the metal giving hope to the idea that gold stocks are going to rally to new highs.

Despite the positive strength in gold stocks late last week, I find it very unlikely that gold or the gold stocks will move up much higher in the short-term. If you look at how intermediate-term tops in gold and gold stocks have been formed over the past few years, they almost always go sideways for one or two weeks after topping and then they fall hard.

In our current situation, to make matters more convincing, they are still in a corrective phase and are digesting the gains made since March. Take a look at the chart of gold above. Any market that makes a parabolic move up, such as this one here in gold, always corrects. I doubt one could find an example of any market in history that has not corrected after making such a parabolic move.

Just think of oil back in October. Energy stocks fell 18% in two weeks after the price of oil topped out in September. But after dropping 18% they quickly bottomed and have been trending up ever since. I think something very similar is in the cards for gold and gold stocks.

I see both continuing to decline over the next four to eight weeks. Gold has support at 492 and then 475. Ultimately, I think it will go to 475 or a few percent below that point before bottoming. The XAU is likely to bottom in the 104-112 area. The correction in gold stocks is likely to be led by the bigger cap names, like Newmont and Goldcorp, not the smaller exploration stocks like Paramount or Fortuna that are on the recommendation list. In fact, some of them may not even drop at all. The reason being that most of the selling is coming from hedge fund momentum managers who bought in near the top simply because the stocks were going higher. Due to a need for liquidity, most hedge fund money flows into the large cap gold stocks, leaving the smaller ones alone.

Right now gold is trying to gather support at 500. It will likely pause or bounce off of that number for a few days before slipping back down below it. I think this is why the stocks acted well on Thursday and Friday - they were looking ahead to a technical bounce in gold. Once that bounce comes and goes the stocks should go back down again, probably by the end of the week. The long-term picture, however, looks even more bullish than ever. 2006 should be a huge year for gold.

In fact, oil provides another angle to thinking about gold right now. Oil stocks have been going up for almost three full years now. However, they didn't get much attention in the press until this year. Bull markets usually come in three stages. The first stage being when insiders and professionals invest in the market. The second stage is when the general public and financial media recognizes that the bull market is real. The third stage is the mania stage when people feel that not only is the bull market real, but it is a MUST OWN situation. Oil entered phase two of its bull market earlier this year. Gold is entering it now.

Even though the gold bull market is now going on its fourth year, up until the past few months it got very little attention in the press. The only people really participating in it were a select group of gold insiders, so called "gold bugs", and a few investment professionals who also understood the gold trend. Over the past six weeks we've seen hedge funds start to flock into the gold market and commentary in the mainstream press is now recognizing that gold is going up.

Typical of this was a comment I saw by one guest on CNBC three weeks ago. This "expert" said that gold was going up and the viewers should buy some if they want to make money. He then said that gold isn't a great long-term investment, but is going up because demand in India for jewelry is growing. I've seen other comments by Wall Street analysts interviewed in newspaper and press wire stories who have said things to the effect that, gold is going up, it is going to keep going up, we don't really know why though. The smarter ones admit they don't know why, the bad ones make up reasons.

For the past few years, the mainstream media has mocked gold bugs whenever it has mentioned the gold trend. Now it is recognizing that the trend is real. This is a sign that we are beginning phase two of the gold bull market. However, phase three will come when the mainstream media and the general public comes to see gold as a 'must own' hedge against inflation or a falling dollar. We are a long way from that happening.

Gold corrections can be tough. You need to realize that this one is likely to continue and prepare yourself mentally to buy back in or add to your position once it comes to an end. Why? Because 2006 is going to bring the biggest move in gold that we've seen yet. Fortunes are going to be made.



The broad market is starting to get sloppy. Although the market has been rising since October, fewer and fewer stocks are participating in the move. The S&P briefly made a new high for the year on Friday, but did so with only 1 out of 10 industry sectors doing the same. The rally is deteriorating, but that doesn't necessarily mean it is over. Almost every year, the broad market rallies in the last two weeks of December and it probably will do so this year again. It is in January when the rally will be in its most vulnerable state.

Rogue