Friday, March 16, 2007

Gold and Gold Stocks



One of my readers asked me about gold stocks so I figured I'd post the above chart with a few comments.

Don't let the numbers in the above chart scare you. This is not Elliot Wave analysis but rather me simply numbering the swings to make it easier for you to follow my thinking.

The correlation between gold and gold stocks is obviously a very strong one as you can see by matching the points on both charts. Points 1 through 6 are almost identical in duration and magnitude until we get to point 7. At point 7 gold makes a new high but the XAU index does not. At point 8 gold makes a higher low while the XAU index makes a lower low. Why would gold stocks suddenly appear to be losing ground when compared to gold from point 7 to 8? Well you have to realize that even though gold is a major catalyst for gold stocks, gold stocks are still stocks and are influenced by movement in the stock market as well. Point 7 is where the S&P made it's top and began it's sharp drop and that is why gold stocks are now losing ground compared to gold the commodity.

My view is that this sets up a potential buying opportunity in gold stocks because these stocks got dragged down by the market not by gold. I think gold stocks are undervalued when compared to gold so I'll be watching them closely in the days to come.

Next week I want to see how gold behaves if the yen begins another leg up. If gold can keep its head above water in the face of a rising yen, I'll be buying GLD next week and possibly gold stocks once I see them showing signs of strength.

6 comments:

khiem said...

Hi Kevin!

I had found a bullish percent index precious metals (BPI PM)!

www.technicalwatch.com/bpi/goldbpi.htm

Khiem.

Kevin said...

Nice workk! Thanks

Stimit said...

Kevin..when you talk of gold holding up against a rising yen, do you talk of the carry trade and the proceeds being invested in gold? I would be surprised since gold gives no interest and the carry would be very highly speculative. On the other hand, $ getting weaker should result in gold priced in $$ rising, right? The one reason I think it may fall with rising yen is managers liquidating positions to raise cash. Your thoughts?

Kevin said...

I think as the yen rises and the carry trade unwinds, there will be a liquidation of stocks and commodities. We saw this 2 weeks ago when the yen rallied. I think the carry trade is what was financing these markets, so as the yen rises, stocks and even some commodities get liquidated. So you are right when you said a rising yen causes managers to liquidate positions to raise cash.

Marcia said...

Kev:

Give us 2 gold STOCKS you'd recommend, please.

Thanks M & R (teamvance)

Kevin said...

I like some of the silver stocks better such as PAAS and SSRI.

Be aware I haven't bought anything yet....I'm just watching them right now. I still think the market has another leg down coming so I'm going to be real cautious about buying.

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