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The
correction in gold stocks that began a month ago appears to be coming to an
end. Let's look at the action that led me to think gold stocks have put in a
potential bottom.
 
First the daily stochastics for the XAU/gold and HUI/gold ratios became
oversold a few days ago. On 3/19/08 I wrote that I was going to be waiting
for these ratios to get oversold before I bought. This is what I said then:
"The
XAU/gold and HUI/gold ratios are still excellent ratios to watch to time
entry points in gold stocks. Above is a plot of the HUI/gold ratio. During
gold and gold stocks corrections gold stocks tend to fall faster than gold
during the bulk of the correction but towards its end they start to fall at
the same rate as the metal or even less. You can see when this happens by
watching the relative performance of gold stocks versus the metal. We have
gotten near lows when the HUI/gold and XAU/gold ratio's daily stochastics have gotten oversold by falling below 20. I
expect this to happen again within the next three weeks and once it does I
will look to buy some gold stocks."
Well we got
there last week. I hesitated to buy just on that one signal, because normally
the gold stocks rally and then retest their lows before going higher. We got
that retest this Tuesday morning as gold fell down below $900 an ounce and
all of the way down to $870 an ounce. While this happened the XAU and HUI
fell at a slower rate than the metal did. Unlike gold, most gold stocks did
not go through their March lows. Although the HUI did so briefly, the XAU did
not. All together the gold stocks were showing excellent signs of relative
strength yesterday. Newmont for example was down
only 50 cents on a day in which gold was down over $30. This is normally what
you see at the end of a gold and gold stocks correction.
Secondly this
happened on what I consider to be major support for gold stocks.
The HUI and XAU
fell down to their 150-day moving averages yesterday and bounced off of them.
Normally in intermediate-term bull rallies you get one or two pullbacks a
year in a sector down to its 150-day moving average. Gold stocks tend to have
more than two pullbacks a year due to their volatility. But this pullback
created a positive divergence between the XAU/gld
and HUI/gld ratios right on this long-term support
level.
We should now
see a quick snap back rally in the HUI back up to the 460 area - which is the
HUI's 50-day moving average and the point of its
20-day upper bollinger band. If this is a true
bottom we'll then likely see a short 1-3 week period of consolidation and a
rally through the March highs. The 445-450 area should mark the bottom of
such a consolidation pattern.
If this isn't a
real bottom then the HUI will come back down to the 420 level after rallying
to 460.
If somehow we
don't get a rally from here then the next major support area on the HUI is
400, the HUI's 200-day moving average. I would
consider it the maximum gold stocks would fall. That is a roughly 5% drop
from here and I don't think its going to happen. When you want to buy dips in
a bull market you just have to buy when the risk becomes limited. We are at
that point now for gold stocks.
I think
yesterday's bottoming potential is real, because I see no signs of the bear
market in the dollar coming to an end. What is more over the past week there
has been a large amount of short covering on the part of commercial traders.
I also think
that there are some select junior mining stocks that make good investments
right now. In fact if I am right on the next move up money will begin to
rotate in the Canadian small caps, which haven't yet participated in this
gold bull run.
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Mike
Swanson
Editor, Wall
Street Window
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