Gold Market Update
...and those bizarre gold stocks
Clive Maund
6 December, 2004
The
fact that gold is overbought relative to its moving averages
and various indicators should not lead one to conclude that it
will react much, if at all, especially as the dollar action on
Friday was indicative of the probable onset of panic. We've seen
heavy selling of the dollar in recent weeks, but not panic, not
an all-out rush for the exits, but that is exactly what we may
witness in the weeks ahead, and such an event would be interesting
to observe.
Although
overbought, as stated above, gold is actually well-placed to
continue to advance strongly on the back of continued weakness
in the dollar, and the downside is not now great. Remember, gold
has just scored an important victory by breaking above heavy
resistance in the $430 zone, which has now become a strong support
level, which is now not so far below the current price, and will
serve to limit downside. It's important not to fool ourselves,
of course, gold didn't rise because of its intrinsic strength,
it rose to compensate for the dollar's decline. This doesn't
diminish the importance of the breakout above $430, however,
as it is a psychological level based on a number. The massive
bull market in gold driven by investment demand hasn't even started
yet, when it does we know that it will be spectacular because
of the relatively tiny and finite supply.
Given
the above, the behaviour of gold stocks in recent weeks borders
on the bizarre. I have given considerable thought to the marked
underperformance of gold stocks during this period and have come
to several conclusions. Gold stock investors are very jumpy and
nervous and are clearly scared of the stocks double-topping with
their highs of last winter, despite gold breaking out. There
is a technical reason for stocks to be "held up" at
this juncture, of course, which is due to the heavy selling by
those who bought near the highs last winter and have been hung-up
and waiting for a chance to "get out even" ever since.
Even so, the defensiveness of gold stock investors look to be
well overdone, with the result that the fear of a double-top
forming, and the resultant defensive selling has actually resulted,
thus far, in a double-top forming - a sort of self-fulfilling
prophecy.
While it is obviously important not to be dogmatic and to have
in place an exit strategy in case the sellers do win the day,
as set out in Friday's Marketwatch article following the heavy
shakeout the day before, I believe the current psychology is
creating the conditions for an explosive upside breakout. Why?
- because if gold carries on up from here, and, simultaneously,
the selling of stocks at this level from last winter's top is
finally exhausted, we will suddenly have a market with plenty
of new buyers coming in and virtually no stock available. Victory
by the buyers will be signalled by a powerful breakout above
260 on the HUI index, possibly involving a very big up day, which
would kick off a substantial intermediate uptrend. Our worst-case
scenario would be if gold stocks stubbornly refused to break
above their highs, even as gold advanced to the $480 - $490 area,
but this is regarded as an extremely unlikely outcome.
Clive Maund
Clive.Maund@t-online.de
Clive
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany.
Visit his subscription website at clivemaund.com.[You can subscribe
here].
No responsibility can be accepted for losses that may result
as a consequence of trading on the basis of this analysis.
Copyright
© 2003-2004 CliveMaund. All Rights Reserved.
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