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The XAU Index is on the Verge of a Multi-year BreakoutContributed by Olaf Sztaba In our last Gold Comment (Golds are ready to follow Energy Stocks - June 9, 2008), we said that the majority of Gold stocks have already reached their objective for this correction and a brief consolidation period should give way to a full-fledged rally. The last four weeks have confirmed our forecast. The strong upside action has silenced the bears and surprised many pundits (again!). The rising price of Gold and the fears of market collapse have added fuel to already bullish fires. On the sentiment side, the bullish setup is in tune with our bullish ears. The latest market jitters scared off investors to the point of capitulation and resignation. In the meantime, Gold stocks have quietly continued to march up. There have been few front-page headlines about the Gold sector revival apart from the hysteria about a so-called "bubble" in commodities and precious metals. The latest data shows that Gold and Gold stocks continue to be ignored by the investment public and money managers. The Gold sector has shown the most stamina of all sectors during the last four weeks as shown by the XAU index (see chart below). The uplift placed the index above its rising 40-week moving average and near the upper boundary of its one-year consolidation pattern. A decisive breakout above this resistance would cement the recovery and provide a strong stimulus for the investors in "the waiting room." In the past, we pointed out the selective nature of the Gold sector. The stocks that withstood the January sell-off, as predicted, performed the best. Among them are Agnico-Eagle (AEM), Barrick Gold (ABX), Goldcorp (G) or Great Basin Gold (GBG), which are all on our Gold and Metals BUY list. As the advance accelerates, we anticipate that more and more Gold stocks will join the rally - especially some forgotten junior stocks. This should help the entire sector to advance in a more unified fashion and bring more buyers into the market. One of the biggest disappointments for investors in the last few years was the mediocre behaviour of Gold stocks in relation to Gold itself. This is most likely to change. A recent multi-year breakout in big-league stocks such as Barrick Gold (ABX) or Goldcorp (G) is the first harbinger of such a change. For better results, we continue to keep our focus on the leaders. Watch for upcoming stock reports. Technically and cyclically, Gold stocks are ready to take a leading role. The current strength in big-cap Gold stocks should include the smaller stocks later this year. Focus on the early leaders of the advance and view any pullbacks as an opportunity to add to a position. XAU INDEX (Weekly chart with the 40-week moving average)
The price action from early 2006 to the present has been in the form of a "Duplex Horizontal" - a bullish technical pattern that usually leads to higher targets (see dashed lines). The pattern consists of a horizontal trading range between 120 and 150 (1st area of consolidation), and then higher trading range mostly between 170 and 200 (2nd area of consolidation). A decisive move above the 200 resistance level would result in a breakout from this bullish pattern and a new up-leg toward significantly higher targets. The 170 level provides strong support for the index.
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Contributed
by Olaf Sztaba