Let’s Answer Some Gold and Gold Share Questions.

Yesterday, I received an email from Jane pointing out that Jeffrey Christian had given an interview on TheStreet.com and the emailer asked the question,

I am very confused that why the most of gold stocks keep declining while gold is keeping to go up. Is the situation normal? How long it can keep like this way? Does it suggests that the gold is peaked and need a deep pullback? I was on the wrong side of the market for the gold stock since last year.

Jane, Martin Goldberg writes at FMNN in UNHEALTHY MIX OF TECHNICAL FACTORS ABOUND about a number of factors signaling an unhealthy stock market and includes this section:

Review of the HUI

The daily action in gold and gold stocks has been wild and the down days severe. It pays to look at the long term view as illustrated in the chart of the gold bugs index ($HUI), below. In Elliott terms, the HUI is in Wave 2 of Wave III. Wave 2’s are corrective or counter to the long term trend which is up. The corrective patterns tend to be irregular and tricky, and this describes the daily action in the $HUI. Since Wave 1 lasted about 5 months, it would be expected that Wave 2 would likely last longer than its current age of about 1 1/2 months. It is possible that the approximate 50% retracement (to about 275) was the low price within the Wave 2 correction of Wave 1.

Once Wave 3 gets started, this will be Wave 3 of Wave III and this wave promises to be quite rewarding to gold stock
bulls.

For long term investors, the evidence suggests that gold stocks are likely to be good places to preserve wealth or even prosper, because an unhealthy mix of technical factors abound.

I am not a big user of Elliot Wave Theory, I have trouble figuring out all the waves, and sub-waves, but the chart is instructive in a couple of ways.
First, $HUI went sideways for two years in a wide range from Q4, 2003 to Q4, 2005 and then broke out of that range. That alone could make an investor frustrated with gold shares. Second, IMO, we are still testing the breakout. Third, the sideways movement often translates into the same length or longer of an up movement making the next major peak in late 2007 or early 2008. Fourth, Elliot Wave posits five waves in a bull market. That would mean after a correction, wave IV, would come wave V! Fifth, in Gold closed in December, 2003 at $416 and $HUI was about 240. Today Gold is $635 and $HUI is 330. $HUI is up 37% and Gold is up 53%. $HUI not only has underperformed Gold and one reason, costs, like energy, have increased more than Gold has increased, but you’d expect $HUI to outperform Gold because of the leverage. Sixth, $HUI outperforms Gold at times.

IMO, here’s what to expect in the future:
1. Oil stays at this level or goes much higher.
2. Gold continues higher through 2007.
3. Gold traditionally sells at 15 times OIL, yielding a minimum price for Gold of $1,125, a 77% increase.
4. $HUI tracks Gold and only goes up 50% = 495.
5. $HUI outperforms Gold at some point.

What is $HUI? $HUI is:

The AMEX Gold BUGS Index(Basket of Unhedged Gold Stocks) represents a portfolio of 16 major gold mining companies.The Index is designed to give investors significant exposure to near term movements in gold prices – by including companies that do not hedge their gold production beyond 1 1/2 years.

The index consists of

Agnico Eagle Mines Ltd NYSE:AEM
Bema Gold Corp AMEX:BGO
Coeur D Alene Mines Corp NYSE:CDE
Eldorado Gold Corp Ltd AMEX:EGO
Freeport-Mcmoran Copper & Gold Inc NYSE:FCX
Glamis Gold Ltd NYSE:GLG
Gold Fields Ltd NYSE:GFI
Goldcorp Inc NYSE:GG
Golden Star Resources Ltd AMEX:GSS
Harmony Gold Mining Co Ltd AMEX:HMY
Hecla Mining Co NYSE:HL
Iamgold Corp NYSE:IAG
Kinross Gold Corp NYSE:KGC
Meridian Gold Inc NYSE:MDG
Newmont Mining Corp NYSE:NEM
Randgold Resources Ltd NasdaqNM:GOLD

Jane, I hope that answers your question.

One final thought. Go to Yahoo Finance (http://finance.yahoo.com/q/bc?t=5y&s=%5EHUI&l=on&z=m&q=l&c=) and compare the performance of $HUI to the S&P, DJIA, any Gold stock or any other stock. You will see that in the last 5 years $HUI is up 400% and the Dow is about flat; S&P is about flat; the Gold ETF, GLD, has traded almost 1:1 with $HUI. One reason I own GSS is that at times GSS was up 1000% while $HUI was up 300%. In the last two years GSS is actually down vs $HUI. I think I will get a double bounce with GSS if Gold and $HUI continue to climb. IMO, we will see GSS outperform both $HUI and Gold.

$HUI Gold Martin Goldberg Gold Stocks Mover Mike

8 Responses to “Let’s Answer Some Gold and Gold Share Questions.”

  1. Technical analysis is complete and total garbage.

    People who try to sell TA should be arrested and imprisoned.

    You cannot tell the future by writing out the past on a graph. IF YOU COULD, why would you let anybody else know about it? IF TECHNICAL ANALYSIS WORKED, you could own the world!

    oly

  2. “You cannot tell the future by writing out the past on a graph”

    I am sure a lot of history professors will have a go at you.

    He who doesn’t know his history, doesn’t know his future.

    He who doesn’t know his history is doomed to repeat it.

  3. You cannot consistently make money using TA. Period.

    Prechter and his ilk make money by selling subscriptions, (apparently)not by regular trading.

    There is a cyclical trend to history, certainly. I could be a history professor if I wanted to be. But there’s not enough money in it and you have to toe a socialist line at most schools.

    You cannot make money by using TA. Period.

    oly

  4. After being in the markets for 44 years, I can tell you that there is a definaite use for TA, and I am not speaking of Elliot Wave Theory. There is also a cyclicallity to markets. I do not believe that any investment tool is flawless. Some things make work for awhile and then stop working. Even time worn advice like “never average down” or “cut your losses short” can break down. Investing is more art than science. For me a combination of fundamental analysis and TA help me more than one method by itself. TA can improve my timing, get the big picture. If I caome up with an idea, I take a look at a chart to see if my FA is reflected in the big picture. I am also aware of statistical research that has been down using a variety of methods. It also makes a difference whether you are in a bull market or a bear market.

    Thomas J Dorsey in his book “Point and Figure charting says that in a Bull market a breakout from a Triple Top is profitable 87.9% of the time with an average gain of 28.7% in 6.8 months. I am assuming that in a bear market, you would avoid buying triple top breakouts, you would use triple bottom breakdowns which he says is profitable 93.5% of the time for an average gain of 23% in 3.4 months.

    I can use that kind of information to make decisions!

  5. If TA is that good, why are you blogging and driving a school bus?

    If these people had unlocked these secrets, they wouldn’t have to tell anybody, and they could control the financial world

    TA, used for investing, is witch doctor kerphlooey.

    oly

  6. I am blogging and driving a school bus because I can.

  7. Goldguru, thanks for dropping by. I have been to your site. You have a lot of great info.

  8. HUI about to explode upward. Broke technical resistance (that part is for you oly) at 353 and also fib retracement. But I’m sure that’s just garbage. haha.

    I blog on gold and silver stock investment strategies here:

    http://www.goldstockbull.com

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