Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Jun 11, 2005 at 04:22AM

Introduction

Perhaps just to start with a reiteration for those who are not regular readers. After seven months of consistently bearish or bearishly toned weekly commentaries, the past few weeks has seen me take a dramatic sentiment shift towards the bullish side towards gold. The rationale for this shift was described in detail in last week's commentary. If you haven't read it , I recommend that you do, as it will likely provide the "context" for all future updates.

Of course just because I have turned bullish does not in itself mean that the gold sector is going to blue skies. The rationale for my bullishness may be in error, or perhaps there are forces out there that have not been properly accounted for. It behooves all to process all commentary, and to run them through your own filters, and your own knowledge base, before putting money on the line.

Now given my current posture on gold there are several things that I am expecting to occur:

1 - I expect to see gold take over from the Euro as the go to vehicle for investors who want to hedge, invest or speculate against dollar weakness. I expect to see gold hold up much better than the Euro on USD strength, and I am expecting it to outperform the Euro on dollar weakness.

1a. I am expecting this resiliency, even in the face of USD strength, to make it much easier for investors to put a bid in the gold mining industry.

2. - Technically I am expecting gold to break out against the Euro, confirming the break-out in terms of the South African Rand

3. I am expecting gold, priced in dollars, to close above its 50 and 200 dma within the next week, or two at the most. I expect bullion to reach trend-line resistance just as the dollar shows confirmatory signs of rolling over.

4. I am expecting that any sell-off in long bonds to now result in a sell-off of the USD.

On the flip side, what I don't want to see is the following:

1 - Bullion swooning below its 65 week moving average ($417)

2- The HUI moving below 175 - a key level in terms of preserving the impulsive nature of the equity side of the advance.

3. Bonds and the dollar to inexorably rise in a Japanese style deflationary scenario

4. A bond sell-off to result in an accelerated move to the upside for the dollar

5. Gold Rand break-out point to be violated to the downside.


Let's take a look at a few charts to see where things lie.

Bullion Daily



Price action in the face of USD strength continues to bode well.

Gold-Euro Price



New historic highs reached. Still too early to yell break-out but again it bodes well. In my way of current thinking trend-line support should not be tested until after a break-out.

HUI Daily



Impulsive nature. Strong move up from 50 dma. I like it.

USD Daily



Commercials keep merrily adding on to record high short positions. Open interest is also at relative extremes. From a swing trader's mindset this is hardly the technical set-up for betting on the long side.

Discussion

No real change. Everything looks good.

Bullet Bullet Bullet