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Upside Exhaustion Alerts in Gold, But not in the Mining Stocks

Technical observations of

Bob Hoye
Institutional Advisors
Jan 17, 2008

Gold was anticipated to rally once the US Dollar Index had tested its 20-week moving average. That was in place as of December 21st. Since then prices have tacked on over $100. If this week holds its current strength then upside exhaustion alerts will be generated on the weekly and monthly charts. Weekly alerts can be maintained for up to three weeks and do not preclude further advancement, but do suggest even greater daily trading ranges are likely and may set up an important high.

In the stocks (as measured by the XAU, HUI, GDX & XGD.TO) a short-term high was possible around the 14th to 18th trading days from the bottom. We are there. However, the weekly charts are not overextended; therefore we view 5% to 7% corrections over the next few days as still buyable for very nimble traders.

Slowing economy and the gold market: The US Bureau of Labor Statistics releases weekly data for the level of initial unemployment claims. By smoothing the data with a 4-week moving average and then monitoring the 52-week rate of change (ROC) we get a measurement as to the strength of the economy. When the ROC moves above zero the likelihood of a recession increases significantly. This occurred on September 21, 2007.

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Each of the moves in the Unemployment Claims to a positive ROC has resulted in a constructive move in the gold price and XAU over the next three months or more. Once the weekly RSI(14) on the XAU becomes overbought following the thirteenth week we can expect a correction back to the 50-week moving average. (Our proprietary Summation Index produces more refined overbought readings as noted with 'sell signals' below.) We are currently entering the eighteenth week and because of its makeup it will take until at least the week of January 28th to produce an overbought Summation reading. We will keep readers advised of any signals.

1988 to present

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1969 to 1988

Big Picture: When priced in real money (i.e. gold) the US equity market topped in August 1999 at which time it took 44 ounces of gold to buy one unit of the Dow Industrials and 5.4 ounces to buy the S&P 500. Today it takes only 14 ounces to buy the Dow and 1.8 for the S&P. From the following chart we see that the initial support for the Dow is 13.50 (ounces of gold), however the most likely support to be tested in the coming years is at 4.75. In other words, gold could appreciate another 2.8 times relative to the Dow before a meaningful bottom is in place.

-Bob Hoye
Institutional Advisors


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