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Gold Into Capitulation Mode

Technical observations of

Bob Hoye
Institutional Advisors
February 10, 2005

Those who monitor gold prices will be well aware that the decline since the December 3rd high of $456 is beginning to feel excessive. As a matter of fact there are only eight occurrences since 1972 where gold has fallen at a pace capable of generating concurrent daily oversold readings in both my exhaustion model and summation index. I categorise this as a capitulation signal. We have a new one today
[Editor's note: written Tue 8th].

This weakness comes at an appropriate time, following the January 1st Economic Confidence Cycle date.

In a major uptrend (rising 233-day moving average) the capitulation signals have resulted in an upside reversal within 48 hours, retracing 40% to 50% of the total decline. This has been followed by a consolidation of 8 to 13 weeks and then a re-instatement of the underlying uptrend with an explosive upside move lasting months and making new recovery highs. Mining stocks can be anticipated to recover with the gold price.

While the gold price is definitively oversold, the XAU (88.59) and HUI (192.37) have achieved only initial oversold readings and are still above measured targets. We can be aggressive bottom pickers as the XAU approaches 86 or the HUI closes in on 184.

The following table outlines the action of Homestake Mining (HM) in the six months following the previous signals. Homestake Mining was used for research purposes due to the minimal history of the XAU and HUI. (A comparison of the 1997 signals in the XAU & HUI generated similar results to the Homestake analysis). During declining years Homestake consistently rallied by 24%, while in the three uptrending years (1972, '73 & '74) rallies were much stronger. This year the gold price is straddling the uptrending 233-day moving average.

Bob Hoye
Institutional Advisors


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