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Gold Update - Buy Pattern

Technical observations of and

Bob Hoye
Institutional Advisors
posted May 3, 2005

The gold bullion market is performing just as we'd like, however the stocks continue to step lower. Not only has the gold price been stepping higher this month in term of the US$ but also in terms of Euros and Canadian Dollars. While none have broken out we may be seeing a transition from the currency based action of the past three years to the long awaited next phase in gold where it moves when priced in any medium (stocks, bonds, commodities and currencies).

The post tech bubble environment produced the anticipated cyclic rally in precious metals and mining stocks. This was similar to the action following the equity bubble in 1929 and the late in 1960's. The three year run into 2003 produced a 617% advance in the HUI basket of unhedged gold stocks. This compared favourably to the 397% rally in Homestake Mining and 560% rally in Dome Mines from 1929 to 1933 and similar action from 1969 through 1974.

Dome Mines is the most representative of the gold stocks in the 1930's and we can see that the 1934 low held 323% above the 1929 low. Appropriately, the HUI held at 355% in May of 2004. To remain in context, the next low in the HUI should hold very close to the lows we are now experiencing.

The other period I like to compare to the last four years cyclical action is 1970 to 1974. In the early 1970's the mining stocks outperformed the bullion. However, following February of 1974 the stocks were unable to make any more progress (as gold made its first attempt at breaching $200). Stock prices remained very choppy through the end of the year, but provided some excellent trading opportunities.

The gold price model we've been tracking (with seven examples since 1970) for today's moves has one of its strongest correlations with 1974. Based upon this model we anticipated a low in gold between April 4th and 14th (below $422, but above $410). The rally came on schedule and took the RSI(14) up to its resistance line. The pullback we are currently experiencing is within the confines of the model. The next rally should be capable of causing a breakout of $440-$445 and resistance line on the RSI.

Reminiscent of 1974, the stocks did not participate in the most recent rally from $422 and are now making new lows with the equity market. However, from where we sit right now the stocks should be capable of forming an important spike bottom and staging a significant upward advance. The catalyst for the rally would be the move in bullion through US$445 or Cdn$550. The charts of four mining stocks (ASA, Campbell Red Lake, Dome Mines and Homestake) are labelled with the spike action in September and the subsequent recovery rally into November.

Placer Dome is an example of an individual stock exhibiting a reliable pattern.

Placer Dome (PDG.TO) is generating a weekly sequential buy setup. This is created when there are nine consecutive weeks where the close is below the one four weeks earlier. Once a market becomes this oversold it is predisposed to stage an upside reversal. The signal will remain valid as long as PDG closes below $19.35 on Friday. There are twelve previous signals since 1990 with average price advances of 23% from the low. If this week's low holds at $16.58 then we can look forward to a target around $20.39. There was only one bad signal, December 24, 1999 in which the stock staged a one week advance before continuing its downtrend. In six of the years the price did not break the low of the signal week prior to its advance. In the remaining five instances the stock made marginally lower lows (3%, 1%, 3%, 1% & 6%) before rallying.

Another supporting factor is the Directional Movement Index (DMI). It is split into positive and negative readings that are utilized to measure the strength of upside and downside action. The negative DMI reading is currently at 39. The best sequential reversals in PDG occurred when this was over 35.

Additionally, the CCI(20) oscillator is producing an oversold reading (-173). In the last fifteen years each reading below -125 that coincided with a sequential setup produced an upside reversal in the stock within one week. Therefore we can view any low generated within the next week as a viable point for a stop loss.

Placer Dome with Weekly Sequential Buy Setups and CCI(20) Oscillator

Bob Hoye
Institutional Advisors


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