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Gold - Steady as She Goes

Technical observations of

Bob Hoye
Institutional Advisors
Posted Dec 1
, 2006

The bullish action of the mining stocks relative to the gold bullion has been a good sign in the past week. Another week like this (taking out 0.23 in the XAU/Gold ratio) could be the catalyst for the anticipated rally into the first calendar quarter. Technical measurements continue to point to $775 for the next leg of gold's bull market while stock indices in the sector have targets 27% to 32% above current levels.

Related mutual funds (i.e. Sprott Gold and Precious Metals Fund, Sentry Select Precious Metals Growth Fund, etc.), the Exchange Traded Funds (GDX & XGD.TO) or options on the indices can provide a diversified means of investing in the sector.

The drop in the XAU/Gold ratio into November creates an important setup. The advance from October 3rd was more than 0.01 and the decline into November 20th has made a higher low. If the ratio reverses up through the resistance of 0.228 from October 25th we will have an important catalyst for gold prices. The basis of this conclusion was outlined last month:

October 29th commentary: XAU vs Gold (Homestake used for analysis purposes prior to 1982) For the past thirty-five years we have seen the beginning of most of the important gold rallies lead by strength in the mining stocks. This only makes sense, because of the leverage factor available in the earnings potential of commodity based companies.

In the biggest rally (1971 to 1974) gold prices rose by 39% per annum. During that period there were six instances where the ratio of Homestake/Gold made a significant pullback (greater than 0.01) to a higher low and then broke out to the upside. Each breakout coincided with the beginning of an upward move in gold prices. In the 1976 to 1980 rally (annualized advance of 35%) there were five such timely 'breakouts'. The 2001 to 2006 rally (annualized advance of 14%) has seen seven 'breakouts', the last one being December 15, 2005.

Red arrows on the following chart identify the last signal.

The most recent COT data showed a decline in the net speculative long position and commercial short positions by over 4,000 contracts. This clearly displays how antsy investors are when only a minor hiccup in the advance was capable of making the speculators question their positions. At 84,293 contracts the speculative positions are still 50k below the levels seen last spring. We should have little need for concern until the positions grow well beyond 110k and produce an RSI reading over 60.

The action in the mining indices (XAU, HUI, GDM & XGD.TO) is on the verge of completing a well defined base. There are many ingredients that correlate with previous bases (see next page) and make it possible to establish guidelines as we move forward.

The similarities:

  • An A-B-C decline into June
  • Followed by a rally back to the volatility band in July coupled with an RSI(14) reading in the mid 60s during July
  • Then a series of re-tests of the July resistance
  • An almost vertical drop to test support in October
  • Now a rally back to the resistance line (from the closes of May 10th & Sept 5th)

What to watch for as we move ahead:

  • Prices could play around here (132 to 145) up to three weeks and must hold 132 to remain positive.
  • A move above 0.23 in the XAU/Gold ratio (through its resistance line) would confirm the leadership in the stocks.

Measured targets that should be attainable in the next phase of the bull market

 Index  Current level  Target
 XAU  143.68  185
 HUI  343.88  455
 GDM  1096.08  1425
 XGD.TO  80.35  102

Examples of similar XAU bases

-Bob Hoye
Institutional Advisors


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The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

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