Technical observations of RossClark@shaw.ca
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:
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.
What to watch for as we move ahead:
CHARTWORKS - NOV 29, 2006
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