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Time to Buy

Clive Maund
19 May, 2004

I have been reluctant to turn bullish on precious metal stocks over the past couple of weeks, despite their deeply oversold status, due to the danger of further declines in response to continued dollar strength, and possibly as a result of a severe decline in the general market. I wanted to see signs that the dollar rally is running out of steam, and some evidence that the risk to the general markets has eased. Happily, we now have both, and it is no coincidence that over the past week to two weeks the precious metal stocks appear to have stabilised and marked out what looks like an intermediate base.

Why is this? - why the change? Why is it looking better now?

Over the past couple of weeks money supply figures have become available which reveal that the principal economic policy to be pursued by the US administration and the Fed going forward, in the face of runaway deficits and a recovery built on credit, is to ramp the money supply endlessly, to provide whatever liquidity is necessary to keep things humming along, in other words to continue to inflate. While this course may well lead to hyperinflation, it does reduce the interest rate pressures, the prospect of which has been one of the factors driving up the dollar over the past couple of months. With the impending relatively minor rate rises already factored into the dollar, this surging liquidity therefore leaves the dollar vulnerable to a renewed downturn - good news for gold.

An obvious effect of this endless flood of liquidity will be to continue to drive prices up across the board, as more and more money chases the same quantity of goods. Your house may double in price, but what good does that do you if you have to pay double for everything down at the shops? For this reason stockmarkets may hold up in nominal value terms, but that won't be good enough - they will need to rise just to hold on to intrinsic value. The combined effect of alleviation of interest rate pressures and surging liquidity should stave off the risk of a stockmarket crash in the foreseeable future. Stockmarkets were looking very shaky and vulnerable over the past week or so, but have managed to hold up and are looking more positive today.

With the smoke starting to clear a little - markets have been in an extremely confused state over the past few weeks - new trends are starting to emerge. The dollar appears to be about to break down from a bearish rising wedge, which will be great news for gold if it does, because it means that gold's long-term trendline will have held. The gold stocks, which are largely propelled by speculators, often serve as an "early warning system" for gold itself. Many gold stocks have been quietly basing over the past couple of weeks, at very oversold levels, with strongly bearish sentiment prevailing - which is, of course, bullish.

Looking now at the 3-year chart for gold, we can see that the $370 area is a very logical place for gold to find a floor of support, from which to begin a new uptrend. Not only do we have the support of the long-term trendline, but we also have very strong support originating in the large ascending triangle formation that developed in 2003, largely beneath $370. Note also the deeply oversold readings on the RSI and MACD indicators on this chart.

On the 3-year HUI index chart, however, we see that core support is still some way beneath in the 150 area, and this does give some grounds for concern, suggesting that we may see some furthering weakening. But not to worry, the XAU index tells a very different story - the weightier stocks are already down into strong support - and it is most encouraging that it is the big gold (and silver) stocks that are firming up and looking poised to move ahead again, so the juniors can be expected to follow suit.

It is important to keep in mind that the failure of the support levels above 200 on the HUI and 90 on the XAU in April has created considerable resistance above these levels which will require some "working off" before further advance can be expected.

A range of annotated gold and silver stock charts and followed by a "shopping list" of promising candidates in the American, Australian and Canadian markets follows for subscribers.

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19 May, 2004
Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets.

Visit his website at clivemaund.com

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © CliveMaund 2004. All Rights Reserved.
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