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Gold Market Update
...and those bizarre gold stocks

Clive Maund
6 December, 2004

The fact that gold is overbought relative to its moving averages and various indicators should not lead one to conclude that it will react much, if at all, especially as the dollar action on Friday was indicative of the probable onset of panic. We've seen heavy selling of the dollar in recent weeks, but not panic, not an all-out rush for the exits, but that is exactly what we may witness in the weeks ahead, and such an event would be interesting to observe.


Although overbought, as stated above, gold is actually well-placed to continue to advance strongly on the back of continued weakness in the dollar, and the downside is not now great. Remember, gold has just scored an important victory by breaking above heavy resistance in the $430 zone, which has now become a strong support level, which is now not so far below the current price, and will serve to limit downside. It's important not to fool ourselves, of course, gold didn't rise because of its intrinsic strength, it rose to compensate for the dollar's decline. This doesn't diminish the importance of the breakout above $430, however, as it is a psychological level based on a number. The massive bull market in gold driven by investment demand hasn't even started yet, when it does we know that it will be spectacular because of the relatively tiny and finite supply.

Given the above, the behaviour of gold stocks in recent weeks borders on the bizarre. I have given considerable thought to the marked underperformance of gold stocks during this period and have come to several conclusions. Gold stock investors are very jumpy and nervous and are clearly scared of the stocks double-topping with their highs of last winter, despite gold breaking out. There is a technical reason for stocks to be "held up" at this juncture, of course, which is due to the heavy selling by those who bought near the highs last winter and have been hung-up and waiting for a chance to "get out even" ever since. Even so, the defensiveness of gold stock investors look to be well overdone, with the result that the fear of a double-top forming, and the resultant defensive selling has actually resulted, thus far, in a double-top forming - a sort of self-fulfilling prophecy.

While it is obviously important not to be dogmatic and to have in place an exit strategy in case the sellers do win the day, as set out in Friday's Marketwatch article following the heavy shakeout the day before, I believe the current psychology is creating the conditions for an explosive upside breakout. Why? - because if gold carries on up from here, and, simultaneously, the selling of stocks at this level from last winter's top is finally exhausted, we will suddenly have a market with plenty of new buyers coming in and virtually no stock available. Victory by the buyers will be signalled by a powerful breakout above 260 on the HUI index, possibly involving a very big up day, which would kick off a substantial intermediate uptrend. Our worst-case scenario would be if gold stocks stubbornly refused to break above their highs, even as gold advanced to the $480 - $490 area, but this is regarded as an extremely unlikely outcome.

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.

Visit his subscription website at
clivemaund.com.[You can subscribe here].

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

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